Fairfax Financial Annual Report 2017

FY2017 Annual Report · Fairfax Financial

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2017 Annual Report

Contents

Fairfax Corporate Performance . . . . . . . . . . . . .

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

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

Management’s Responsibility for the Financial
Statements and Management’s Report on
Internal Control over Financial Reporting . . .

Independent Auditor’s Report to the

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

Fairfax Consolidated Financial Statements . . . . .

Notes to Consolidated Financial Statements

. . .

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

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

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

123

202

203

30JAN201416052574

2017 Annual Report

(in US$ millions, except as otherwise indicated)(1)

Fairfax Corporate Performance

Book
value
per
share

Closing
share
price(1) Revenue

Net
earnings
(loss)

Total
assets

Invest-
ments

Net
debt

Common
share-
holders’

Shares
out-
equity standing

Earnings
(loss)
per
share

3.25(3)

As at and for the years ended December 31(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
2013
2014
2015
2016
2017

12.2
38.9
86.9
112.0
108.6
167.0
217.4
237.0
266.7
464.8
837.0
1,082.3
1,507.7
2,469.0
3,905.9
4,157.2
3,953.2
5,104.7
5,731.2
5,829.7
5,900.5
6,803.7
7,510.2
7,825.6
6,635.6
5,967.3
7,475.0
8,022.8
5,944.9
10,017.9
9,580.4
9,299.6
16,224.6

1.52
4.25
6.30
8.26
10.50
14.84
18.38
18.55
26.39
31.06
38.89
63.31
86.28
112.49
155.55
148.14
117.03
125.25
163.70
162.76
137.50
150.16
230.01
278.28
369.80
376.33
364.55
378.10
339.00
394.83
403.01
367.40
449.55

12.75
12.37
15.00
18.75
11.00
21.25
25.00
61.25
67.00
98.00
290.00
320.00
540.00
245.50
228.50
164.00
121.11
226.11
202.24
168.00
231.67
287.00
390.00
410.00
408.99
437.01
358.55
424.11
608.78
656.91
648.50
669.34

30.4
(0.6)
93.4
4.7
139.8
12.3
200.6
12.1
209.5
14.4
461.9
18.2
447.0
19.6
464.6
8.3
906.6
25.8
1,549.3
27.9
2,104.8
63.9
4,216.0
110.6
152.1
7,148.9
280.3 13,640.1

23.9
68.8
93.5
111.7
113.1
289.3
295.3
311.7
641.1
1,105.9
1,221.9
2,520.4
4,054.1
7,867.8
42.6 22,229.3 12,289.7
75.5 21,667.8 10,399.6
(406.5) 22,183.8 10,228.8
252.8 22,173.2 10,596.5
288.6 24,877.1 12,491.2
53.1 26,271.2 13,460.6
(446.6) 27,542.0 14,869.4
227.5 26,576.5 16,819.7
1,095.8 27,941.8 19,000.7
1,473.8 27,305.4 19,949.8
856.8 28,452.0 21,273.0
335.8 31,448.1 23,300.0
45.1 33,406.9 24,322.5
526.9 36,945.4 26,094.2
(573.4) 35,999.0 24,861.6
1,633.2 36,131.2 26,192.7
567.7 41,529.0 29,016.1
(512.5) 43,384.4 28,430.7
1,740.6 64,090.1 39,255.4

7.6
–
29.7
3.7
46.0
4.9
60.3
27.3
76.7
21.9
81.6
83.3
101.1
58.0
113.1
69.4
211.1
118.7
279.6
166.3
346.1
175.7
664.7
281.6
960.5
369.7
1,364.8
830.0
2,088.5
1,248.5
1,940.8
1,251.5
1,679.5
1,194.1
1,760.4
1,602.8
2,264.6
1,961.1
2,605.7
1,965.9
2,448.2
1,984.0
2,662.4
1,613.6
4,063.5
1,207.4
4,866.3
412.5
7,391.8
1,071.1
7,697.9
1,254.9
7,427.9
2,055.7
7,654.7
1,920.6
7,186.7
1,752.9
8,361.0
1,966.3
8,952.5
2,075.6
3,438.2
8,484.6
4,057.2 12,475.6

5.0
7.0
7.3
7.3
7.3
5.5
5.5
6.1
8.0
9.0
8.9
10.5
11.1
12.1
13.4
13.1
14.4
14.1
13.8
16.0
17.8
17.7
17.7
17.5
20.0
20.5
20.4
20.2
21.2
21.2
22.2
23.1
27.8

(1.35)
0.98
1.72
1.63
1.87
2.42
3.34
1.44
4.19
3.41
7.15
11.26
14.12
23.60
3.20
5.04
(31.93)
17.49
19.51
3.11
(27.75)
11.92
58.38
79.53
43.75
14.82
(0.31)
22.68
(31.15)
73.01
23.15
(24.18)
64.98

Compound annual growth
19.5%

18.1%

(1) All share references are to common shares; Closing share price is in Canadian dollars; per share amounts are in US dollars;

Shares outstanding are in millions.

(2)

IFRS basis for 2010 to 2017; Canadian GAAP basis for 2009 and prior. Under Canadian GAAP, investments were
generally carried at cost or amortized cost in 2006 and prior.

(3) When current management took over in September 1985.

FAIRFAX FINANCIAL HOLDINGS LIMITED

Corporate Profile

Fairfax Financial Holdings Limited is a 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.

Insurance and Reinsurance

Northbridge Financial, based in Toronto, Canada, provides property and casualty insurance products in the
Canadian market through its Northbridge Insurance and Federated subsidiaries. It is one of the largest commercial
property and casualty insurers in Canada based on gross premiums written. In 2017, Northbridge’s net premiums
written were Cdn$1,381.0 million. At year-end, the company had statutory equity of Cdn$1,442.2 million and there
were 1,467 employees.

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
2017, OdysseyRe’s net premiums written were US$2,495.9 million. At year-end, the company had shareholders’
equity of US$4,067.7 million and there were 987 employees.

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, principally specialty, coverages. In 2017, C&F’s
net premiums written were US$1,863.4 million. At year-end, the company had statutory surplus of
US$1,302.3 million and there were 2,298 employees.

Zenith National, based in Woodland Hills, California, is primarily engaged in the workers’ compensation
insurance business in the United States. In 2017, Zenith National’s net premiums written were US$837.4 million. At
year-end, the company had statutory surplus of US$571.7 million and there were 1,535 employees.

Brit, based in London, England, is a market-leading global Lloyd’s of London specialty insurer and reinsurer. In
2017, Brit’s net premiums written were US$1,530.9 million. At year-end, the company had shareholders’ equity of
US$1,130.3 million and there were 558 employees.

Allied World, based in Zug, Switzerland, provides property, casualty and specialty insurance and reinsurance
solutions, with principal locations in the United States, Bermuda, London, Singapore and Canada. In 2017, Allied
World’s net premiums written were US$2,238.8 million. At year-end, the company had shareholders’ equity of
US$2,523.8 million and there were 1,430 employees. Allied World was acquired on July 6, 2017.

Fairfax Asia

Falcon Insurance, based in Hong Kong, writes property and casualty insurance in niche markets in Hong Kong. In
2017, Falcon’s net premiums written were HKD 361.9 million (approximately HKD 7.8 = US$1). At year-end, the
company had shareholders’ equity of HKD 573.4 million and there were 66 employees.

Pacific Insurance, based in Malaysia, writes all classes of general insurance and medical insurance in Malaysia. In
2017, Pacific Insurance’s net premiums written were MYR 229.0 million (approximately MYR 4.3 = US$1). At
year-end, the company had shareholders’ equity of MYR 439.6 million and there were 422 employees.

AMAG, based in Indonesia, writes all classes of general insurance in Indonesia. In 2017, AMAG’s net premiums
written were IDR 672.1 billion (approximately IDR 13,381.5 = US$1). At year-end, the company had shareholders’
equity of IDR 3,170.1 billion and there were 769 employees.

Fairfirst Insurance, based in Sri Lanka, writes general insurance in Sri Lanka, specializing in automobile and
personal accident lines of business. In 2017, Union Assurance’s net premiums written were LKR 7,831.3 million
(approximately LKR 152.6 = US$1). At year-end, the company had shareholders’ equity of LKR 5,358.7 million and
there were 963 employees. Union Assurance amalgamated with Fairfirst Insurance Limited effective February 28,
2017 and the amalgamated entity continued as Fairfirst Insurance Limited.

Insurance and Reinsurance – Other

Advent, based in London, England, is a reinsurance and insurance company, operating through Syndicate 780 at
Lloyd’s, focused on specialty property reinsurance and insurance risks. In 2017, Advent’s net premiums written were
US$184.4 million. At year-end, the company had shareholders’ equity of US$129.7 million and there were
117 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 2017, Group Re’s net premiums written were US$129.2 million. At year-end, the Group Re companies
had combined shareholders’ equity of US$442.7 million.

Bryte Insurance, based in South Africa, writes property and casualty insurance in South Africa and Botswana. In
2017, Bryte Insurance’s net premiums written were ZAR 3.2 billion (approximately ZAR 13.3 = US$1). At year-end,
the company had shareholders’ equity of ZAR 1,861.6 million and there were 765 employees.

Fairfax Central and Eastern Europe comprises Polish Re and Colonnade Insurance.

Polish Re, based in Warsaw, writes reinsurance in the Central and Eastern European regions. In 2017, Polish Re’s net
premiums written were PLN 211.1 million (approximately PLN 3.8 = US$1). At year-end, the company had
shareholders’ equity of PLN 334.5 million and there were 39 employees.

Colonnade Insurance, based in Luxembourg, writes general insurance through its Ukrainian insurance company and
through its branches in the Czech Republic, Hungary, Slovakia, Bulgaria, Poland and Romania. In 2017, Colonnade
Insurance’s net premiums written were US$92.2 million. At year-end, the company had shareholders’ equity of
US$67.3 million and there were 461 employees.

Fairfax Latin America comprises Fairfax Brasil and Fairfax Latam.

Fairfax Brasil, based in S˜ao Paulo, writes general insurance in Brazil. In 2017, Fairfax Brasil’s net premiums written
were BRL 200.5 million (approximately BRL 3.2 = US$1). At year-end, the company had shareholders’ equity of BRL
213.8 million and there were 104 employees.

Fairfax Latam, with its headquarters in Miami, writes general, property and casualty insurance through its operating
companies in Chile and Colombia (acquired July 2017), Argentina (acquired September 2017) and Uruguay
(acquired January 2018). In 2017, Fairfax Latam’s net premiums written were US$97.7 million. At year-end, the
company had shareholders’ equity of US$146.9 million and there were 980 employees.

Run-off

The run-off business comprises the U.S. and the European run-off groups. At year-end, the run-off group had
combined shareholders’ equity of US$1,750.7 million.

The Resolution Group (TRG) and the RiverStone Group (run by TRG management) manage run-off under the
RiverStone name. At year-end, TRG/RiverStone had 269 employees in the U.S., located primarily in Manchester,
New Hampshire, and 137 employees in its offices in the United Kingdom.

Other

Pethealth, based in Toronto with 412 employees, provides pet medical insurance and pet-related management
software and database management services in North America and the United Kingdom. In 2017, Pethealth
produced gross premiums written of Cdn$80.6 million.

Hamblin Watsa Investment Counsel, founded in 1984 and based in Toronto, provides investment management
to the insurance, reinsurance and run-off subsidiaries of Fairfax.

Notes:

(1) All of the above companies are wholly owned (except for 73%-owned Brit, 67%-owned Allied World, 85%-owned Pacific

Insurance, 78%-owned Fairfirst Insurance and 80%-owned AMAG).

(2) The foregoing lists all of Fairfax’s operating subsidiaries (many of which operate through their own operating structure,
primarily involving wholly-owned operating subsidiaries). The Fairfax corporate structure also includes a 9.9% interest in
ICICI Lombard (an Indian property and casualty insurance company), a 41.4% interest in Gulf Insurance (a Kuwait
company with property and casualty insurance operations in the MENA region), a 34.9% interest in Thai Re (a Thai
reinsurance and insurance company), a 15.0% interest in Alltrust Insurance (a Chinese property and casualty insurance
company), a 35.0% interest in BIC Insurance (a Vietnamese property and casualty insurance company), a 27.8% interest
in Singapore Re (a Singapore based reinsurance company), a 41.2% interest in Falcon Insurance (Thailand), a 43.3%
interest in Eurolife (a Greek life and non-life insurer), a 45.3% interest in Digit (an insurance company in India established
by Fairfax) and a 7.4% interest in Africa Re as well as investments in a number of non-insurance-related companies. The
other companies in the Fairfax corporate structure, which include a number of intermediate holding companies, have no
insurance, reinsurance, run-off or other operations.

FAIRFAX FINANCIAL HOLDINGS LIMITED

To Our Shareholders,

We had a record year in 2017 in spite of a spate of hurricanes and other catastrophes that cost us $1.3 billion(1). We
earned a record $1.7 billion in 2017, our book value per share increased 24.7% (adjusted for the $10 per share
dividend paid) to $450 per share and we ended the year with a record $2.4 billion in cash and marketable securities in
the holding company. Since we began in 1985, our book value per share has compounded at 19.5% annually while
our common stock price has compounded at 18.1% annually. Our company is in great shape.

Here’s how our insurance companies performed in 2017:

Northbridge
OdysseyRe
Crum & Forster
Zenith
Brit
Allied World*
Fairfax Asia
Other Insurance and Reinsurance

Underwriting
Profit (Loss)
9
60
3
117
(202)
(587)
38
(80)

Combined
Ratio
99.1%
97.4%
99.8%
85.6%
113.1%
157.0%
88.4%
110.2%

Catastrophe
Losses
0.9%
16.8%
2.3%
1.0%
16.8%
52.7%
–
10.0%

Combined Ratio
Excluding
Cat Losses
98.2%
80.6%
97.5%
84.6%
96.3%
104.3%
88.4%
100.2%

Consolidated

(642)

106.6%

13.7%

92.9%

For the period since its acquisition on July 6, 2017

The second half of 2017 reminded us yet again that ours is a risk business. During the third quarter of 2017, the
insurance industry experienced some of the largest catastrophe losses in its history as a result of Hurricanes Harvey,
Irma and Maria and earthquakes in Mexico. During the fourth quarter, the industry suffered losses from the
California wildfires, resulting in total catastrophe losses of about $130 billion for the industry in 2017 – close to the
largest losses the industry has suffered in its history. Catastrophe losses cost us 13.7% of net premiums earned in 2017
versus 4.6% in 2016. Over the past ten years, catastrophe losses have cost us 7.7% of net premiums earned. The table
below shows you our 2017 losses from the major catastrophes (we acquired Allied World only in July 2017):

Hurricane Irma
Hurricane Maria
Hurricane Harvey
California wildfires
Mexico earthquakes
Other

Total catastrophe losses

As % of net premiums earned

Fairfax
excluding
Allied World
218
157
129
98
15
171

Allied
World
154
125
123
87
9
44

Total
372
282
252
185
24
215

788

9.1%

542

1,330

52.7%* 13.7%

* % of net premiums earned by Allied World since we acquired it in July 2017

As you can see, catastrophe losses for Fairfax amounted to $1.3 billion or 13.7% of net premiums earned; Allied
World’s losses as a percentage of net premiums earned were magnified as the losses were on only six months of
premiums: for the year, Allied World’s catastrophe losses were 25.1% of net premiums earned – higher than our own
experience. We do not expect this to be the case in the future. Our combined ratio for Fairfax, including Allied World,
was 106.6%, of which catastrophe losses accounted for 13.7%. Excluding Allied World, our catastrophe losses were

(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.

9.1% of net premiums earned – within the range you would expect in a very severe catastrophe year like 2017. Our
combined ratio excluding Allied World was 100.6%.

With the exception of Brit, which demonstrated a combined ratio under 100% excluding catastrophe losses, all of
our pre-existing major insurance subsidiaries continued to achieve a combined ratio under 100%, with Zenith and
Fairfax Asia at 85.6% and 88.4% respectively. But special mention must be made of OdysseyRe, whose business is
significantly subject to catastrophe risk.

OdysseyRe had an outstanding year in 2017, with a combined ratio of 97.4% in spite of the catastrophes, and
premiums growing by 17%. This was the first time in OdysseyRe’s history that its combined ratio was less than 100%
in a year of major catastrophe losses. A big round of applause for Brian Young and his team. It helped that Brian had
Hudson Insurance, which we began essentially from scratch in 2002 and which is run by Chris Gallagher, with
$1 billion in premium in 2017 at a combined ratio of 92%!

We have always told you that our results will be lumpy, and this was demonstrated in spades by our two large capital
gains in 2017:

from the reduction in our ownership of ICICI Lombard from 35% to 9.9%; and

from our strategic alliance with Mitsui Sumitomo Insurance Company and our sale of First Capital to them.

Why did we make these two sales?

ICICI Lombard is an Indian insurance company that we began in 2001 from scratch as a minority partner with ICICI
Bank. Over the following 16 years, ICICI Lombard went on to become the largest non-government-owned property
and casualty insurance company in India. Until fairly recently, our ownership interest was limited to 26% by
government mandate. About three years ago, the government allowed the foreign ownership to go to 49%, which
resulted in our going to 35% by buying 9% from ICICI Bank. Since then, given ICICI Lombard’s intent to go public,
ICICI Bank wanting to control ICICI Lombard with at least 55% ownership, and Indian law requiring that the public
own at least 25% of a public company, our ownership would be reduced to a mere 20%. As property and casualty
insurance is our core business and we are very optimistic about the growth prospects in India, and as Indian law does
not permit an ownership of 10% or more in more than one insurance company, we agreed with ICICI Bank that we
would reduce our interest in ICICI Lombard to below 10% so that we could start our own property and casualty
company in India, Digit. ICICI Lombard is a great company led by an exceptional leader, Bhargav Dasgupta, and we
wish them much success in the years to come. We have thoroughly enjoyed our partnership with ICICI Bank and its
CEO Chanda Kochhar and we wish them also much success in the future.

The reduction in our equity interest in ICICI Lombard from 35% to 9.9% resulted in cash proceeds of $909 million
plus our continuing to own 45 million shares of ICICI Lombard worth $450 million at the IPO (now worth about
$550 million) resulting in an after-tax gain of $930 million.

For the past two years, Mr. Athappan has come to me saying that he had taken First Capital as far as he could in the
commercial property and casualty business in Singapore and that he needed a partner like Mitsui with a brand name
to build the personal lines business. I refused him twice as I really did not want to sell First Capital. His continued
persistence, his position as the founder of the company, and the fact that he would continue to run Fairfax Asia and
First Capital and we would have a 25% quota share in the business of First Capital going forward persuaded us, with
unanimous support from our officers and directors, to form a global alliance with Mitsui Sumitomo Insurance
Company and sell First Capital to them. We worked very closely with Matsumoto san, the Senior Executive Officer of
International Business of Mitsui Sumitomo, and his team, and the partnership is going very well. Through our
cooperation agreement with Mitsui Sumitomo, we have been working together on a number of fronts including
opportunities on reinsurance, shared business and products and innovation to name a few. We are very excited to be
a partner with Mitsui Sumitomo. Total proceeds from the sale of First Capital were $1.7 billion, resulting in an
after-tax gain of $1.0 billion. I do want to emphasize that we agreed to this global alliance and sale only because of its
truly unique circumstances and we do not see this being repeated! Our companies are not for sale, period!

By the way, Mr. Athappan has had an incredible record with us in building First Capital. We provided $35 million in
2002 to let him establish First Capital; 15 years later, with no additional capital having been added, he had grown
First Capital to be the largest P&C company in Singapore and with the Mitsui Sumitomo deal, gave us back
$1.7 billion. That’s a compound rate of return of approximately 30% annually. A fantastic track record by
Mr. Athappan!

FAIRFAX FINANCIAL HOLDINGS LIMITED

While catastrophes in 2017 led to huge losses for us and the P&C industry, the following table shows the record of
OdysseyRe’s property book from 2000 to 2017 on an underwriting year basis (on this basis, losses are attributed to the
year when the insurance contract generating those losses was entered into, which may be the year prior to the year
when the loss was incurred):

Underwriting
Year
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017

Total

Net
Premiums
Earned
113
284
440
539
555
636
581
597
627
638
706
884
1,140
1,056
970
704
683
468

Combined Underwriting
Profit (Loss)
36
(12)
89
146
29
(193)
201
135
119
117
(141)
191
382
291
291
185
49
(174)

Ratio
68.1%
104.2%
79.7%
72.9%
94.8%
130.4%
65.4%
77.3%
81.0%
81.6%
120.0%
78.4%
66.5%
72.4%
70.0%
73.8%
92.8%
137.1%

11,621

85.1%

1,741

In spite of September 11 in 2001, hurricanes in 2005, the Tokyo earthquake, Thai floods and New Zealand
earthquakes in 2011, Super Storm Sandy in 2012 and the catastrophes of 2017, the cumulative combined ratio of
OdysseyRe’s property business over the last 18 years on an underwriting year basis was 85%. Catastrophes are the
foremost risk that a P&C company faces and we take great care to monitor our exposures carefully.

As I mentioned in the section on ICICI Lombard earlier, we are very excited to welcome Kamesh Goyal and his more
than 240 employees at Digit to Fairfax. Kamesh built Bajaj Allianz from scratch to be the second largest
non-government-owned P&C company in India and then spent a total of 17 years at Allianz, the last five years in
Munich operating at the highest levels. He is building a digital property and casualty insurance company in India,
which was created in December 2016 and has begun actively selling policies. We are very excited about the prospects
of Digit.

We closed our acquisition of Allied World on July 6, 2017 and we welcomed Scott Carmilani and Allied World’s
1,430 employees to the Fairfax family. As you know, Allied World is the largest acquisition that we have done and we
pursued this acquisition because of Allied World’s outstanding track record over its 15 years of existence and the
quality of its management team. We are very thankful to our financing partners OMERS ($1 billion), AIMCO
($0.5 billion) and two others. We issued a total of 5.1 million shares for Allied World. The effect of this acquisition is
shown in the table below, which was previously presented to you at our 2017 annual shareholders’ meeting:

($ billions)
Gross premiums written
Investment portfolio
Common shareholders’ equity
Shares outstanding (millions)
Investments per share ($)

(1) Combined numbers adjusted for financing and goodwill

Fairfax Allied World
3.1
8.7
3.6

10.2
27.4
8.5
23.1
1,186

Combined % Change
30%
29%
28%
22%
5%

13.3
35.3(1)
10.9(1)
28.2
1,250

As you can see, while this acquisition increased our gross premiums, investment portfolio and common equity by
about 30%, our shares outstanding grew by only 22%. Although we issued the Fairfax shares at a 6% premium to
book value while we purchased Allied World at a 32% premium to book value, we are confident that the high quality
of Allied World, let by Scott Carmilani, will make this an excellent acquisition for us, but we were not pleased at
issuing our shares at only a 6% premium to book value.

The table below shows the shares we have issued and retired over our history:

Shares
Issued Repurchased Outstanding Reason for Issue

1985
1986-90
1991-95
1996-00
2001-05
2006-10
2011-15
2016
2017

Total

(shares in millions)

2.3
3.8
5.3
5.5
4.3
2.2
1.0
5.1

29.5

1.8
0.4
1.1
0.8
1.6
0.5
0.1
0.4

6.7

5.0
5.5 Morden & Helwig
8.9 Hamblin Watsa/Ranger/Lombard

13.1 OdysseyRe/Sphere Drake/Crum & Forster/TIG
17.8
20.5
22.2
23.1
27.8 Allied World

Financial soundness
Zenith/OdysseyRe minority
Brit
ICICI Lombard/Eurolife

27.8

Over our history, we have issued 29.5 million shares as we expanded Fairfax from net premiums written of
$10 million to $10 billion (current run rate of $11.5 billion). During this period, we have also reduced our shares
outstanding by 6.7 million, for a net increase of 22.8 million. As the table below shows, our shares outstanding have
grown by 5.6x while net premiums written, investments and common equity have increased by 1,000x or more.
Henry Singleton, at Teledyne, reversed this trend, as you know, and over the next ten years we expect to do the
same – use our free cash flow to buy back our shares!

Net premiums written
Net earnings
Investment portfolio
Common shareholders’ equity
Shares outstanding (millions)

1985
10
(1)
24
8
5.0

2017
9,984
1,741
39,255
12,476
27.8

We have now completed our acquisition of AIG’s insurance operations in Argentina, Chile, Colombia and Uruguay.
In 2017, these Latin American operations had aggregate premiums of $580 million, an investment portfolio of
$249 million and common equity of $145 million. In total, 980 employees have joined the Fairfax family and we give
them a warm welcome.

Our Latin American operations, excluding Brazil, report to Fabricio Campos. We have a very small office in Miami
with Fabricio, Simon Bobbin (CFO) and Marcelo Milani (Chief Risk Officer) – and like it that way! We have strong
country managers in Juan Luis Campos (Argentina), Fabiana De Nicolo (Chile), Marta Lucia Pava (Colombia) and
Marcelo Lena (Uruguay). Latin America is very under-penetrated in insurance and has huge opportunity for us
over time.

Our Colonnade Insurance subsidiary, run by Peter Csakvari, acquired AIG’s operations in Bulgaria, the Czech
Republic, Hungary, Poland, Romania and Slovakia. We have strong country managers in Venislav Yotov (Bulgaria
and Romania), Dominik ˇStros (Czech Republic), Gabor Kov ´acs (Hungary), Pawel Holnicki-Szulc (Poland), Peter C´ısar
(Slovakia) and Svyatoslav Yaroshevych (Ukraine), all reporting to Peter Csakvari. We welcome the 229 employees of
these Central and Eastern Europe operations to the Fairfax family.

Both Fabricio and Peter work closely with Bijan Khosrowshahi while Andy Barnard provides oversight, as he does
with all of Fairfax’s insurance operations.

FAIRFAX FINANCIAL HOLDINGS LIMITED

I like to review all our annual reports before I begin writing the most recent one. I noticed this year that in 2011, I
wrote to you that the major risks for the economy would be felt in the next three years and after that, common stocks
would do very well over the next decade – and it was unlikely that bonds would outperform stocks in the next decade
as they had in the past two decades, given that long term treasuries were yielding only 2.9% at the time!
Unfortunately, we did not eliminate our index hedges after three years, since we continued to be concerned about
the economy, but that changed when the new U.S. administration got elected in 2016. We quickly eliminated our
index hedges and have virtually eliminated our individual shorts also, and it is extremely unlikely that we will resort
to shorting to protect our portfolios in the future. The new U.S. administration’s reduction in the corporate tax rate
to 21%, accelerated depreciation for capital expenditures, roll back in regulation and potential massive infrastructure
spending – combined with the fact that the U.S. has never had an eight year stretch of less than 2% real economic
growth – could result in much higher economic growth in the next few years. Higher economic growth would result,
we think, in higher profits for many companies, so that even though the indices may not go up significantly, we
think this will be a ‘‘stock pickers’’ market in which a value investor like us can thrive. So we are back to playing
offense again, recognizing of course that the stock market is not cheap. Long interest rates have bottomed out and
will likely go higher over the next five years, perhaps significantly higher.

We continue to be vigilant, though, about the many risks to global economic growth that prevail, including
protectionism and a collapse in world trade, China unraveling and a significant blow up in the junk bond market,
which is trading at record low spreads. To protect us against these risks, we continue to retain the $117 billion
notional amount in deflation swaps, which have 41⁄2 years to go and cannot cost us more (their carried value is only
$40 million). We also have more than $17 billion in cash and short term securities in our insurance portfolios which
should benefit from rising interest rates.

More on all of this in our section on investments.

In last year’s annual report, I documented the significant opportunity cost to our shareholders of our decision to
hedge our common stocks. Another cost of our hedging, and why it is extremely unlikely that we will repeat this in
the future, is that it required us to sell some wonderful long term common stock holdings, as shown below:

Johnson & Johnson
US Bancorp
Kraft
Wells Fargo

Total

Total Sale Realized
Gain
213
309
94
407

Proceeds
725
567
385
795

Cost
512
258
291
388

%
42%
120%
32%
105%

Current
Value
1,071
859
805
1,144

Increase
from
Sale
346
292
420
349

%
48%
52%
109%
44%

1,449

2,472

1,023

70%

3,879

1,407

57%

While we realized $1.0 billion on the sale of these long term common stock holdings, these compound growth
machines resulted in us leaving $1.4 billion on the table. A costly mistake we will try not to repeat!

Fairfax has benefitted greatly from its decentralized structure over its 32 years. It gives us a major competitive edge, as
it empowers our Presidents to run their operations unfettered from head office and allows us at head office to
respond quickly to risks and opportunities. Our North American insurance operations are run by Silvy Wright, Brian
Young, Marc Adee, Kari Van Gundy and Scott Carmilani; Brit is run by Matthew Wilson and Mark Cloutier; Advent is
run by Nigel Fitzgerald and William Beveridge; Fairfax Asia is run by Mr. Athappan; our Middle Eastern partnership,
Gulf Insurance, is run by Khaled Al Hasan; our Latin American operations, excluding Brazil, which is run by Bruno
Camargo, are under the supervision of Fabricio Campos; while Peter Csakvari runs our Central and Eastern European
operations and Bryte is run by Edwyn O’Neill. We, of course, monitor all of these insurance operations and provide
assistance as requested, essentially through Andy Barnard, supported by Peter Clarke, our Chief Risk Officer, and
others including Bijan Khosrowshahi, Jean Cloutier, Gobi Athappan, Ravi Prabhakar and Mark Cloutier, so that we
are confident that we are on top of all of the insurance operations (we buttress this by advising all our Presidents that
when there is bad news, we want to hear it quickly).

This same decentralized structure applies to our non-insurance operations. Cara is run by Bill Gregson but its
subsidiaries, such as Keg Restaurants and St. Hubert, are run separately by their own Presidents; Thomas Cook is run
by Madhavan Menon but its subsidiaries are run independently – Quess by Ajit Isaac and Sterling Holidays by
Ramesh Ramanathan; Fairfax’s Fairbridge subsidiary is run by Harsha Raghavan; and Fairfax Africa is run by Mike
Wilkerson and Neil Holzapfel. Our monitoring and assistance of these non-insurance operations is by Chandran
Ratnaswami as to the Indian operations, and otherwise by Paul Rivett; again, this and our instruction to give us bad
news quickly makes us confident that we are on top of all of the non-insurance operations.

As you can see, this structure allows us to attract the best and brightest in all the countries where we operate, while
our fair and friendly culture binds us all together. So when you see Fairfax acquiring companies, rest assured that
there is a proven President running the operations independently, with light monitoring by us.

In 1995, Chandran Ratnaswami joined us to build our international insurance and common stock investments,
particularly in India. I said then, ‘‘this may be an acorn for a future oak tree.’’ Well what an oak tree Chandran has
developed! We, with ICICI Bank, created the largest non-government-owned property and casualty insurance
company in India from scratch, managed an Indian investment portfolio with outstanding results for over 20 years,
created Fairbridge with Harsha Raghavan as Managing Director, acquired a 77% interest in Thomas Cook India
which then acquired Quess and Sterling Resorts, and finally created Fairfax India which now has a market value of
$2.5 billion. Chandran was intimately involved with all of these activities and serves on most of the Boards of our
Indian companies.

We now have approximately $5 billion(1) invested in India, employing a total of approximately 285,000 people, as
shown in the table below:

Cost of
Ownership Investment

Market

(under Number of

Value Change management)(1) Employees CEO

Market
Value

30.2
26.6
89.5

48.0
48.8

67.6
49.0
100.0

8.9
9.9

469

666

277
174
300
586
74
423

47
140

253

425
65
99
299

997

475
303
549
327

908
179
334
608
149
430

42%
228%
3%
11%
4%
101%
2%
294%
1,292 2,650%
9%
12%
364%
453%
10%

152

2,207

Chandran Ratnaswami

14,239 Nirmal Jain
3,521 Sanjay Kaul
2,252 N. Sankar

903 Hari Marar

1,336 Nahoosh Jariwala/Mahesh Babani

1,474

6,686 Madhavan Menon

250,000 Ajit Isaac

2,479 Ramesh Ramanathan

475
303
549
327

14,239 Nirmal Jain

6,460 Bhargav Dasgupta

Company

Fairfax India

IIFL
NCML
Sanmar
BIAL.
Fairchem
Other

Thomas Cook

Quess
Sterling Resorts
Government Bonds
IIFL
ICICI Lombard
Other

Total investments

1,610

3,317

106%

5,335

(1)

Includes 100% of Fairfax India and Thomas Cook

Our first major acquisition in India was the purchase of a 77% interest (later reduced to 68%) in Thomas Cook India
led by Madhavan Menon. Thomas Cook, first set up in India in 1881, is the leading integrated travel and travel-
related financial services company in India, offering, through its about 6,700 employees, a broad spectrum of services
that include foreign exchange, corporate travel, leisure travel, insurance, visa and passport services and e-business.
Through Thomas Cook India, we purchased Quess, founded and run by Ajit Isaac, and Sterling Resorts, run by
Ramesh Ramanathan. Thomas Cook India dominates the foreign exchange and high end travel business in India.
Through the purchase of Kuoni’s Indian travel business, and last year, its international operations all over the world,
Thomas Cook India is today one of the largest travel service provider networks headquartered in the Asia-Pacific
region. We welcome Asian Trails, Allied T Pro, Australian Tours Management, Desert Adventures, Travel Circle
International and Private Safaris East & South Africa to the Fairfax family, which added to Thomas Cook India’s
existing Thomas Cook, SOTC, TCI and Sita brands.

Quess has had a phenomenal run since we acquired our interest in it in 2013. Thomas Cook India invested
$47 million in Quess in 2013, sold 5.4% last year for $97 million and retains 49%, which is currently worth over
$1 billion. Because of Quess’ great success, Thomas Cook India intends to spin its holding in Quess out to its
shareholders during 2018 so that Quess can be run independently as a public company under the leadership of Ajit
Isaac. A big thank you to Madhavan Menon for nurturing Quess under the Thomas Cook India umbrella as it became
large enough to be a freestanding company. Today, Quess is India’s leading integrated business services provider.
With over 250,000 employees, the company has a pan-India presence with 65 offices across 34 cities, along with an
overseas footprint in North America, the Middle East and South East Asia. It serves over 1,700 customers across five
segments – Industrials, Global Technology Solutions, People and Services, Integrated Facility Management and
Internet Solutions.

FAIRFAX FINANCIAL HOLDINGS LIMITED

When Mr. Modi got elected in 2014, we thought, based on his outstanding track record in Gujarat, that India could
be transformed by ‘‘an unabashedly business friendly government’’. We are even more excited about India’s
prospects today than we were in 2014. Mr. Modi’s election led us to create Fairfax India, which has just completed its
third year as a public company listed on the TSX. I must say, its success, under the leadership of Chandran
Ratnaswami, Harsha Raghavan and the team at Fairbridge, has far exceeded even our most optimistic expectations. I
cannot fail to mention that Deepak Parekh, the Founder and Chairman of HDFC and now a director on the Board of
Fairfax India, has been instrumental in Fairfax India’s success, as we have not done anything without his
wise counsel.

Fairfax India’s investments are shown in the table on page 9. Chandran’s letter to shareholders in Fairfax India’s
annual report and the individual company websites give you a lot more information on each of Fairfax India’s
investee companies. Please read that report for more details.

Suffice it to say, we have built a huge amount of intrinsic value in Fairfax India which is much in excess of its current
market value. When after-tax profits are growing at over 30%, as they have at IIFL and other companies in India, a
P/E ratio of 20x drops quickly to 9x in three years. We are optimistic about all our investments in Fairfax India and
expect over the years to invest much more money in that country. We think the opportunity in India is unparalleled!
Our investment in Fairfax India was $469 million, and its market value today is $753 million.

Also, every three years we are eligible for a performance fee from Fairfax India. In the three years ending
December 31, 2017, from the IPO price of $10 per share, Fairfax India investors enjoyed a 15.5% gross annual
compound return and a net 13.5% return after payment of the performance fee, versus 5.9% for the US$ S&P BSE
Sensex Index. As a result of this excellent performance, the performance fee for the three-year period to the end of
2017 was $114 million, which we took, as required, in shares of Fairfax India, thereby increasing our ownership to
33.6% from 30.2%. Much more to come from Fairfax India.

With Roger Lace, Brian Bradstreet and I having worked together for over 40 years, we felt it was time to begin the
transition to a younger group for the management of our investment portfolios, of course supervised by the three of
us. So Roger will pass the title of President of Hamblin Watsa to Wade Burton, while he becomes Chairman. Wade,
currently Hamblin Watsa’s Chief Investment Officer, has been with us since 2009 and has achieved an outstanding
return on the investment portfolio he has been managing (he should have been managing all of the portfolios!).
Wade, Lawrence Chin and Quinn McLean (who is also responsible for the Middle East and Africa) will be responsible
for running our North American portfolios, Jamie Lowry our U.K. and European portfolios, Yi Sang our Southeast
Asia and greater China portfolios, and Jeff Ware our Latin American portfolios. Peter Furlan is our Director of
Research and Paul Ianni is Vice President and our exceptional analyst. Together we work as a team, and with our
investment decision-making now more dispersed than in the past but supervised by Roger, Brian and myself, I am
really excited about our potential returns under Wade’s leadership. Wade works closely with Paul Rivett and myself.

With $40 billion in investments, a current run rate of $11.5 billion in net premiums written and $12.5 billion in
common shareholders’ equity, we need an investment return of approximately 7% in order to achieve an annual
15% increase in book value per share, assuming a consolidated combined ratio of 95% at our insurance operations.
We have drilled deeper and by analyzing each of our consolidated insurance companies (a total of 21), we have
estimated the investment return needed for each company in order for us to achieve our 15% target. We have
delegated investment responsibility for each of our insurance companies to one member of our investment team.

In our restaurant businesses, we ended the year with a bang! After over four years of working together collaboratively,
David Aisenstat from the Keg and Bill Gregson at Cara decided to merge their two businesses. Fairfax assisted with the
transaction by agreeing to contribute its 51% ownership of the Keg, primarily in return for shares of Cara. The
combined businesses will have a network of 1,365 restaurants with total system sales in excess of Cdn$3.5 billion and
EBITDA in excess of Cdn$200 million. Much like with the St. Hubert transaction, the Keg business will continue to be
run independently from its head office in Vancouver and regional office in Toronto under the leadership of David
Aisenstat and his senior executive team, including Neil Maclean, Doug Smith and Jamie Henderson. David will also
assist with the other premium brand restaurants in the Cara group. In the coming months, the publicly traded Cara
will look to change its name and ticker symbol to reflect the changing nature of the business following the Keg
transaction. In 2017, Cara also purchased the Pickle Barrel restaurant group from a group led by its CEO, Peter Higley.
Pickle Barrel had approximately Cdn$50 million in sales in 2017 from 12 restaurants as well as a 50% partnership
with Rose Reisman in one of Canada’s premier catering businesses. Peter Higley will continue to run the company
and provide his expertise to the Cara group. The Cara team continues to watch for accretive acquisition

opportunities, but if none present themselves, they will focus on debt reduction and share buybacks with excess free
cash flow.

Our partner, Mark McEwan, grew the sales in his business for the fifth straight year. Mark continues to grow his
highly-respected brand with the entrepreneurial, customer service focus we look for in each of our business partners.
We are particularly excited about the growth of his high-end grocery and ready-made meal locations.

In addition to our restaurant businesses, our investment in the Davos craft spirit brands, in partnership with our
good friend David Sokol and the management team led by Andrew Chrisomalis, continues to do exceptionally well.
Davos’ brands include TYKU Sake, Aviation American Gin, Sombra Mezcal and Astral Tequila. Davos recently
partnered with Ryan Reynolds (star of the blockbuster movie Deadpool) in Aviation American Gin.

Our partners at Sporting Life, David and Patti Russell, had a fantastic year with over Cdn$160 million in sales as they
continued to roll their brand out across Canada. We love the winter here in Canada!

On the other side of the seasonal divide, our boys of summer, Chad McKinnon and Fred Lecoq, continued to exceed
expectations, with the Golf Town business now running profitably on approximately Cdn$250 million in sales in
2017 following a somewhat difficult exit from bankruptcy last year (we bought Golf Town on its exit from
bankruptcy). Chad and Fred and their team have also worked collaboratively with the team at Sporting Life on a
number of mutually beneficial projects.

Kitchen Stuff Plus continued its profitable, steady growth in Ontario. Our partner, Mark Halpern, is relentless on
costs but has also found ways to expand creatively and profitably. Meanwhile, Jackie Chiesa and her team at William
Ashley have been focused on the build-out of their new one-of-a-kind retail location while continuing to benefit
from the ongoing success of their iconic holiday warehouse sale.

Sean Smith, Alan Maresky, Mike Wallace, Michelle Cole and the entire team at Pethealth continue to grow their
business, recently acquiring the pet portfolio from PC Financial. With Pethealth’s software solutions in over
3,000 locations across the U.S. and Canada, the business continues to see substantial proprietary opportunities
assisting pets and their owners with adoption, recovery and health insurance.

David Fortier, Ivan Schneeberg and John Young, our partners at Boat Rocker Media, continued to grow their business
with several acquisitions, including Proper Television and Fremantle Media’s Kids and Family Entertainment
division. The company has grown from Cdn$90 million in production volume in 2015 to Cdn$130 million last year
and has been profitable since inception eleven years ago.

Rouge Media and our partners, Martin Poitras and his wife Alison Jacobs, continued their profitable expansion in the
out-of-home media space across the U.S. and Canada while doubling sales in 2017. The Rouge team continues to see
many long-term organic growth and acquisition opportunities, particularly in certain U.S. niches.

Our partnership with Paul Desmarais III and his excellent team at Sagard Capital progressed well through 2017. The
Bauer and Cascade brands are overseen by Ed Kinnaly and the Easton business by Tony Palma. Both businesses have
recovered nicely since we acquired them on their exit from bankruptcy and both revenue and earnings are outpacing
expectations.

Arbor Memorial, which we helped the Scanlan family take private in 2012, continues to do well. Brian Snowden and
the Scanlan family have proven to be great partners. Death care continues to be an excellent business in Canada.

FairVentures’ innovation efforts at Fairfax continued to progress well throughout 2017. As you will recall,
FairVentures, led by Gerry McGuire, is focused on identifying innovations and technologies that may disrupt the
Fairfax group businesses. Gerry works closely with Dave Kruis and the Innovation Lab in Waterloo, Davidson Pattiz
and the many dedicated creative volunteers participating in the Fairfax Innovation Working Group as well as JD
Dolan and his accelerator group at LDR. This year we will be presenting the inaugural Presidents’ Innovation Award
to the team in the Fairfax group that has shown the most innovative achievement in the year (no easy task to choose
a winner from over 31 submissions from over 10 companies across our group!).

John Chen has completed the transition of BlackBerry from a smartphone company to a software company with
about $1 billion in revenue and growing. BlackBerry’s reputation for security for mobile devices, its focus on an
integrated internet of things system and its very large patent portfolio stand it in good stead for the future. Its QNX
platform has had much success with building autonomous car systems for the major automobile companies, and its
Radar for the trucking industry continues to excel. In 2017, BlackBerry also benefitted from a $1 billion (about $2 per
share) arbitration award from Qualcomm. We continue to bet on John!

FAIRFAX FINANCIAL HOLDINGS LIMITED

Early in 2017, we listed another Fairfax company, Fairfax Africa, on the TSX. This was a result of our excellent
experience with Mike Wilkerson and Neil Holzapfel on taking the Afgri Group private in 2014. Mike and Neil had
further opportunities for investment in Africa and we enthusiastically adopted Paul Rivett’s proposal that the best
way to take advantage of those opportunities was to clone Fairfax India and create Fairfax Africa, a company focused
on investments in Africa. Neil, Trent Hudson and Jim Bisenius, based in Johannesburg, South Africa, have a heart for
Africa and, with Mike, fit our fair and friendly culture well. So we raised $500 million, of which we contributed
$325 million, including our interest in Afgri Group. Fairfax Africa made two additional investments in 2017 – Atlas
Mara and Nova Pioneer. Richie Boucher of Bank of Ireland fame joined the Eurobank Board and has also joined the
Atlas Mara Board. We are excited to have Richie as our partner, especially on anything to do with banks. Fairfax Africa
has had a good start in 2017. Please read the company’s annual report for further details.

2018 should be the year for Greece as the government fulfills all its requirements to exit the ECB program. Also,
Greece has at last accessed the bond market – once in August 2017 for A3 billion and more recently in February 2018
for A3 billion of seven-year bonds with a yield to maturity of 3.5%. Greece is expected to have GDP growth of 2.6% in
2017 and the unemployment rate has dropped from 28% to 21% currently. Greece attracted foreign direct
investment for the first time in a long time in 2017. Given how far the Greek economy has fallen (27%), it is likely
that Greece will recover strongly in the next four years. In fact, the Greek purchasing manager index has recently
been at record highs. The yield on ten-year Greek government bonds, which at the height of the Greek crisis reached
35%, has recently dropped below 4%. With Greece having access to the bond market and strong economic growth,
we expect our Greek investments to do very well (at last!). The table below shows our investments in Greece:

Eurobank Ergasias
Grivalia Properties (see more detail below)
Mytilineos
Praktiker and Other

Percent decline

December 31, 2017

Cost
975.5
396.3
15.9
32.7

Fair Value
395.0
568.6
31.5
34.5

1,420.4

1,029.6

(28)%

Not shown in the table above is our investment in Eurolife led by Alex Sarrigeorgiou. As you know, Eurolife is one of
Greece’s leading life and non-life insurance companies, created by Eurobank in 2000. We bought our share of Eurolife
in 2016 for $181 million, with Eurolife being 40% owned by us, 40% by OMERS and 20% by Eurobank. We expect to
buy out OMERS within the next two years, so Eurolife will become a Fairfax insurance subsidiary. Eurolife has earned
$111 million (our share) since we acquired it, benefitting greatly from a Greek bond portfolio of about A1 billion. The
non-life portfolio had a combined ratio less than 70% again in 2017. We are very excited to be partners with Alex and
his team at Eurolife as they build a very successful company in Greece.

In 2017, we raised our equity interest in Grivalia to 52.7% by buying 10.3% for $100 million when Eurobank decided
to divest its interest in Grivalia. It has been six years since we first met George Chryssikos, the outstanding CEO of
Grivalia. Through Wade Burton, we took our first position in Grivalia in 2011 at A5.77 per share. George has
navigated the Greek economic crisis superbly by buying only the highest quality commercial buildings and shopping
centres at huge discounts to replacement cost and unlevered returns of 8% to 10%, not using excessive leverage and
always focusing on the long term. We are very excited to be partners with George and his team as they build a
fantastic real estate company. Like Bill McMorrow at Kennedy Wilson, George has a unique nose for value in real
estate! And like all our Fairfax companies, he is building a fine company, focused on its customers, looking after its
employees, making a return for shareholders and gratefully reinvesting in the communities where it operates.
Business is a good thing!!

As this may well be Greece’s year, we think Eurobank will benefit greatly as its non-performing loans drop
significantly and margins begin to increase again. Eurobank has been superbly run by Fokion Karavias as he also
navigated an economy undergoing a depression. Eurobank is well financed and we expect it to pass the stress tests all
Greek banks will go through this spring. At 74 Euro cents, with a book value of A2.64 per share, we consider Eurobank
to be one of the cheaper stocks in the world! Let’s see what happens this year!

Finally in Greece, Praktiker and Mytilineos also continue to do well.

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
2013
2014
2015
2016
2017
1985-2017 (compound annual growth)

INTRINSIC VALUE
% Change in
US$ Book Value per Share
+180
+48
+31
+27
+41
+24
+1
+42
+18
+25
+63
+36
+30
+38
(cid:2)5
(cid:2)21
+7
+31
(cid:2)1
(cid:2)16
+9
+53
+21
+33
+2
(cid:2)3
+4
(cid:2)10
+16
+2
(cid:2)9
+22
+19.5

STOCK PRICE
% Change in
Cdn$ Price per Share
+292
(cid:2)3
+21
+25
(cid:2)41
+93
+18
+145
+9
+46
+196
+10
+69
(cid:2)55
(cid:2)7
(cid:2)28
(cid:2)26
+87
(cid:2)11
(cid:2)17
+38
+24
+36
+5
–
+7
(cid:2)18
+18
+44
+8
(cid:2)1
+3
+18.1

The table shows the change in book value in U.S. dollars and our stock price in Canadian dollars. As I have said
before, we think our intrinsic value far exceeds our book value. As shown in the table, there have been many years
when our stock price has gone up significantly as that intrinsic value is recognized in the marketplace. We are focused
on performing to make that happen again!

FAIRFAX FINANCIAL HOLDINGS LIMITED

Insurance and Reinsurance Operations

The table below shows the recent combined ratios and the 2017 change in net premiums written of our insurance
and reinsurance operations:

Combined Ratio

2017

2016
99.1% 94.9%
97.4% 88.7%
99.8% 98.2%
85.6% 79.7%
113.1% 97.9%
157.0%(3)
–
88.4% 86.4%
110.2% 93.7%

2015
91.8%
84.7%
97.7%
82.5%
94.9%(2)

–
87.9%
89.6%

106.6% 92.5%

89.9%

Change in Net
Premiums
Written

2017
13.0%(1)
18.8%
3.5%
2.2%
3.4%
–

(6.2)%(4)
4.9%(5)

8.3%(6)

Northbridge
OdysseyRe
Crum & Forster
Zenith
Brit
Allied World
Fairfax Asia
Other Insurance and Reinsurance

Consolidated

(1) An increase of 10.7% in Canadian dollars

(2) For the period since its acquisition on June 5, 2015

(3) For the period since its acquisition on July 6, 2017

(4) Excluding AMAG and Fairfirst

(5) Excluding Bryte, Fairfax Latin America (other than Fairfax Brasil) and operations acquired by Colonnade in 2017

(6)

Insurance and reinsurance operations, excluding Allied World and the acquisitions described in footnotes (4) and (5)

Northbridge continued to strengthen its position in the Canadian marketplace. A flurry of large loss activity
adversely affected results at its Federated subsidiary, generating an unfavorable 117% combined ratio. For
Northbridge as whole, Silvy Wright and her team produced a combined ratio of 99.1% – 96.0% excluding Federated.
As has consistently been the case, Northbridge’s conservative reserving practices benefitted our calendar year results
once again. Premiums grew over 10%, and the various brand and distribution initiatives undertaken over the last
several years are expected to bear fruit in the years ahead.

At OdysseyRe, Brian Young and his colleagues distinguished themselves in 2017 by posting a combined ratio of
97.4% despite the historic level of catastrophe losses. Compared with others in the market, this stands out as a
remarkable accomplishment and speaks to the singular underwriting discipline and portfolio management skills
present at Odyssey. Also worth noting, Odyssey’s specialist insurance arm, Hudson Insurance, posted a 91.8%
combined ratio and surpassed the billion dollar mark in gross premiums written in 2017. Great credit goes to Chris
Gallagher, CEO of Hudson, and the terrific team he has assembled over the years!

Crum and Forster’s results were largely stable. Its combined ratio of 99.8% reflected approximately one point of
catastrophe activity from the major windstorms. Results were very favorable in the excess and surplus lines division,
which includes business from the prior acquisitions of First Mercury and American Safety. The transportation
division, under Joe DeVito, continued to ramp up. Under the leadership of Marc Adee, Crum and Forster continues to
develop its middle market specialty lines footprint in the United States, and we think its future is bright.

Guided by the strong leadership of Kari Van Gundy, Zenith outshone all of our companies in 2017 by producing an
underwriting profit of $117 million and a combined ratio of 85.6%. Since our purchase of Zenith in 2010, it has gone
from producing our worst combined ratio to our best. Throughout that period, Kari and her predecessors, Jack Miller
and Stanley Zax, have maintained an unwavering commitment to professional excellence. Aside from the
superlative results being generated within Zenith, its unparalleled expertise in the workers’ compensation field has
been a boon elsewhere in Fairfax, as our companies have been adept at leveraging the Zenith capabilities to improve
their own results.

Brit’s results were negatively impacted by the spate of catastrophes in 2017, as both its insurance and reinsurance
divisions were hit hard. Its combined ratio of 113.1% included over 16 points related to the storms, earthquakes and
wildfires. Brit’s underlying business remains sound, and the underwriting culture guided by CEO Matthew Wilson is
well-positioned to capitalize as opportunities emerge from the ever-changing markets. Special mention should be made
of CFO Mark Allan, who has overseen a variety of innovative initiatives designed to improve Brit’s financial flexibility.

Allied World became part of the Fairfax group in 2017, and it sure entered with a bang! As a prominent writer of
catastrophe risk, Allied World was not spared the worst of the losses in the second half of the year. At Fairfax, we were
unfortunately deprived of Allied World’s favorable results from the first half of the year. Hence, for the six months
Allied World’s results are included in Fairfax, its combined ratio was an unpleasant 157%. As we turn the page into 2018
and beyond, we expect big things from Allied World, carrying on the consistent excellence of every one of the
15 pre-2017 years since it began. Scott Carmilani and his team are savvy operators, and they give us a prominent
presence in markets in which we have heretofore had a limited presence.

From Singapore, Mr. Athappan had another excellent year for Fairfax Asia with an 88.4% combined ratio. First Capital
was, of course, the star performer and we will miss its performance in the future. Fairfax Asia, excluding First Capital,
had a combined ratio of 99.2% with gross premiums written of $333 million.

In South Africa, Bryte Insurance had its first full year as a Fairfax company, generating gross premiums written of
$349 million and a combined ratio of 101.2%. Local catastrophe losses pushed Bryte’s combined ratio into the red in
2017. We expect Edwyn O’Neill and his strong team to deliver an underwriting profit for us in 2018.

Bruno Camargo of Fairfax Brasil brought his combined ratio in at 98.3%, despite ongoing market challenges. In fact,
Fairfax Brasil was one of the few companies operating in the Brazilian market to produce an underwriting profit in
2017.

In London, Advent had a difficult year. Its combined ratio of 126.3% yielded an underwriting loss of $49 million.
Catastrophe losses were the primary culprit, though adverse results in the marine and accident and health divisions
contributed to the red ink. Nigel Fitzgerald and William Beveridge, our leaders at Advent, are hard at work righting
the ship!

Our partnership in Gulf Insurance, which operates in 11 countries in the Middle East, is going very well. Although its
results slipped a bit, we were pleased to see that it still produced an underwriting profit at a 99.8% combined ratio.
Bijan Khosrowshahi continues to do an excellent job working with Khaled Al Hasan, Gulf’s excellent CEO. As I have
said previously, Faisal Al-Ayyar, from Kipco, has been an outstanding partner for us.

FAIRFAX FINANCIAL HOLDINGS LIMITED

The table below shows you our international operations at December 31, 2017:

Fairfax Share

Gross

Premiums Shareholders’
Equity

Written

Investment

Gross
Fairfax Premiums Shareholders’
Equity

Portfolio Ownership Written

Consolidated
Fairfax Latam(1)
Advent (Lloyd’s)
Bryte Insurance (South Africa)
Fairfax Brasil
Colonnade (Central and Eastern

Europe)

Pacific Insurance (Malaysia)
AMAG (Indonesia)
Polish Re
Falcon Insurance (Hong Kong)
Fairfirst Insurance (Sri Lanka)

580
271
349
148

126
122
112
65
63
66

145
130
150
64

67
109
234
96
73
35

249
468
234
159

104
152
128
229
134
40

100%
100%
100%
100%

100%
85%
80%
100%
100%
78%

580
271
349
148

126
104
90
65
63
51

145
130
150
64

67
93
187
96
73
27

Non-consolidated
Gulf Insurance (Middle East)
Eurolife (Greece)
Alltrust Insurance (China)
BIC (Vietnam)(2)
Falcon Insurance (Thailand)

Total International

Operations

1,902

1,103

1,897

1,847

1,032

1,005
546
962
83
52

2,648

280
782
387
93
17

780
3,264
959
143
33

1,559

5,179

41%
43%
15%
35%
41%

416
236
144
29
21

846

116
338
58
33
7

552

4,550

2,662

7,076

2,693

1,584

(1) Full year 2017 premium (the component operations basically joined at different times during 2017)

(2) As at and for the 12 months ended September 30, 2017

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

As at and for the Year Ended
December 31, 2017

Net Premiums
Written

Surplus
Cdn 1,381.0 Cdn 1,442.2

Net Premiums
Statutory Written/Statutory
Surplus
1.0x
0.6x
1.4x
1.5x
1.4x
0.9x
0.4x

4,067.7(1)
1,302.3
571.7
1,130.3
2,523.8(3)
478.5(5)

2,495.9
1,863.4
837.4
1,530.9
2,238.8(2)
201.3(4)

Northbridge
OdysseyRe
Crum & Forster
Zenith
Brit
Allied World
Fairfax Asia

(1)

IFRS total equity

(2) Net premiums written is for full year 2017

(3) US GAAP equity

(4) Net premiums written excludes First Capital

(5)

IFRS equity, excluding certain holding company investments

On average we are writing at about 0.8 times net premiums written to surplus. In the hard markets of 2002 – 2005 we
wrote, on average, at 1.5 times. We have significant 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.

The combined ratios of our companies which we have owned since 2008 are shown in the table below:

Northbridge
OdysseyRe
Crum & Forster
Zenith(1)
Fairfax Asia

Total

(1) Since acquisition on May 20, 2010

2008 – 2017

Cumulative Net
Premiums Written
($ billions)
Cdn 11.2
21.7
12.6
5.4
2.3

53.2

Average
Combined Ratio

100.2%
93.8%
103.4%
96.2%
82.9%

97.2%

Since we began, we have written over $100 billion in net premiums, with a combined ratio of approximately 100%.

The table below shows the average annual reserve redundancies for the past ten years (business written from 2007
onwards) for our companies which we have owned since 2007:

Northbridge
OdysseyRe
Crum & Forster
Zenith(1)
Fairfax Asia

(1) Since acquisition on May 20, 2010

2007 – 2016
Average Annual
Reserve
Redundancies
14.7%
12.8%
0%
11.9%
15.4%

The table shows you how our reserves have developed for the ten accident years prior to 2017. 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 process. More on our reserves in the MD&A and the
Annual Financial Supplement for the year ended December 31, 2017 available on our website www.fairfax.ca.

Our run-off operations under the leadership of Nick Bentley continued to be busy in 2017, looking at over fifteen
acquisition opportunities but completing only the one which met its standards. Nick and his team continue to
exhibit a disciplined approach on the acquisition front, an approach which is validated by the success of their past
run-off acquisitions. Run-off had an operating loss of $185 million in 2017, reflecting development on asbestos reserves
from our legacy business and depressed investment income as a result of the low interest rate environment. Late in
2017, run-off made the final payment of $125 million in regard to the purchase consideration associated with the
acquisition of TRG (our original run-off management team) in 2002. As we have said before, we strongly believe that
RiverStone was one of the best acquisitions we have made.

FAIRFAX FINANCIAL HOLDINGS LIMITED

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

Year
1986
2008
2017

Weighted average last ten years
Fairfax weighted average financing differential last

ten years: 3.4%

Underwriting
Profit
3
(281)
(642)

Average
Float
22
8,918
16,978

Cost
(Benefit)
of Float
(11.6)%
3.1%
3.8%

Average
Long Term
Canada Treasury
Bond Yield
9.6%
4.1%
2.3%

(0.5)%

2.9%

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. 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, is why we feel we can achieve our long term objective of compounding book value per
share by 15% per annum. In 2017, our cost of float was 3.8% versus only 2.3% for the long term Canadian bond yield.
In the last ten years, our float has cost us nothing (in fact, it provided a 0.5% benefit per year) – significantly less than
the average 2.9% that it cost the Government of Canada to borrow for ten years.

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

Insurance and Reinsurance

Total
Insurance
and

Year

2013
2014
2015
2016
2017

Northbridge OdysseyRe

Asia Other Reinsurance Run-off Total

Crum &
Forster National Brit World

Zenith

Allied Fairfax

2.1
1.9
1.6
1.7
1.8

4.7
4.5
4.2
4.0
4.4

2.3
2.6
2.6
2.7
2.9

($ billions)
–
1.2
1.2
–
1.2 2.7
1.2 2.8
1.2 3.1

–
–
–
–
5.4

0.5
0.5
0.6
0.6
0.2

1.0
0.9
0.8
0.8
1.2

11.8
11.6
13.7
13.8
20.2

3.7 15.6
3.5 15.1
3.4 17.1
2.9 16.7
2.5 22.7

In the past five years our float has increased by 46%, due partly to organic growth in net premiums written at Crum &
Forster, Zenith and Fairfax Asia, but due principally to the acquisition of Brit and Allied World.

Of course, our float and float per share have grown tremendously since we began in 1985, as the table below shows. This
has been one of the key reasons for our success in the past and will continue to be a key reason in the future.

Total Float
13
164
653
5,877
8,757
13,110
16,673
22,730

Float per Share
$2 1⁄2
30
74
449
492
641
722
819

1985
1990
1995
2000
2005
2010
2016
2017

Our float increased to $819 per share, a 13% increase from 2016.

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 and reinsurance

Northbridge
OdysseyRe
Crum & Forster
Zenith
Brit
Allied World
Fairfax Asia
Other

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

Operating income (loss)
Run-off (excluding net gains (losses) on investments)
Non-insurance operations
Interest expense
Corporate overhead and other

Pre-tax income (loss) before net gains (losses) on investments
Net realized gains (losses) on investments

Pre-tax income (loss) including net realized gains (losses) on investments
Net change in unrealized gains (losses) on investments

Pre-tax income (loss)
Income taxes and non-controlling interests

Net earnings (loss)

2017

2016

9.0
60.0
3.2
117.2
(201.9)
(586.6)
38.2
(80.6)

(641.5)
425.8

(215.7)
(184.6)
212.1
(331.2)
56.5

46.3
235.2
32.4
164.1
29.1
–
41.1
27.7

575.9
463.3

1,039.2
(149.4)
133.5
(242.8)
(131.2)

(462.9)
1,742.0

649.3
(2,071.4)

1,279.1
744.1

(1,422.1)
867.8

2,023.2
(282.6)

(554.3)
41.8

1,740.6

(512.5)

The table shows the results from our insurance and reinsurance (underwriting and interest and dividends), run-off
and non-insurance operations (which shows the pre-tax income (loss) before interest). Net realized gains (losses) and
net change in unrealized gains (losses) are shown separately to help you understand the composition of our earnings.
In 2017, after interest and dividend income, our insurance and reinsurance companies had an operating loss of
$215.7 million because of the catastrophes discussed earlier. Excluding unrealized gains, our pre-tax income was
$1.3 billion. All in, after-tax income was $1.74 billion. (See more detail in the MD&A.)

FAIRFAX FINANCIAL HOLDINGS LIMITED

Financial Position

Holding company cash and investments (net of short sale and derivative

obligations)

Borrowings – holding company
Borrowings – insurance and reinsurance companies
Borrowings – non-insurance companies

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

(1) Excludes non-insurance minority interests

Consolidated
2017

Excluding
Non-Insurance
Company Debt
2017

2,356.9

3,475.1
1,373.0
1,566.0

6,414.1

4,057.2

12,475.6
1,335.5
4,600.9

18,412.0

22.0%
18.1%
25.8%
7.1x
6.0x

2,356.9

3,475.1
1,373.0
–

4,848.1

2,491.2

12,475.6
1,335.5
1,725.9(1)

15,537.0

16.0%
13.8%
23.8%
8.0x
6.5x

When we have a controlling interest in a company (for example, Cara or Thomas Cook India), we are required to
consolidate that company’s financial statements into our own financial statements even though we do not guarantee
the debt – and quite often it is an investment in a public company. From this year onwards, we will show you our
financial position both on a consolidated basis as well as excluding the debt of non-insurance companies that we do
not own 100%. Excluding non-insurance company debt, our debt/capital ratios are excellent and for 2017, we had
interest and fixed charge coverage of 8.0x and 6.5x respectively.

Excluding hedging losses, which we are quite confident will not be repeated, our interest and fixed charge coverage
in the last five years was 7.1x and 5.4x respectively.

We have a very strong financial position, with $2.4 billion in cash and marketable securities at the end of 2017 and
very limited debt maturities in the next three years as we continue to refinance near-term maturities. In addition,
during 2017 we increased our unused four-year bank lines to $2 billion from $1 billion, while improving the
covenants. Our financial position is rock solid, much better than our ratings would suggest!

Investments

The table below shows the time-weighted compound annual returns (excluding equity hedging) achieved by
Hamblin Watsa, 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
S&P 500
Taxable bonds

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

5 Years
7.2%
15.8%
4.2%
2.8%

10 Years
4.2%
8.5%
9.0%
4.8%

15 Years
10.9%
9.9%
9.6%
4.7%

The table shows that our common equity results have been poor, particularly during the past five years! We are
working on changing that soon. Our bond results continue to be outstanding.

The last five years have favoured momentum investing and growth stocks. Value investing has underperformed in
the last five years but its time will come again. In fact, during the 1999-2001 period when the S&P 500 dropped 40%,
Fairfax’s stock portfolio went up 100%. Don’t give up on us yet!

We think economic growth under the new U.S. administration will be robust due to the reduction in the corporate
tax rate to 21%, the rollback in regulation and potential infrastructure spending. These policy changes, combined
with the fact that the U.S. has never had an eight year stretch of economic growth less than 2%, potentially provides
a long runway for above average economic growth. Animal spirits are alive and well in the U.S. as economic
optimism by small business has never been higher. When President Reagan dropped taxes (corporate and personal)
in 1981, economic growth in the following four years was 4% per year – and this may well be repeated in the next few
years! Earnings for the S&P 500 index are forecasted to be about 150 in 2018 or a price earnings ratio of 18x at current
levels. If economic growth is robust, these price earnings ratios could prevail for some time as they did in the 1960s.
In this environment, a ‘‘stock pickers’’ market, we are playing offense even though we recognize the stock market is
not cheap. Of course, it may not be as expensive as the Shiller CAPE Price Earnings Ratio suggests, because a price
earnings ratio based on ten-year average earnings may not be appropriate when earnings are increasing
significantly – as they are currently.

Here is a listing of the debt and warrants that we have acquired over the past 18 months:

Debt and warrant deals

Company

Seaspan
Chorus Aviation
AGT Foods
Mosaic Capital
Altius Minerals
Westaim

Principal

Warrant
Coupon Maturity

Warrant
Strike Price

Current

Potential
Stock Price Ownership

250
155
148
116
78
39

786

5.5% Feb-2025
6.0% Dec-2024
5.4% Aug-2024
5.7% Jan-2024
5.0% Dec-2024
5.0% Dec-2024

5.5%

(local currency)
6.50
8.25
33.25
8.81
15.00
3.50

5.87
8.09
15.61
6.50
13.42
2.95

22.4%
16.2%
19.1%
61.7%
13.4%
8.2%

We have invested approximately $800 million with an average yield of 5.5% in these debt and warrant deals. We will
get an annual income of $43 million while we wait for the warrants to become valuable over time. We expect to do
many more of these deals in the U.S. and Canada with companies that have great long term track records and who
would like to have a supportive, friendly long term shareholder.

In this connection, you will have noticed that with the unanimous approval of our board of directors, we invested
$50 million in a global small and mid-cap fund with a long term value orientation managed by my son, Ben. The
fund has had excellent results over the six years since it began, and the small and mid-cap area where the fund invests
is quite different from the areas where we invest. We invested in that fund to get access to these excellent returns, but
also to potentially do debt and warrant deals with some of the fund’s investee companies.

Late in 2017, we had the good fortune to be a partner with David Sokol and Dennis Washington, two outstanding
businessmen with great track records, by investing in Seaspan. Dennis is the largest shareholder of Seaspan while
David became its Executive Chairman in July 2017. David has one of the most outstanding records I have come
across, as he built Mid American Energy from revenue of $116 million in 1991 to revenue of $11 billion in 2010,
while net income increased from $27 million to $1.2 billion over the same period, representing a compound growth
rate of 22.4% per year.

Seaspan is the world’s largest independent owner of container ships, managing a fleet of 110 container ships
representing a total capacity of approximately 900,000 TEUs (twenty foot equivalent unit cargo containers) and with
a current operating fleet of 89 vessels with an average age of approximately six years and an average remaining lease
period of approximately five years. Lease rates for container ships appear to have bottomed out and have increased
significantly recently. We have invested $250 million in a seven-year debenture with a coupon of 5.5% with warrants
exercisable at $6.50 per share, for a potential ownership position of 22.4%.

A couple of years ago, Paul Rivett came across a great Canadian entrepreneur, Murad Al-Katib from Regina,
Saskatchewan. Murad, whose parents immigrated to Canada from Turkey, had the bright idea that the prairie

FAIRFAX FINANCIAL HOLDINGS LIMITED

food

(a Turkish-based

ingredients company controlled by the Arslan

provinces could grow pulses (peas, lentils and beans) as a rotation crop instead of wheat. He began Saskcan Pulse
Trading in 2001 and developed the market, one farm at a time. AGT was formed in 2007 through the merger of
Saskcan with Arbel
family)
(http://www.agtfoods.com/about-agt/history.html). Huseyin Arslan joined the board of AGT as its Executive Chairman,
overseeing global operations while Murad continued to oversee the head office based in Regina. Together Murad and
Huseyin control 19% of the company. Today, AGT is the global leader in the procurement and distribution of pulses
with over Cdn$2 billion in revenue from over 120 countries and Cdn$100 million in EBITDA. Over the last few years
the company has spent significantly on capex, acquiring and building over 40 facilities on five continents as well as
expanding rail and port facilities necessary to ensure product delivery. Without any further growth capex, we believe
that the company will generate between Cdn$75-100 million annually in free cash flow (Cdn$3-4 per share). There is
tremendous overlap between the AGT global operations and Fairfax’s existing agricultural investments in Canada,
India, the Ukraine and South Africa. We believe that our investment in AGT could be the first step towards building a
global agricultural platform with our existing partners. We have invested $148 million in a debenture with a coupon
of 5.375% with warrants exercisable at Cdn$33.25 per share, for a potential ownership of 19.1%

We also invested in Westaim, a TSX-listed investment holding company run by Cameron MacDonald that controls
two businesses, a U.S. property and casualty insurer called Houston International Insurance Group and a
U.S. commercial mortgage and debt origination investment manager called Arena Investors. At the time of our
investment, Westaim’s stock was trading at a slight discount to book value. The deal is structured on a similar basis to
our recent transactions with Chorus, Mosaic and Altius (secured debt and warrants). Westaim has issued 5% debt to
us, secured by its shares of Houston International and Arena, along with warrants exercisable at Cdn$3.50 per share.
Fairfax has also agreed to invest up to $500 million in commercial mortgages and secured debt investments sourced
by Arena, at Fairfax’s discretion on a case by case basis.

An update on one of the best banks we have ever invested in, the CIB Bank of Egypt. It has an outstanding track
record and has been run by Hisham Ezz Al-Arab since 2002 and Hussein Abaza (CEO since March 2017). Since 2002,
earnings per share for CIB Bank have compounded by 23% annually and book value per share by 19.4% annually.
Egypt has only 3 million bank accounts despite a population of 92 million people – an unlimited growth opportunity
for CIB Bank.

We acquired the bulk of our 7.3% stake in CIB in May 2014 for a total cost of $330 million. Since then, in local
currency, the book value per share has gone up 115%, while the stock price is up 183%. CIB today sells at 10x
earnings. Unfortunately, in November 2016, the Egyptian pound was allowed to float and depreciated 50% very
quickly. In dollar terms, our investment is valued at $392 million today, only 19% higher than our cost. You may find
it interesting to know that HDFC, the premier financial services company in India and perhaps in the world, had a
compound growth in stock price of 29% in rupee terms over the last 27 years. Even though the rupee depreciated by
70% during this time period, HDFC’s share price compounded at 24% in U.S. dollars. So over the long term, exchange
rates are not that important when you invest in growth companies!

Can I finish this section on investments without making a comment on Bitcoin and cryptocurrencies? I am always
amazed at how rank speculation comes into markets once every decade or so! Reminds me of the outstanding book
‘‘Extraordinary Popular Delusions and the Madness of Crowds’’. Bitcoin, a digital currency operating independently
of central banks that uses blockchain technology to regulate the creation of new coins, went from $500 in 2015 to
$19,000 in 2017 – that’s a parabolic curve if you have ever seen one! And it currently trades at under $10,000. It has
no assets, no revenue and no profit. Madness of crowds all right! Will any of us be surprised to see this go back to
$500 – down 97% from the top!! Having said that, I must say I felt the same about Amazon in 1999. It did fall 92%
from the top but has had huge success in the last ten years. Perhaps Bitcoin and the blockchain technology will
experience the same result – you have to survive the first 92% drop of course!!

With more robust economic growth, it is very likely that inflation and long treasury bond rates have bottomed and
could be heading upwards: they have started to do so already. We have no net long term bonds (the interest rates on
any we have are hedged), and we have over $17 billion (50% of our insurance portfolios) in cash and short term
investments which should benefit from higher rates.

There are many risks in the world today as there will always be, like a collapse in world trade, problems in China or a
significant blow-up in the junk bond market. As we have said earlier, to protect us against these risks, we continue to
retain the $117 billion notional amount in deflation swaps, which have 41⁄2 years to go and cannot cost us more
(their carried value is only $40 million).

In 2017 we benefitted significantly by the removal of our hedges. Excluding the gain on the sale of ICICI Lombard
and First Capital, we had net gains on our equity and equity-related holdings of $649 million. We had net gains on
our long equity exposure of $1.1 billion offset by net losses on our remaining individual short positions of
$418 million (now behind us). During 2017 we realized net gains of $201 million on our long equity exposures,
primarily from the sale of our remaining holdings in Bank of Ireland, a partial sale of IIFL Holdings to Fairfax India
and the sale of Tembec.

Also, when you review our financial statements, please remember that generally when we own more than 20% of a
company, we equity account (and call them associates), and when we own above 50%, we consolidate, so that mark
to market gains in these companies are not reflected in our results. Let me mention some of those gains.

As you can see in note 6 to our consolidated financial statements, the fair value of our investment in associates
(excluding investments in associates held by Fairfax India and Fairfax Africa) is $2,824 million while its carrying
value is $2,487 million, representing an unrealized gain of $337 million which is not on our balance sheet.

Also, we own significant positions in Cara, Grivalia, Thomas Cook, Fairfax India and Fairfax Africa which are
consolidated in our statements. The unrealized gain on these positions, based on market values at December 31,
2017, is $896 million. This brings the total unrealized gain not reflected on our balance sheet to $1,233 million.

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):

Canada
United States
Other

Total

1,060.7
2,078.2
3,137.0

6,275.9

We continue to like the long term prospects of our common stock holdings, which include names like General
Motors, General Electric and US Gypsum, all of which should benefit from robust economic growth in the U.S. and
are currently very reasonably priced.

Miscellaneous

Our dividend remained the same in 2017 in spite of record earnings. We are focused on using our free cash flow to
buy back stock so it is unlikely our dividend will be increased soon. Since we began paying dividends, we have paid
cumulative dividends per share of $103.

Our ‘‘fair and friendly’’ corporate culture is being recognized worldwide as executives and companies, insurance and
non-insurance, want to join our company. Our culture is now our biggest strength – and one we guard fiercely. This
principle of treating people in a ‘‘fair and friendly’’ way is firmly embedded in our culture and backed by our Guiding
Principles (included as an Appendix to this annual report, as always). I am really excited about our small holding
company team who with great integrity, team spirit and no egos keep the whole company going forward, protecting
us from unexpected downside risks and taking advantage of opportunities when they arise. This team is led by our
President, Paul Rivett. As I said last year, there is no one more hard working than Paul or who represents our culture
so well, and he is a delight to work with! Paul leads our efforts in all areas but particularly the non-insurance
acquisitions we have made. He, of course, is backed by a fantastic team of officers whom I again want to thank on
your behalf. They are David Bonham, Peter Clarke, Jean Cloutier, Vinodh Loganadhan, Brad Martin, Rick Salsberg,
Ronald Schokking and John Varnell. 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 the long term view. Our Presidents, officers and investment principals are ultimately the strength of
our company and the reason I am so excited about our future.

As our 32nd year comes to an end, I want to particularly thank Rick Salsberg, who has been with me from day one in
1985 when this incredible journey began. As I have said many times over, Rick is our ‘‘consigliere’’ and we have never
made any significant decision without his approval. He represents the heart and soul of our company and we are very
grateful that he has not retired. Our future is bright with Rick!

FAIRFAX FINANCIAL HOLDINGS LIMITED

As you all know, my multiple voting shares prevent our company from being taken over – now and after I pass away
because these shares will never be sold. This allows our company to be built over the next 100 years with the same
culture that has prevailed over the past 32 years. To help retain our culture, long after I have gone, we nominated my
son Ben to the Board of Directors in April 2015. This year, as you will note in the management proxy circular, we have
nominated my daughter Christine McLean to join our Board for the very same reason. Christine is the Director of
Research at Sprucegrove, a money management firm in Toronto managing $20 billion, and she has been in the
investment business for 13 years. With our Board of Directors, including Ben and Christine, I feel confident that our
culture will stand the test of time.

Goodwill and intangibles (G&I) increased significantly last year to $6.1 billion from $3.8 billion in 2016. Of the
$6.1 billion in G&I in 2017, $3.8 billion comes from our insurance companies ($1.7 billion being added in 2017 from
Allied World). This is ‘‘good’’ goodwill as our companies have all demonstrated their ability to consistently generate
underwriting profits (excluding huge hurricanes!). The remaining $2.3 billion in G&I comes from our consolidated
non-insurance operations. We consider all of this G&I to be ‘‘good’’, but while the goodwill portion comprises only
our share of the goodwill, a significant portion of these intangibles are not ours as we do not own 100% of these
companies (for example, we only own 40% of Cara and 68% of Thomas Cook India). While we are comfortable with
the goodwill on our balance sheet, we thought we would highlight these points for you.

We continue to encourage all our employees to be owners of our company through our employee share ownership
plan, under which our employees’ share purchases by way of payroll deduction are supplemented by contributions
by their employer. 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
23%

10 Years
17%

15 Years
16%

20 Years
13%

Since
Inception
16%

On May 8, 2017, we were profoundly saddened when we lost one of our own. Monika Wozniak-Makarska, President
of Polish Re, passed away in Warsaw at the age of 44 after a courageous battle with cancer. Monika was appointed
President and CEO of Polish Re on August 26, 2013. She was previously the Chief Underwriting Officer of the
company and was with Polish Re since its formation in 1996. She left behind her husband, her two sons and her
parents. We will always remember Monika as a wonderful person and a valuable member of the Fairfax family.

In our 2014 annual report, I mentioned that ‘‘in tragedy there is always hope, and when one of our employee’s
ten-year-old daughter lost a valiant battle with cancer, the Odyssey and Fairfax family made a donation for the
treatment and research for Merkel Cell Carcinoma, under the leadership of Andy Dickson and his wife Raquel, in
honor of their beloved daughter Kelsey, whose legacy endures through our efforts to find a cure so others won’t have
to suffer what she and her parents went through.’’ The 2015 Kelsey Dickson Team Science Courage Research Award at
the University of Washington accelerated an absolute ‘‘breakthrough’’ in precision curative treatment for what is no
longer a fatal cancer. This cancer has gone from chemotherapy incurable to over 60% curable. Pembrolizumab is now
available to patients with Merkel Cell Cancer – like Kelsey had – in over 16 countries. What a miracle!

Our donations program continues to thrive across the communities all over the world where we do business. Our
employees are all pitching in and having ‘‘fun’’, helping people less fortunate. In 2017, we donated $22 million, for a
total of $177 million since we began. In 2017, we created a Fairfax foundation, with an initial donation of
$20 million, which will allow us to help communities all over the world over the long term. Over the 27 years since
we began our donations program, our annual donations have gone up approximately 125 times at a compound rate
of 20% per year. Here are a few examples of our company donations that I would like to highlight:

In the wake of the suffering and destruction caused by the severe flooding in Houston in 2017, we donated $1 million
to programs providing flood relief there.

Northbridge’s Northbridge Cares program focuses on empowering, educating and supporting Canadian youth to
reach their potential. Northbridge has partnered with six organizations that directly benefit the communities where
its customers and employees live and work – Pathways to Education, DAREarts, SickKids, Jack.org, United Way and
Tree Canada. Northbridge’s employees are passionate about these charities, together with Northbridge have donated
over $1.5 million to support these organizations, and have donated over 2,000 volunteer hours.

Crum & Forster reaffirmed its commitment to community health and wellness by stepping up as the Diamond
Sponsor of Morristown Medical Center’s signature fundraising event, which will help fund the new Center for
Nursing Innovation and Research. While C&F employees make a difference in communities across the country, other
causes close to home at corporate headquarters included, among many others, donations to the world-renowned
Seeing Eye guide dog program and the Mayo Performing Arts Center, both based in Morristown, and C&F employees
providing volunteer services for the relief of battered women and hunger. In recognition of leadership and
community service across the state, NJBIZ, New Jersey’s leading business journal, named Crum & Forster 2017
Corporate Citizen of the Year.

OdysseyRe continued its ongoing commitment to cancer research, global disaster relief, education and many other
worthy causes, including the National Kidney Foundation, Institut Pasteur, Stamford Hospital and AmeriCares.
Additional funding was provided to assist in rebuilding efforts in the wake of Hurricanes Harvey, Irma and Maria for
those impacted in the U.S. and Caribbean countries. A new OdysseyRe Global Studies Award Fund was also
established at the St. John’s School of Risk Management.

Each year Brit supports ten charities chosen by its employees, which for 2017 were the Motor Neuron Disease
Association, Autistica, Action Duchenne, The Disability Foundation, Ordinary 2 Extraordinary, Horatio’s Garden,
Rockinghorse (all U.K.), Bountiful Blessings (U.S.), Philabundance (U.S.) and Blossom Trust (India). Brit has also
partnered with Decoda, a Canadian charity working to increase the literacy and learning skills of children in foster
care, and the Creative Corrections Education Foundation, a U.S. charity helping the children of incarcerated parents
through education. During 2017 Brit donated $200,000 for the completion of a dormitory to house up to 100 girls
being educated at the Soweto Academy in Kibera, Kenya, the largest slum in Africa, and set up a fund to keep girls in
an environment safe from the perils of sexual assault and early pregnancy.

Allied World has supported two NYC-based charities – the N.Y. Police and Fire Widows’ & Children’s Benefit Fund at
whose gala Scott Carmilani, Allied World’s CEO, was the honoree in November 2017, and the Citizens Committee for
New York City, whose mission is to improve the quality of life for low-income New Yorkers via various community
projects.

RiverStone U.S. supports a number of charities, including three major initiatives which respond to various needs of
the local community. RiverStone U.S. enjoys a decades-long relationship with the New Hampshire Food Bank and
contributed over $150,000 (as well as additional contributions to Atlanta and San Diego food banks) from a
week-long, employee-driven campaign in its offices in 2017. RiverStone U.S. also provided a full, four-year
scholarship to a local Manchester, NH student to attend St. Anselm’s college, and continues to partner with City Year,
which serves students who are at risk of dropping out of school by providing support and supportive programs.

RiverStone U.K. supports a wide variety of causes nominated by employees, including RISE, a charity which provides
sanctuary and support for victims of domestic violence and abuse in the local area. RiverStone U.K.’s donation
provides those individuals with access to a 12-week group-work program with specialist childcare support.

In addition to making charitable donations, Zenith actively promotes and enables volunteerism among its
employees to benefit its local communities. In times of need, Zenith supports disaster relief and humanitarian aid
programs by facilitating employee contributions and making matching donations. This year, Zenith responded to
hurricanes Harvey, Irma and Maria, the earthquake in Mexico, the Las Vegas tragedy and the California wildfires.
Many Zenith employees also volunteered their time to assist some of those affected by these disasters, which in some
cases included customers and agents.

We are looking forward to seeing you at our annual meeting in Toronto at 9:30 a.m. (Eastern time) on Thursday,
April 26, 2018 at Roy Thomson Hall. As in the past few years, we will have booths (the number keeps growing each
year) which will provide information and allow you the opportunity to interact with the Presidents and senior
members of our insurance companies, such as Northbridge, OdysseyRe, Crum & Forster, Zenith, Brit, Allied World,
RiverStone, Fairfax Asia (which now includes AMAG, Pacific Insurance, Falcon, BIC, our insurance operation in
Vietnam, and Fairfirst, our insurance operation in Sri Lanka), and our partners in the Middle East, the Gulf Insurance
Group, along with Colonnade which covers Central and Eastern Europe, our Latin American operations and Digit,
our insurance company that we launched late last year in India. We continue to be active in the pet insurance market
and for all you pet lovers, Sean Smith and his team at Pethealth will be on hand to help you insure your favorite pet:
Sean did not see enough of you last year, so please stop by the Pethealth booth and take advantage of some special
offers that he has for you. To give you ample time to visit all our booths, the doors will open at 8:00 a.m.

FAIRFAX FINANCIAL HOLDINGS LIMITED

The Fairfax Leadership Workshop continues to grow, so that now about 150 individuals have attended the program.
Many have moved on to senior leadership roles and some are running our companies. You will recognize them by the
special pins that they wear that even I do not get. You will see them at the various insurance company booths, so stop
by and speak to them. In addition, the booths will showcase some of our non-insurance company investments,
including some you have known previously, such as William Ashley, Sporting Life, Arbor Memorial, Quess, Golf
Town, Boat Rocker Media and Blue Ant Media, and some new ones like AGT, Altius and Chorus Aviation. Our
innovation lab that we started in Waterloo, for which we created our FairVentures company, continues to grow and
support innovation at all our companies, so please stop by and visit their booth where Dave Kruis, who runs the
FairVentures Innovation Lab, promises to have an interactive experience for you.

Like last year, after our meeting we will have Cara, which now includes The Keg, and McEwan’s, led by celebrity chef
Mark McEwan, tantalize your taste buds with some of their delicious offerings from their various restaurants. I
reiterate that we are now the third largest restaurant company in Canada: you cannot go too far before you come
across one of our restaurants in either the fast food or fine dining space.

Madhavan Menon from Thomas Cook India has said that not enough shareholders have taken advantage of the
discount to take your family for a trip of a lifetime to India, so this year he will be auctioning off a ‘‘Trip of a Lifetime
to India’’: all proceeds from the auction will go to the Crohn’s and Colitis Foundation, so please be generous. This
will be a truly memorable trip: we only ask that the winner come back and let everyone else know how wonderful it
was, so others can experience it as well! Please visit Madhavan, Dipak Deva and others at the Thomas Cook India
booth. We will have Hari Marar who runs the Bangalore Airport on hand and you can hear from him all the exciting
things that he has planned in the year ahead. Ajit Isaac from Quess will be there, as will Nirmal Jain from IIFL and
Vijay Sankar from Sanmar. Sterling Resorts, NCML, Saurashatra Freight, Fairchem, Privi, Quantum and Primary Real
Estate will round out the investments that we have in India, each represented by its CEO. I guarantee that after you
speak to them, you will be as excited as I am regarding our investments in India.

Also, stop by Golf Town, where you can improve your putting in a three-hole contest, with the winner getting a prize:
you might find me there as well, practising my putting! We will also have Bauer, which will showcase some of its
latest equipment.

Altogether, this is a fantastic opportunity for you to learn more about our companies, as well as to get some discounts
for shopping at William Ashley, Sporting Life and Golf Town and for dining at Cara and The Keg.

As in the past, highlighted will be two excellent programs that we support: the Ben Graham Centre for Value
Investing with George Athanassakos at the Ivey School of Business, and the Actuarial Program at the University of
Waterloo – both among the best in North America! This year the staff at the University of Waterloo booth will again
include co-op students working at our companies. I encourage you to speak to them: I assure you that you will be
impressed. Many of you have hired, and will want to continue to hire, a few more at your own companies: the
University will have someone on hand to let you know how you can go about doing so. George will also have many
of his MBA students on hand, so speak to them: you may want to hire them as well. George runs a Value Investing
Conference the day before our meeting. This will be its seventh year and in case you have not attended, please check
the website for details (www.bengrahaminvesting.ca). I highly recommend it and it is well worth your time to attend.
Many who have attended have mentioned to me that it is one of the best of its kind, and this year’s lineup of speakers
is outstanding!

Also, as we have done in the past, we will be giving you a book by Sir John Templeton: this year, ‘‘Thrift and
Generosity – The Joy of Giving’’. As I have said many times, Sir John was a mentor to me and the great admiration
that I have had for him and the influence that he has had on me personally and others in our company will always
resonate with us. Sanjeev Parsad will hand out the book for a donation of your choosing, and all the money collected
will go to the Crohn’s and Colitis Foundation in memory of my assistant Jo Ann Butler. Sanjeev has raised a little over
Cdn$160,000 to date. Hats off to Sanjeev for spearheading this valiant effort.

Similarly to last year, Fairfax India (of which many of you are also shareholders) will hold its annual meeting at
2:00 p.m. on April 26 at Roy Thomson Hall. Chandran Ratnaswami, Jenn Allen, John Varnell, Harsha Raghavan and
the CEOs of many of Fairfax India’s investees will be on hand to answer any questions you may have. As noted above,
Fairfax India will also showcase the companies in its portfolio at the booths in the foyer, so stop by and visit them
and hear firsthand all the wonderful things taking place in India and the vast potential that lies ahead there.

This year Fairfax Africa will hold its first shareholders’ meeting on Wednesday, April 25 at 2:30 p.m. at the Sheraton
Hotel in Toronto. Fairfax Africa will also have a booth at our meeting, so stop by and say hello to Michael Wilkerson
and his partner Neil Holzapfel and see the exciting opportunities that lie ahead in Africa.

So, as we have done for the last 32 years, we look forward to meeting you, our shareholders, and answering all your
questions, as well as getting you to meet our dedicated directors and the fine men and women who work at and run
our companies. I personally am inspired each and every time that I meet you all, and when I hear your stories I want
to work twice as hard to make a return for you in the long term. We are truly blessed to have the loyal shareholders
that we have and I look forward to seeing you at our shareholders’ meeting in April.

March 9, 2018

10MAR201607580995

V. Prem Watsa
Chairman and Chief Executive Officer

FAIRFAX FINANCIAL HOLDINGS LIMITED

Management’s Responsibility for the Financial Statements

The preparation and presentation of the accompanying consolidated financial statements, Management’s
Discussion and Analysis of Financial Condition and Results of Operations (‘‘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 Canadian Securities Administrators and the Securities and Exchange Commission
(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 reporting
and is ultimately responsible for reviewing and approving the consolidated financial statements and MD&A. 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 independent auditor; 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 auditor for appointment by the shareholders. The independent
registered public accounting firm has full 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
shareholders 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, 2017 using criteria established in Internal Control – Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (‘‘COSO’’). The scope of this assessment, in
accordance with Canadian and U.S. securities laws, did not include an evaluation of the internal control over
financial reporting of Allied World Assurance Company Holdings, AG (since renamed ‘‘Allied World Assurance
Company Holdings, GmbH’’) which was acquired on July 6, 2017. The operations of Allied World Assurance
Company Holdings, GmbH represented 6.5% of the company’s consolidated revenue for the year ended
December 31, 2017 and represented 22.8% and 23.9% of the company’s consolidated assets and liabilities
respectively as at December 31, 2017. Based on this assessment, management concluded that the company’s internal
control over financial reporting was effective as of December 31, 2017.

The effectiveness of the company’s internal control over financial reporting as of December 31, 2017 has been
audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report
which appears herein.

March 9, 2018

10MAR201607580995

V. Prem Watsa
Chairman and Chief Executive Officer

30JAN201416020159

David Bonham
Vice President and Chief Financial Officer

Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of Fairfax Financial Holdings Limited

Opinions on the financial statements and internal control over financial reporting

We have audited the accompanying consolidated balance sheets of Fairfax Financial Holdings Limited and its
subsidiaries (together, the Company) as of December 31, 2017 and 2016, and the related consolidated statements of
earnings, comprehensive income, changes in equity and cash flows for the years then ended, including the related
notes (collectively referred to as the consolidated financial statements). We also have audited the Company’s internal
control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of the Company as of December 31, 2017 and 2016, and its financial performance and its cash
flows for the years then ended in conformity with International Financial Reporting Standards (IFRS) as issued by the
International Accounting Standards Board (IASB). Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in
Internal Control – Integrated Framework (2013) issued by the COSO.

Basis for opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective
internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting, included in Management’s Report on Internal Control over Financial Reporting. Our responsibility is to
express opinions on the Company’s consolidated financial statements and on the Company’s internal control over
financial reporting based on our audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of
material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting
was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts
and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures, as we considered necessary in the circumstances. We believe
that our audits provide a reasonable basis for our opinions.

As described in Management’s Report on Internal Control over Financial Reporting, management has excluded
Allied World Assurance Company Holdings, AG, which was subsequently renamed Allied World Assurance
Company Holdings, GmbH (Allied World) from its assessment of internal control over financial reporting as of
December 31, 2017 because it was acquired by the Company in a purchase business combination during 2017. We
have also excluded Allied World from our audit of internal control over financial reporting. Allied World is a
subsidiary whose total assets, total liabilities and total revenues excluded from management’s assessment and our
audit of internal control over financial reporting represent 22.8%, 23.9% and 6.5%, respectively, of the related
consolidated financial statement amounts as of and for the year ended December 31, 2017.

FAIRFAX FINANCIAL HOLDINGS LIMITED

Definition and limitations of internal control over financial reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over 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 reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets
that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. 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.

Chartered Professional Accountants, Licensed Public Accountants

8MAR201809340041

Toronto, Canada
March 9, 2018

We have served as the Company’s auditor since at least 1985. We have not determined the specific year we began
serving as auditor of the Company or its predecessor.

(This page is intentionally left blank)

FAIRFAX FINANCIAL HOLDINGS LIMITED

Consolidated Financial Statements

Consolidated Balance Sheets
as at December 31, 2017 and December 31, 2016

Assets
Holding company cash and investments (including assets pledged
for short sale and derivative obligations – $77.8; December 31,
2016 – $94.4)

Insurance contract receivables

Portfolio investments
Subsidiary cash and short term investments
Bonds (cost $8,764.6; December 31, 2016 – $8,699.1)
Preferred stocks (cost $338.5; December 31, 2016 – $111.2)
Common stocks (cost $4,877.5; December 31, 2016 – $4,824.0)
Investments in associates (fair value $2,824.3; December 31, 2016 –

$2,955.4)

Derivatives and other invested assets (cost $585.7; December 31,

2016 – $546.2)

Assets pledged for short sale and derivative obligations (cost $197.5;

December 31, 2016 – $223.9)

Fairfax India and Fairfax Africa cash, portfolio investments and

Notes

December 31, December 31,
2016

2017
(US$ millions)

5, 27
10

5, 27
5
5
5

5, 6

5, 7

2,368.4
4,686.9

17,382.5
9,164.1
296.8
4,838.7

1,371.6
2,917.5

9,938.0
9,323.2
69.6
4,158.8

2,487.0

2,393.0

255.4

194.7

179.7

228.5

associates

5, 6, 27

2,394.0

1,002.6

Deferred premium acquisition costs
Recoverable from reinsurers (including recoverables on paid losses –

$453.8; December 31, 2016 – $290.9)

Deferred income taxes
Goodwill and intangible assets
Other assets

Total assets

See accompanying notes.

9
18
12
13

37,013.2

27,293.4

927.5

693.1

7,812.5
380.8
6,072.5
4,828.3

4,010.3
732.6
3,847.5
2,518.4

64,090.1

43,384.4

Signed on behalf of the Board

10MAR201607580995
Director

10MAR201607580340
Director

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

company – $11.5; December 31, 2016 – $42.2)

Funds withheld payable to reinsurers
Insurance contract liabilities
Borrowings – holding company and insurance and reinsurance

companies

Borrowings – non-insurance companies

Total liabilities

Equity
Common shareholders’ equity
Preferred stock

Shareholders’ equity attributable to shareholders of Fairfax
Non-controlling interests

Total equity

See accompanying notes.

Notes

December 31, December 31,
2016

2017
(US$ millions)

14
18

5, 7

15
15

3,629.5
95.6

126.2
850.2
34,562.5

4,848.1
1,566.0

2,888.6
35.4

234.3
416.2
23,222.2

3,908.0
859.6

45,678.1

31,564.3

12,475.6
1,335.5

13,811.1
4,600.9

18,412.0

64,090.1

8,484.6
1,335.5

9,820.1
2,000.0

11,820.1

43,384.4

FAIRFAX FINANCIAL HOLDINGS LIMITED

Consolidated Statements of Earnings
for the years ended December 31, 2017 and 2016

Revenue

Gross premiums written

Net premiums written

Gross premiums earned
Premiums ceded to reinsurers

Net premiums earned
Interest and dividends
Share of profit of associates
Net gains (losses) on investments
Gain on sale of subsidiary
Other revenue

Expenses

Losses on claims, gross
Losses on claims ceded to reinsurers

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

Earnings (loss) before income taxes
Provision (recovery) for income taxes

Net earnings (loss)

Attributable to:
Shareholders of Fairfax
Non-controlling interests

Net earnings (loss) per share
Net earnings (loss) per diluted share
Cash dividends paid per share
Shares outstanding (000) (weighted average)

See accompanying notes.

Notes

2017

2016

(US$ millions except per
share amounts)

10, 25

12,207.5

9,983.5

11,822.0
(2,100.6)

9,721.4
559.0
200.5
1,467.5
1,018.6
3,257.6

25
5
6
5
23
25

9,534.3

8,088.4

9,209.7
(1,347.5)

7,862.2
555.2
24.2
(1,203.6)
–
2,061.6

16,224.6

9,299.6

8
9

9,518.7
(2,371.8)

26
26
9
15
25, 26

17
17
16
17

7,146.9
2,049.5
1,649.2
331.2
3,024.6

14,201.4

2,023.2
408.3

1,614.9

1,740.6
(125.7)

1,614.9

$ 66.74
$ 64.98
$ 10.00
25,411

5,682.9
(964.3)

4,718.6
1,597.7
1,336.4
242.8
1,958.4

9,853.9

(554.3)
(159.6)

(394.7)

(512.5)
117.8

(394.7)

$ (24.18)
$ (24.18)
$ 10.00
23,017

Consolidated Statements of Comprehensive Income
for the years ended December 31, 2017 and 2016

Net earnings (loss)

Other comprehensive income (loss), net of income taxes

Items that may be subsequently reclassified to net earnings

Net unrealized foreign currency translation gains (losses) on foreign operations
Losses on hedge of net investment in Canadian subsidiaries
Share of other comprehensive income (loss) of associates, excluding net gains

(losses) on defined benefit plans

Items that will not be subsequently reclassified to net earnings

Share of net gains (losses) on defined benefit plans of associates
Net losses on defined benefit plans

Other comprehensive income (loss), net of income taxes

Comprehensive income (loss)

Attributable to:
Shareholders of Fairfax
Non-controlling interests

Income tax (expense) recovery included in other comprehensive income

(loss)

Income tax on items that may be subsequently reclassified to net

earnings
Net unrealized foreign currency translation gains (losses) on foreign operations
Share of other comprehensive income (loss) of associates, excluding net gains

(losses) on defined benefit plans

Income tax on items that will not be subsequently reclassified to net

earnings
Share of net gains (losses) on defined benefit plans of associates
Net losses on defined benefit plans

Total income tax (expense) recovery

See accompanying notes.

Notes

2017
(US$ millions)

2016

1,614.9

(394.7)

461.7
(106.3)

(80.2)
(37.5)

110.1

(35.6)

465.5

(153.3)

6
21

5.2
(31.8)

(33.2)
(18.3)

(26.6)

(51.5)

438.9

(204.8)

2,053.8

(599.5)

2,024.4
29.4

(696.4)
96.9

2,053.8

(599.5)

Notes

2017

2016

10.4

14.0

(25.9)

3.7

(15.5)

17.7

(7.4)
2.3

(5.1)

(20.6)

10.5
5.0

15.5

33.2

FAIRFAX FINANCIAL HOLDINGS LIMITED

Consolidated Statements of Changes in Equity
for the years ended December 31, 2017 and 2016
(US$ millions)

Share-
based
payments
and

Accumulated
other

Equity
attributable
to

Subordinate Multiple Treasury
shares
(at cost)

voting
shares

Non-
Common
other Retained comprehensive shareholders’ Preferred shareholders controlling
interests

income (loss)

of Fairfax

earnings

equity

reserves

Total
equity

Balance as of January 1, 2017
Net earnings (loss) for the year
Other comprehensive income, net of

income taxes:
Net unrealized foreign currency
translation gains on foreign
operations

Losses on hedge of net investment

in Canadian subsidiaries
Share of other comprehensive

income of associates, excluding
net gains on defined benefit
plans

Share of net gains on defined
benefit plans of associates

Net losses on defined benefit plans

Issuance of shares
Purchases and amortization
Excess of book value over

consideration of common shares
purchased for cancellation

Common share dividends
Preferred share dividends
Acquisitions of subsidiaries (note 23)
Other net changes in capitalization

(note 16)

4,750.8
–

3.8
–

(285.1)
–

106.8 4,456.2
– 1,740.6

(547.9)
–

8,484.6 1,335.5
–
1,740.6

9,820.1
1,740.6

2,000.0 11,820.1
(125.7) 1,614.9

–

–
–
2,196.4
(45.6)

–
–
–
–

–

–
–
–
–

–

–
–
17.4
(140.5)

–
–
(16.9)
51.8

–

–
–
–
–

–

–
–
–
–

(50.6)
(237.4)
(44.6)
–

52.8

183.8

306.7

(106.3)

109.3

5.0
(30.9)
–
–

5.0
(30.9)
2,196.9
(134.3)

–
–
–
–

–

(50.6)
(237.4)
(44.6)
–

236.6

–

–
–
–
–

–

306.7

155.0

461.7

(106.3)

–

(106.3)

109.3

0.8

110.1

5.0
(30.9)
2,196.9
(134.3)

0.2
(0.9)
–
3.8

5.2
(31.8)
2,196.9
(130.5)

(50.6)
(237.4)
(44.6)
–

–
(67.5)
–
2,451.2

(50.6)
(304.9)
(44.6)
2,451.2

236.6

184.0

420.6

Balance as of December 31, 2017

6,901.6

3.8

(408.2)

194.5 6,048.0

(264.1)

12,475.6 1,335.5

13,811.1

4,600.9 18,412.0

Balance as of January 1, 2016
Net earnings (loss) for the year
Other comprehensive loss, net of

income taxes:
Net unrealized foreign currency
translation losses on foreign
operations

Losses on hedge of net investment

in Canadian subsidiaries

Share of other comprehensive loss

of associates, excluding net losses
on defined benefit plans
Share of net losses on defined
benefit plans of associates

Net losses on defined benefit plans

Issuance of shares
Purchases and amortization
Excess of book value over

consideration of common shares
purchased for cancellation

Common share dividends
Preferred share dividends
Acquisitions of subsidiaries (note 23)
Other net changes in capitalization

4,229.8
–

3.8
–

(236.0)
–

88.2 5,230.7
(512.5)

–

(364.0)
–

8,952.5 1,334.9
–

(512.5)

10,287.4
(512.5)

1,731.5 12,018.9
(394.7)

117.8

–

–
–
523.5
(6.1)

–
–
–
–
3.6

–

–
–
–
–

–
–
–
–
–

–

–
–
15.1
(64.2)

–
–
(17.6)
40.6

–

–
–
–
–

–
–
–
–
–

–
–
–
–
(4.4)

(8.0)
(227.8)
(44.0)
–
17.8

(61.4)

(37.5)

(35.4)

(32.0)
(17.6)
–
–

–
–
–
–
–

(32.0)
(17.6)
521.0
(29.7)

(8.0)
(227.8)
(44.0)
–
17.0

–

–
–
–
–

–
–
–
–
0.6

(61.4)

(18.8)

(80.2)

(37.5)

–

(37.5)

(35.4)

(0.2)

(35.6)

(32.0)
(17.6)
521.0
(29.7)

(8.0)
(227.8)
(44.0)
–
17.6

(1.2)
(0.7)
–
(0.8)

(33.2)
(18.3)
521.0
(30.5)

–
(41.2)
–
86.8
126.8

(8.0)
(269.0)
(44.0)
86.8
144.4

Balance as of December 31, 2016

4,750.8

3.8

(285.1)

106.8 4,456.2

(547.9)

8,484.6 1,335.5

9,820.1

2,000.0 11,820.1

See accompanying notes.

Consolidated Statements of Cash Flows
for the years ended December 31, 2017 and 2016

Operating activities
Net earnings (loss)
Depreciation, amortization and impairment charges
Net bond premium (discount) amortization
Amortization of share-based payment awards
Share of profit of associates
Deferred income taxes
Net (gains) losses on investments
Gain on sale of subsidiary
Loss on repurchase of borrowings
Net sales of securities classified as FVTPL
Changes in operating assets and liabilities

Cash provided by operating activities

Investing activities

Sales of investments in associates
Purchases of investments in associates
Net purchases of premises and equipment and intangible assets
Purchases of subsidiaries, net of cash acquired
Sale of subsidiary, net of cash divested
Decrease in restricted cash for purchase of subsidiary

Cash used in investing activities

Financing activities

Notes

2017
(US$ millions)

2016

6
18
5
23
15
27
27

1,614.9
280.5
(52.7)
51.8
(200.5)
230.3
(1,467.5)
(1,018.6)
28.6
2,678.4
555.4

(394.7)
191.7
3.6
40.6
(24.2)
(273.8)
1,203.6
–
–
1,119.3
(607.9)

2,700.6

1,258.2

6, 23
6, 23

23
23

1,014.9
(1,026.5)
(415.2)
(1,107.7)
640.4
–

45.8
(735.3)
(208.3)
(779.1)
–
6.5

(894.1)

(1,670.4)

Borrowings – holding company and insurance and reinsurance companies:

Proceeds, net of issuance costs
Repayments
Net borrowings from (repayments to) holding company revolving credit

facility

Borrowings – non-insurance companies:

Proceeds, net of issuance costs
Repayments
Net borrowings from revolving credit facilities
Increase in restricted cash related to financing activities

Subordinate voting shares:

Issuances, net of issuance costs
Repurchases for treasury
Repurchases for cancellation

Common share dividends
Preferred share dividends
Subsidiary common shares:

Issuances to non-controlling interests, net of issuance costs
Purchases of non-controlling interests
Sales to non-controlling interests
Dividends paid to non-controlling interests

Cash provided by financing activities

Increase in cash and cash equivalents

Cash and cash equivalents – beginning of year
Foreign currency translation

Cash and cash equivalents – end of year

See accompanying notes.

577.0
(483.7)

637.7
(5.4)

(200.0)

200.0

500.6
(268.7)
193.7
(150.8)

–
(140.5)
(96.2)
(237.4)
(44.6)

2,223.2
(140.3)
96.8
(67.5)

360.5
(38.9)
193.6
(18.9)

523.5
(64.2)
(14.1)
(227.8)
(44.0)

157.1
(87.2)
12.7
(41.2)

16
16

23
23
23
16

1,761.6

1,543.4

3,568.1
4,219.1
147.8

1,131.2
3,125.6
(37.7)

7,935.0

4,219.1

FAIRFAX FINANCIAL HOLDINGS LIMITED

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

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

7. Short Sales and Derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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. Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

111

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

117

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

118

28. Related Party Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

119

29. Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

120

Notes to Consolidated Financial Statements
for the years ended December 31, 2017 and 2016
(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 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 company’s consolidated financial statements for the year ended December 31, 2017 are prepared in accordance
with International Financial Reporting Standards (‘‘IFRS’’) as issued by the International Accounting Standards Board
(‘‘IASB’’) effective as at December 31, 2017, except IFRS 9 (2010) Financial Instruments which was adopted early. The
consolidated financial statements have been prepared on a historical cost basis, except for derivative financial
instruments and fair value through profit and loss (‘‘FVTPL’’) financial assets and liabilities that have been measured
at fair value.

The consolidated balance sheets of the company 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 are considered
current, including the following balances: cash, short term investments, insurance contract receivables, deferred
premium acquisition costs, income taxes payable, and short sale and derivative obligations. The following balances
are considered non-current: deferred income taxes and goodwill and intangible assets. All other balances are
comprised of current and non-current amounts.

The holding company has 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.

These consolidated financial statements were approved for issue by the company’s Board of Directors on
March 9, 2018.

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.

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 over which the
company has control. The company controls an entity when the company has power over the entity, is exposed to,
or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns
through its power over the entity. Assessment of control is based on the substance of the relationship between the
company and the entity and includes consideration of both existing voting rights and, if applicable, potential voting
rights that are currently exercisable and convertible. The operating results of subsidiaries acquired are included in the
consolidated financial statements from the date control is acquired (typically the acquisition date). The operating
results of subsidiaries that are 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 a divested subsidiary is recognized in
the consolidated statement of earnings.

The consolidated financial statements were prepared as of December 31, 2017 and 2016 based on individual holding
companies’ and subsidiary companies’ financial statements at those dates. Accounting policies of subsidiaries have

FAIRFAX FINANCIAL HOLDINGS LIMITED

been aligned with those of the company where necessary. The company’s significant subsidiaries are identified in
note 29.

Non-controlling interests – A non-controlling interest is initially recognized as the proportionate share of the
identifiable net assets of a subsidiary on its acquisition date and is subsequently adjusted for the non-controlling
interest’s share of changes in 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.

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 may include cash paid and the fair
value at the date of exchange of assets given, liabilities incurred and equity instruments issued by the company or its
subsidiaries. The consideration transferred also includes any 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. If the consideration transferred is less than the fair value of identifiable
net assets acquired, the excess is recognized in the consolidated statement of earnings.

A pre-existing equity interest is re-measured to fair value at the date of a business combination with any gain or loss
recognized in net gains (losses) on investments 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. On an annual
basis or more frequently if there are potential indicators of impairment, the carrying value of a cash-generating unit
inclusive of its allocated goodwill is compared to its recoverable amount, with any goodwill impairment measured as
the excess of the carrying amount over the recoverable amount. Goodwill is derecognized on disposal of a
cash-generating unit to which goodwill was previously allocated.

Intangible assets – Intangible assets are comprised primarily of customer and broker relationships, brand names,
Lloyd’s participation rights, 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
subsequently measured at cost less accumulated amortization and impairment, where amortization is calculated
using the straight-line method based on the estimated useful life of those intangible assets with a finite life. The
carrying value of 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 annually or more frequently if there are potential indicators of impairment.

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

Customer and broker relationships
Brand names and Lloyd’s participation rights
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.

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. 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. The
company’s share of profit (loss) and other comprehensive income (loss) of associates are reported in the
corresponding lines in the consolidated statement of earnings and consolidated statement of comprehensive
income, respectively. A pre-existing equity interest is re-measured to fair value at the date significant influence is
obtained and included in the carrying value of the associate.

The fair value of associates is estimated at each reporting date (or more frequently when conditions warrant) using
valuation techniques consistent with those applied to the company’s other investments in equity instruments. See
‘Determination of fair value’ under the heading of ‘Investments’ for further details. If there is objective evidence that
the carrying value of an associate is impaired, the associate is written down to its recoverable amount and the
unrealized impairment loss is recognized in share of profit (loss) of associates in the consolidated statement of
earnings. Impairment losses are reversed in future periods if the circumstances that led to the impairment no longer
exist. The reversal is limited to restoring the carrying amount to what would have been determined had no
impairment loss been recognized in prior periods.

Upon loss of significant influence, any retained interest classified as a financial asset is re-measured to fair value and
all amounts previously recognized in other comprehensive income in relation to that investee are reclassified to the
consolidated statement of earnings. Gains and losses on loss of significant influence or disposition of an associate are
recognized in net gains (losses) on investments in the consolidated statement of earnings.

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.

Foreign currency transactions – 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 foreign subsidiaries (including goodwill and fair value
adjustments arising on their acquisition, where applicable) 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 accumulated other
comprehensive income, and only recycled to the consolidated statement of earnings upon reduction of an
investment in a foreign subsidiary.

Net investment hedge – The company has designated a portion of the principal amount of its Canadian dollar
denominated borrowings as a hedge of its net investment in its Canadian subsidiaries. The cumulative unrealized
gain or loss relating to the effective portion of the hedge is recognized in accumulated other comprehensive income,
and only recycled to the consolidated statement of earnings upon reduction of an investment in a hedged foreign
subsidiary. Gains and losses relating to any ineffective portion of the hedge are recorded in net gains (losses) on
investments in the consolidated statement of earnings.

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 or distributions to
owners. Unrealized foreign currency translation amounts arising from foreign subsidiaries and associates that do not
have U.S. dollar functional currencies and the effective portion of changes in the fair value of hedging instruments
on hedges of net investments in foreign subsidiaries are recognized in other comprehensive income (loss) and
included in accumulated other comprehensive income (loss) until recycled to the consolidated statement of earnings
on reduction of an investment in a foreign subsidiary or associate. 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 included in accumulated other comprehensive income (loss) without recycling. Upon settlement
of the defined benefit plan or disposal of the related associate or subsidiary, those amounts are reclassified directly to
retained earnings. Accumulated other comprehensive income (loss), net of income taxes, is included on the
consolidated balance sheet as a component of common shareholders’ equity.

FAIRFAX FINANCIAL HOLDINGS LIMITED

Consolidated statement of cash flows
The company’s consolidated statement of cash flows is prepared in accordance with the indirect method, classifying
cash flows by operating, investing and financing activities.

Cash and cash equivalents – Cash and cash equivalents consist of holding company and subsidiary cash on
hand, demand deposits with banks and other short term highly liquid investments with maturities of three months
or less when purchased, and exclude cash and short term highly liquid investments that are restricted.

Investments
Investments include cash and cash equivalents, short term investments, equity instruments, debt instruments,
securities sold short, derivatives, investment property and investments in associates. Management determines the
appropriate classifications of investments at their acquisition date. The company has not designated any financial
assets or liabilities (including derivatives) as accounting hedges except for the hedge of its net investment in
Canadian subsidiaries as described in note 7.

Classification – Short term investments, equity instruments, bonds, securities sold short and derivatives are
classified as FVTPL.

An investment in 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 outstanding. The company’s business model currently does not permit any of its short term
investments or bonds to be measured at amortized cost.

Recognition and measurement – The company recognizes purchases and sales of investments 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.

Investments classified as FVTPL are carried at fair value on the consolidated balance sheet, with transaction costs
expensed as incurred and changes in fair value reported in the consolidated statement of earnings as interest and
dividends and net gains (losses) on investments. Interest and dividends comprises dividends received on holdings of
common stocks and preferred stocks, and interest income on short term investments and bonds calculated using the
effective interest method, net of investment expenses. All other changes in fair value of investments classified as
FVTPL are reported in net gains (losses) on investments in the consolidated statement of earnings, such that the sum
of interest income and net gains (losses) on short term investments and bonds is equal to their total change in fair
value for the reporting period.

Interest and dividends and net gains (losses) on investments are reported as operating activities in the consolidated
statement of cash flows.

An investment 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.

Short term investments – Debt instruments with maturity dates between three months and twelve months when
purchased are presented as short term investments.

Bonds – Debt instruments with maturity dates greater than twelve months when purchased are presented as bonds.

Securities sold short – Securities sold short (‘‘short sales’’) represent obligations to deliver securities which were
not owned at the time of the sale.

Derivatives – Derivatives may include interest rate, credit default, currency and total return swaps, consumer price
index linked (‘‘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 total return swaps.

The company uses derivatives principally to mitigate financial risks arising from its investment holdings and
reinsurance recoverables, and monitors its derivatives for effectiveness in achieving their risk management
objectives.

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
contract, if any, would be recorded as a derivative asset and subsequently adjusted for changes in the fair value of the
contract at each balance sheet date. Changes in the fair value of a derivative are recorded as net gains (losses) on
investments in the consolidated statement of earnings at each balance sheet date, with a corresponding adjustment
to the carrying value of the derivative asset or liability.

Cash received from counterparties as collateral for derivative contracts is recognized within holding company cash
and investments or subsidiary cash and short term investments, and a corresponding liability is recognized within
accounts payable and accrued liabilities. Securities received from counterparties as collateral are not recorded
as assets.

Cash and securities delivered to counterparties as collateral for derivative contracts continue to be reflected as assets
on the consolidated balance sheet within holding company cash and investments or within portfolio investments 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 (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 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 and equity index total return swaps on a net basis as
interest and dividends in the consolidated statement of earnings. The company’s equity and equity index total
return swaps contain contractual reset provisions requiring counterparties to cash-settle monthly or quarterly any
fair value movements arising subsequent to the prior settlement. Any cash amounts paid to settle unfavourable fair
value changes and, conversely, any cash amounts received in settlement of favourable fair value changes, are
recorded as net gains (losses) on investments 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 fair value changes since the last quarterly reset date. Total return swaps require no initial net investment
and have a fair value of nil at inception.

CPI-linked derivative contracts – The company’s derivative contracts referenced to consumer price indexes (‘‘CPI’’) in
the geographic regions in which it operates serve as an economic hedge against the potential adverse financial
impact on the company of decreasing price levels. These contracts may be structured to provide a payout at maturity
if there is cumulative deflation over the life of the contract or if cumulative average inflation is below a specified floor
rate over the life of the contract. As the average remaining life of a CPI-linked derivative declines, the fair value of the
contract (excluding the impact of changes in the underlying CPI) will generally decline.

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 using a three level hierarchy in accordance with IFRS (‘‘fair value hierarchy’’)
as described below:

Level 1 – Inputs represent unadjusted quoted prices for identical instruments exchanged in active markets. The
fair values of securities sold short, 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

FAIRFAX FINANCIAL HOLDINGS LIMITED

majority of the company’s investments in bonds are priced based on information provided by independent
pricing service providers while much of the remainder, along with most derivative contracts (including total
return swaps, U.S. treasury bond forward contracts 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.

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, such investments in limited partnerships are classified as
Level 3.

Level 3 – Inputs include unobservable inputs used in the measurement of financial instruments. Management is
required to use its own assumptions regarding unobservable inputs as there is little, if any, market activity in
these instruments or related observable inputs that can be corroborated at the measurement date. CPI-linked
derivatives are classified as Level 3 and valued using broker-dealer quotes which management has determined
utilize market observable inputs except for the inflation volatility input which is not market observable.

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 use of prices from similar instruments where observable market prices exist, discounted cash flow analysis,
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).

Fair values of CPI-linked derivative contracts received from third party broker-dealers are assessed by comparing the
fair values to recent market transactions where available and values determined using third party pricing software
based on the Black-Scholes option pricing model for European-style options 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.

The company employs dedicated personnel responsible for the valuation of its investment portfolio. Detailed
valuations are performed for those financial instruments that are priced internally, while external pricing received
from independent pricing service providers and third party broker-dealers are evaluated by the company for
reasonableness. The company’s Chief Financial Officer oversees the valuation function and regularly reviews
valuation processes and results, including at each quarterly reporting period. Significant valuation matters,
particularly those requiring extensive judgment, are communicated to the company’s Audit Committee.

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.

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, with 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. 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 contractually
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 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 servicing the
business based on historical experience. The ultimate recoverability of deferred premium acquisition costs is
determined without regard to investment income. Brokers’ commissions are included in commissions, net, in the
consolidated statement of earnings. Premium taxes and 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 adjustment
expenses that arise from the company’s general insurance and reinsurance products and its run-off operations. These
reserves are based on assumptions that represent the best estimates of possible outcomes aimed at evaluating the
expected ultimate cost to settle claims occurring prior to, but still outstanding 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 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 losses on claims, gross, in the consolidated statement of earnings.

The company’s reserves for reported losses and loss adjustment expenses are based on estimates of future payments
to settle reported general insurance and reinsurance claims and claims from its run-off operations. Case reserve
estimates are based 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 company 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 determining the level of reserves, the company
considers historical trends and patterns of loss payments, pending levels of unpaid claims and types of coverage. In
addition, court decisions, economic conditions and public 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 regularly reviews and re-evaluates case reserves. 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 final
settlement cost for loss events which have already occurred but which have not yet been reported. Historical
information and statistical models, based on product line, type and extent of coverage, as well as reported claim
trends, claim severities, exposure growth, and other factors, are relied upon to estimate IBNR reserves. These
estimates are revised as additional information becomes available and as claims are actually reported and paid.

Estimation techniques – Provisions for losses and loss adjustment expenses and provisions for unearned
premiums 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 payment

FAIRFAX FINANCIAL HOLDINGS LIMITED

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 several commonly accepted actuarial projection methodologies in estimating
required provisions to give greater insight into the trends inherent in the data being projected. These include
methods based upon the following: 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; notified
claims development, where notified claims to date for each year are extrapolated based upon observed development
of earlier years; and, 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 to the individual circumstances of the line of business and accident or
underwriting year.

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 for losses and loss adjustment expenses 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 by subsidiary
actuaries, at the corporate level by the company’s Chief Risk Officer and by independent third party actuaries. In
addition, for major classes of business 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.

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

Ceded premiums and losses are recorded in the consolidated statement of earnings in premiums ceded to reinsurers
and losses on claims ceded to reinsurers respectively and in recoverable from reinsurers on the consolidated balance
sheet. Commission income earned on premiums ceded to reinsurers is included in commissions, net in the
consolidated statement of earnings. 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.

Impairment – Reinsurance assets are assessed regularly for any events that may trigger impairment, including 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 by recording a provision for
uncollectible reinsurance in the consolidated statement of earnings.

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.

Income taxes
The provision for income taxes for the period comprises current and deferred income tax. Income taxes are
recognized in the consolidated statement of earnings, except when related to items recognized in other
comprehensive income or directly in equity. In those cases, the income taxes are also recognized in other
comprehensive income or directly in equity, respectively.

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

Deferred income tax is calculated under the liability method whereby deferred income tax assets and liabilities are
recognized for temporary differences between the financial statement carrying amounts of assets and liabilities and
their respective income tax bases at 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 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 profits will be available
against which the temporary differences can be utilized. Carry forwards of unused losses or unused tax credits are tax
effected and recognized as deferred tax assets when it is probable that future taxable profits will be available against
which these losses or tax credits can be utilized.

Deferred income tax is not recognized on unremitted earnings of subsidiaries where the company has determined it
is not probable those earnings will be repatriated in the foreseeable future.

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.

On December 22, 2017 the United States enacted the Tax Cuts and Jobs Act (‘‘U.S. tax reform’’) that, among other
changes, introduced a new minimum base erosion and anti-abuse tax (‘‘BEAT’’) on certain payments to foreign
affiliates and a U.S. tax on foreign earnings for certain global intangible low-taxed income (‘‘GILTI’’), applicable to
U.S. corporate income tax for tax years beginning after December 31, 2017. The company will recognize charges
related to BEAT and GILTI, if any, in the periods in which they are incurred, and does not include their impacts in
measuring its net deferred income tax asset.

Investment property
Real estate held by the company for investment purposes, such as capital appreciation or long-term rental yield, is
initially recorded at cost (including transaction costs) and subsequently carried at historical cost less accumulated
amortization and any accumulated impairment losses. On the consolidated balance sheet investment property held
is included in portfolio investments by the insurance and reinsurance companies and in other assets by the
non-insurance companies. Investment property rental income and gains or losses on disposal are recorded in the
consolidated statement of earnings as interest and dividends and net gains (losses) on investments respectively by
the insurance and reinsurance companies, and as other revenue by the non-insurance companies.

Other assets
Other assets consist of inventories, receivables and investment properties of non-insurance companies included in
the Other reporting segment, premises and equipment, accrued interest and dividends, income taxes refundable,
receivables for securities sold, pension assets, deferred compensation assets, prepaid expenses and other
miscellaneous receivables.

Premises and equipment – Premises and equipment is recorded at historical cost less accumulated amortization
and any accumulated impairment losses. The company reviews premises and equipment for impairment when
events or changes in circumstances indicate that the carrying value may not be recoverable. The cost of premises and
equipment is depreciated on a straight-line basis over the asset’s estimated useful life and charged to operating
expenses in the consolidated statement of earnings.

FAIRFAX FINANCIAL HOLDINGS LIMITED

Other revenue and expenses
Revenue from the sale of hospitality, travel and other non-insurance products and services 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 or services provided are recorded in other revenue and
other expenses respectively in the consolidated statement of earnings.

Borrowings
Borrowings are initially recognized at fair value, net of transaction costs incurred, and subsequently carried at
amortized cost. Interest expense on borrowings is recognized in the consolidated statement of earnings using the
effective interest rate method.

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, irrespective of the objective of the transaction. The company 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 subsidiaries
with vesting periods of up to ten years from the date of grant. The fair value of restricted share awards on the grant
date is amortized to compensation expense over the vesting period, with a corresponding increase in the share-based
payments equity reserve. 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 subordinate 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 dilutive effect, if
any, of share-based payments.

Pensions and post retirement benefits
The company’s subsidiaries have a number of arrangements in Canada, the United States, the United Kingdom and
certain other jurisdictions 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 and invested principally
in high quality fixed income securities and cash and short term investments. Certain of the company’s post
retirement benefit plans covering medical care and life insurance are internally funded.

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. 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 management’s
assumptions.

Defined benefit obligations, net of the fair value of plan assets, and adjusted for 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, subject to any minimum funding requirements, are recognized in other assets (note 13).

Defined benefit expense recognized in the consolidated statement of earnings includes the net interest on the net
defined benefit liability (asset) calculated using a discount rate based on market yields on high quality bonds, past
service costs arising from plan amendments or curtailments and gains or losses on plan settlements.

Re-measurements, consisting of actuarial gains and losses on plan liabilities, the actual return on plan assets
(excluding the net interest component) and any change in asset limitation amounts, are recognized in other
comprehensive income and subsequently included in accumulated other comprehensive income. These
re-measurements will not be recycled to the consolidated statement of earnings in the future, but are reclassified to
retained earnings upon settlement of the plan or disposal of the related subsidiary.

Operating leases
The company and its subsidiaries are lessees under various operating leases relating to premises, automobiles and
equipment. Payments made under an operating lease, net of any incentives received from the lessor, are recorded in
operating expenses on a straight-line basis over the term of the lease.

New accounting pronouncements adopted in 2017
The company adopted the following amendments, effective January 1, 2017. These changes were adopted in
accordance with the applicable transitional provisions of each amendment, and did not have a significant impact on
the consolidated financial statements.

IFRS Annual Improvements 2014-2016
In December 2016 the IASB issued an amendment to clarify the scope of the disclosure requirements in IFRS 12
Disclosure of Interests in Other Entities.

Recognition of Deferred Tax Assets for Unrealised Losses (Amendments to IAS 12)
In January 2016 the IASB issued amendments to IAS 12 Income Taxes to clarify the requirements on recognition of
deferred income tax assets for unrealized losses.

Disclosure Initiative (Amendments to IAS 7)
In January 2016 the IASB issued amendments to IAS 7 Statement of Cash Flows that require additional disclosures for
cash and non-cash changes in liabilities arising from financing activities.

New accounting pronouncements issued but not yet effective
The following new standards have been issued by the IASB and were not yet effective for the fiscal year beginning
January 1, 2017. The company is currently evaluating their impact on its consolidated financial statements and does
not expect to adopt any of them in advance of their respective effective dates.

Foreign Currency Transactions and Advance Consideration (‘‘IFRIC 22’’)
In December 2016 the IASB issued an interpretation by the IFRS Interpretations Committee to clarify the accounting
for transactions that include the receipt or payment of advance consideration in a foreign currency. IFRIC 22 is
effective for annual periods beginning on or after January 1, 2018, with a choice of prospective or retrospective
application. Adoption of IFRIC 22 is not expected to have a significant impact on the company’s consolidated
financial statements.

Classification and Measurement of Share-based Payment Transactions (Amendments to IFRS 2)
In June 2016 the IASB issued narrow-scope amendments to clarify the classification and measurement requirements
of IFRS 2 Share-based Payment. The amendments are effective for annual periods beginning on or after January 1,

FAIRFAX FINANCIAL HOLDINGS LIMITED

2018, with prospective application in accordance with certain transitional provisions. Adoption of the amendments
is not expected to have a significant impact on the company’s consolidated financial statements.

IFRS 9 Financial Instruments (‘‘IFRS 9’’)
In July 2014 the IASB issued the complete version of IFRS 9 which will supersede the 2010 version of IFRS 9 currently
applied by the company (‘‘IFRS 9 (2010)’’). IFRS 9 is effective for annual periods beginning on or after January 1,
2018, with retrospective application, and includes requirements for the classification and measurement of financial
assets and liabilities, an expected credit loss model that replaces the existing incurred loss impairment model, and
new hedge accounting guidance. The company is nearing completion of its analysis of IFRS 9’s accounting
requirements and has determined that its current classifications of equity investments, derivatives, financial
liabilities and hedge of net investment under IFRS 9 (2010) will remain substantially unchanged. The company
continues to monitor and consider evolving guidance and interpretations related to IFRS 9 as it works through the
classification analysis for its investments in debt instruments.

IFRS 15 Revenue from Contracts with Customers (‘‘IFRS 15’’)
In May 2014 the IASB issued IFRS 15 which introduces a single model for recognizing revenue from contracts with
customers. IFRS 15 excludes insurance contracts and financial instruments from its scope and is applicable primarily
to the company’s non-insurance companies. In April 2016 the IASB issued amendments to clarify certain aspects of
IFRS 15 and to provide additional practical expedients upon transition. The standard is effective for annual periods
beginning on or after January 1, 2018, with retrospective application. The company has substantially completed its
analysis of the accounting requirements under IFRS 15 and does not expect the adoption of IFRS 15 to have a
significant impact on the company’s consolidated financial statements or to require any significant transition
adjustments.

IFRS 16 Leases (‘‘IFRS 16’’)
In January 2016 the IASB issued IFRS 16 which largely eliminates the distinction between finance and operating
leases for lessees. With limited exceptions, a lessee will be required to recognize a right-of-use asset and a liability for
its obligation to make lease payments. The standard is effective for annual periods beginning on or after January 1,
2019, with a choice of modified retrospective or full retrospective application. The company has commenced impact
assessments and reviews of lease data at its operating companies in preparation for the adoption of IFRS 16.

IFRIC Interpretation 23 Uncertainty over Income Tax Treatments (‘‘IFRIC 23’’)
In June 2017 the IASB issued IFRIC 23 to clarify how the requirements of IAS 12 Income Taxes should be applied when
there is uncertainty over income tax treatments. The interpretation is effective for annual periods beginning on or
after January 1, 2019, with modified retrospective or retrospective application. Adoption of IFRIC 23 is not expected
to have a significant impact on the company’s consolidated financial statements.

IFRS Annual Improvements 2015-2017
In December 2017 the IASB issued amendments to clarify the requirements of four IFRS standards. The amendments
are effective for annual periods beginning on or after January 1, 2019, primarily with prospective application.
Adoption of the amendments is not expected to have a significant impact on the company’s consolidated financial
statements.

IFRS 17 Insurance Contracts (‘‘IFRS 17’’)
In May 2017 the IASB issued IFRS 17, a comprehensive standard that establishes principles for the recognition,
measurement, presentation and disclosure of insurance contracts. The measurement approach is based on the
following: (i) a current, unbiased probability-weighted estimate of future cash flows expected to arise as the insurer
fulfills the contract; (ii) the effect of the time value of money; (iii) a risk adjustment that measures the effects of
uncertainty about the amount and timing of future cash flows; and (iv) a contractual service margin which
represents the unearned profit in a contract (that is recognized in net earnings as the insurer fulfills its performance
obligations under the contract). Estimates are required to be re-measured each reporting period. In addition, a
simplified measurement approach is permitted for short-duration contracts in which the coverage period is
approximately one year or less. The standard is effective for annual periods beginning on or after January 1, 2021,
with retrospective application and some practical expedients available on adoption. The company has commenced
implementation planning, education workshops and impact assessments at its largest insurance and reinsurance
companies in preparation for the adoption of IFRS 17.

4. Critical Accounting Estimates and Judgments

In the preparation of the company’s consolidated financial statements, management has made a number of critical
accounting estimates and judgments which are discussed below, with the exception of the determination of fair
value for financial instruments (notes 3 and 5), carrying value of associates (notes 3 and 6), charges related to U.S. tax
reform (note 18) and contingencies (note 20). 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 estimated 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 estimation of provisions for losses and loss adjustment
expenses are reviewed and updated by the company on an ongoing basis to reflect recent and emerging trends in
experience and changes in the 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 associated with
insurance contracts are described in the ‘‘Underwriting Risk’’ section of note 24 while the historic development of
the company’s insurance liabilities are presented in note 8.

Recoverability of deferred income tax assets
In determining the recoverability of deferred income tax assets, management exercises judgment in assessing recent
and expected profitability of applicable operating companies and their ability to utilize any recorded income tax
assets. The company reviews its deferred income tax assets quarterly, taking into consideration the availability of
sufficient current and projected taxable profits, reversals of taxable temporary differences and tax planning
strategies. Details of deferred income tax assets are presented in note 18.

Business combinations
Judgment may be required to determine whether a transaction qualifies as a business combination when it involves
elements such as contractual arrangements between shareholders or potential voting rights. Accounting for business
combinations requires fair values to be estimated for the consideration transferred, assets acquired and liabilities
assumed. The company uses all available information, including external valuations and appraisals where
appropriate, to determine these fair values. Changes in estimates of fair value due to additional information related
to facts and circumstances that existed at the acquisition date would impact the amount of goodwill (or gain on
bargain purchase) recognized. If necessary, the company has up to one year from the acquisition date to finalize the
determination of fair values for a business combination. Details of business combinations are presented in note 23.

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
growth rate. 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 in the
consolidated statement of earnings. Given the variability of future-oriented financial information, goodwill
impairment tests are subjected to sensitivity analysis. The critical estimates pertain to those cash-generating units
where there is little difference between the recoverable amount and the related carrying amount. Details of goodwill
are presented in note 12.

FAIRFAX FINANCIAL HOLDINGS LIMITED

5. Cash and Investments

Holding company cash and investments, portfolio investments and short sale and derivative obligations are
classified as 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 27)
Short term investments
Bonds
Preferred stocks
Common stocks(1)
Derivatives (note 7)

Assets pledged for short sale and derivative obligations:
Short term investments
Bonds

Short sale and derivative obligations (note 7)

Portfolio investments
Cash and cash equivalents (note 27)
Short term investments
Bonds
Preferred stocks
Common stocks(1)
Investments in associates (note 6)
Derivatives (note 7)
Other invested assets

Assets pledged for short sale and derivative obligations:
Cash and cash equivalents (note 27)
Short term investments
Bonds

Fairfax India cash, portfolio investments and associates
Fairfax Africa cash, portfolio investments and associates

Short sale and derivative obligations (note 7)

Total investments

December 31, December 31,
2016

2017

995.4
115.4
380.9
2.8
784.9
11.2

533.2
285.4
264.8
1.0
153.2
39.6

2,290.6

1,277.2

77.8
–

77.8

2,368.4
(11.5)

2,356.9

7,384.1
9,998.4
9,164.1
296.8
4,838.7
2,487.0
192.6
62.8

82.6
11.8

94.4

1,371.6
(42.2)

1,329.4

3,943.4
5,994.6
9,323.2
69.6
4,158.8
2,393.0
163.7
16.0

34,424.5

26,062.3

16.8
145.7
32.2

194.7

1,762.5
631.5

2,394.0

37,013.2
(114.7)

–
189.6
38.9

228.5

1,002.6
–

1,002.6

27,293.4
(192.1)

36,898.5

27,101.3

39,255.4

28,430.7

(1) Common stocks include investments in limited partnerships and other funds with carrying values of $1,903.7 and $90.9

respectively at December 31, 2017 (December 31, 2016 – $1,171.6 and $157.1).

Fairfax India and Fairfax Africa cash, portfolio investments and associates were comprised as follows:

Fairfax India

Fairfax Africa

Cash and cash equivalents (note 27)
Short term investments
Bonds
Common stocks
Investments in associates (note 6)
Derivatives and other invested assets

December 31, December 31, December 31, December 31,
2016
–
–
–
–
–
–

2017
44.0
34.3
694.2
40.5
949.5
–

2016
173.2
33.6
528.8
26.5
240.5
–

2017
329.7
57.2
19.4
4.9
219.8
0.5

1,762.5

1,002.6

631.5

–

Restricted cash and cash equivalents at December 31, 2017 of $835.0 (December 31, 2016 – $430.7) was comprised
primarily of amounts required to be maintained on deposit with various regulatory authorities to support the
subsidiaries’ insurance and reinsurance operations. Restricted cash and cash equivalents are included on the
consolidated balance sheet in holding company cash and investments, or in portfolio investments within subsidiary
cash and short term investments, assets pledged for short sale and derivative obligations and Fairfax India and Fairfax
Africa cash, portfolio investments and associates.

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 subsidiaries
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 assets pledged to third parties by the nature of the pledge requirement (excluding
assets pledged in favour of Lloyd’s (note 20), for short sale and derivative obligations and for certain intercompany
reinsurance arrangements). Pledged assets primarily consist of cash and fixed income securities within portfolio
investments on the consolidated balance sheets.

Regulatory deposits
Security for reinsurance and other

December 31, December 31,
2016
4,748.2
732.8

2017
4,256.8
1,449.2

5,706.0

5,481.0

FAIRFAX FINANCIAL HOLDINGS LIMITED

Fixed Income Maturity Profile
Bonds are summarized by their 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, 2017 bonds containing
call and put features represented approximately $3,390.3 and $93.3 respectively (December 31, 2016 – $4,498.0 and
$196.2) of the total fair value of bonds. The table below does not reflect the impact of $1,693.8 (December 31, 2016 –
$3,013.4) notional amount of U.S. treasury bond forward contracts (described in note 7) that reduce the company’s
exposure to interest rate risk.

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, 2017

December 31, 2016

Amortized
cost
3,383.9
3,540.7
1,017.6
1,872.1

Fair Amortized
cost
1,649.4
3,245.9
1,046.7
3,575.1

value
3,537.6
3,720.2
1,054.3
1,978.7

Fair
value
1,779.0
3,447.6
1,031.3
3,909.6

9,814.3

10,290.8

9,517.1

10,167.5

Effective interest rate

4.0%

4.7%

The calculation of the effective interest rate of 4.0% (December 31, 2016 – 4.7%) is on a pre-tax basis and therefore
does not give effect to the favourable tax treatment which the company expects to receive with respect to its tax
advantaged U.S. state and municipal bond investments of approximately $2.3 billion (December 31, 2016 –
$3.3 billion).

Fair Value Disclosures
The company’s use of quoted market prices (Level 1), valuation models with significant observable market
information as inputs (Level 2) and valuation models with significant unobservable information as inputs (Level 3)
in the valuation of securities and derivative contracts by type of issuer was as follows:

December 31, 2017

December 31, 2016

Total fair
value
asset
(liability)

Significant
other
Quoted observable unobservable
inputs
inputs
(Level 3)
(Level 2)

Significant Total fair
value
asset
(liability)

prices
(Level 1)

Significant
Significant
other
Quoted observable unobservable
inputs
inputs
(Level 3)
(Level 2)

prices
(Level 1)

Cash and cash equivalents

8,770.0

–

4,649.8

Short term investments:

Canadian government

Canadian provincials

U.S. treasury

Other government

Corporate and other

Bonds:

Canadian government

Canadian provincials

U.S. treasury

U.S. states and municipalities

Other government

Corporate and other

Preferred stocks:

Canadian

U.S.

Other

Common stocks:

Canadian

U.S.

Other funds

Other

–

7.1

281.9

9,225.5

403.0

511.3

307.0

–

96.0

466.3

–

45.0

8.2

261.7

5,930.3

212.2

173.4

–

173.4

10,428.8

9,821.5

562.3

45.0

6,585.8

6,412.4

173.4

84.4

93.8

1,779.3

2,452.1

1,799.4

4,081.8

10,290.8

240.7

5.0

53.9

299.6

–

1.5

958.7

1,583.3

90.9

825.9

474.8

–

0.6

84.4

93.8

1,779.3

2,452.1

1,799.4

2,185.7

–

311.4

196.9

1,117.3

4,732.2

1,176.2

1,896.1

2,633.5

8,394.7

1,896.1 10,167.5

11.3

–

3.6

14.9

110.3

66.9

90.9

229.4

5.0

48.8

283.2

22.2

0.3

48.1

70.6

22.5

665.3

1,041.6

1,172.6

–

157.1

545.0

629.6

–

311.4

196.9

1,117.3

4,732.2

1,176.2

1,580.4

–

1,053.1

9,114.4

1,053.1

10.9

–

15.1

26.0

98.6

33.9

157.1

532.5

11.3

0.3

32.4

44.0

21.7

509.1

–

773.8

3,036.1

1,713.7

415.1

907.3

2,343.5

1,037.2

5,669.0

3,014.4

683.2

1,971.4

4,338.5

2,211.8

822.1

1,304.6

Derivatives and other invested assets

267.1

Short sale and derivative obligations

(126.2)

–

89.5

177.6

219.3

(126.2)

–

(234.3)

–

121.5

(234.3)

97.8

–

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

35,599.1 21,607.4

9,618.4

4,373.3 25,797.2 13,274.6

10,023.1

2,499.5

100.0%

60.7%

27.0%

12.3% 100.0%

51.5%

38.9%

9.6%

Investments in associates (note 6)(1)

4,629.3

2,004.3

45.3

2,579.7

3,267.3

1,100.1

40.9

2,126.3

(1) The carrying value of investments in associates is determined using the equity method of accounting so fair value is

presented separately in the table above.

FAIRFAX FINANCIAL HOLDINGS LIMITED

Transfers between fair value hierarchy levels are considered effective from the beginning of the reporting period in
which the transfer is identified. The increase in the company’s Level 3 financial assets during 2017 was partially due
to the consolidation of certain Allied World investments in limited partnerships that were classified as Level 3
common stocks ($583.8) based on their unobservable net asset values and inability to be liquidated or redeemed
within three months. In addition, during 2017 a private placement debt security was transferred from Level 2 to
Level 3 due to the modification of its terms and its credit spread (a key valuation input) becoming unobservable.
During 2017 and 2016 there were no significant transfers of financial instruments between Level 1 and Level 2
and there were no other significant transfers of financial instruments in or out of Level 3 as a result of changes in the
observability of valuation inputs.

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

2017

Private

Private
company

placement preferred partnerships
and other
shares

debt securities

Limited Private company
equity common
shares
funds

Private Derivatives
and other
invested
assets

Total

Balance – January 1
Net realized and unrealized gains (losses) included in the

consolidated statement of earnings

Purchases
Sales and distributions
Acquisitions of subsidiaries (note 23)
Transfer into category
Unrealized foreign currency translation gains on foreign
operations included in other comprehensive income

1,053.1

44.0

981.4

167.8

155.4

97.8 2,499.5

190.2
430.2
(209.7)
22.4
384.0

1.3
268.4
(34.1)
–
–

243.4
221.2
(443.4)
583.8
–

(5.5)
–
–
–
–

22.6
11.1
(19.4)
29.9
–

(9.9)
442.1
72.3 1,003.2
(706.6)
645.8
391.1

–
9.7
7.1

70.9

3.6

12.3

8.2

2.6

0.6

98.2

Balance – December 31

1,941.1

283.2

1,598.7

170.5

202.2

177.6 4,373.3

2016

Private

Private
company

placement preferred partnerships
and other
shares

debt securities

Limited Private company
equity common
shares
funds

Private Derivatives
and other
invested
assets

Total

Balance – January 1
Net realized and unrealized gains (losses) included in the

consolidated statement of earnings

Purchases
Sales and distributions
Transfer into category
Unrealized foreign currency translation gains (losses) on
foreign operations included in other comprehensive
income

Balance – December 31

696.4

7.7

960.9

171.0

138.0

285.4 2,259.4

(52.9)
955.6
(548.2)
9.4

2.5
115.7
(82.5)
0.4

102.7
124.4
(202.9)
–

(12.5)
16.4
(10.2)
–

(21.6)
38.8
–
–

(204.4)

(186.2)
21.1 1,272.0
(848.7)
(4.9)
9.8
–

(7.2)

1,053.1

0.2

44.0

(3.7)

3.1

0.2

0.6

(6.8)

981.4

167.8

155.4

97.8 2,499.5

The table below presents the valuation techniques, range of values applied for significant unobservable inputs and
the typical relationship between significant unobservable inputs and estimated fair values for the company’s
significant Level 3 financial assets:

Asset class

Private placement debt

securities(b)(1)

Private placement debt

securities(b)(2)

Limited partnerships and

other(c)(3)

Private company preferred

shares(d)(4)

Private equity funds(c)(3)
Private equity funds(c)(5)

Private company common

shares(c)(5)

Private company common

shares(c)(5)

Carrying
value at
December 31,
2017

Significant

Input range
used

Valuation technique unobservable input

Low High

Effect on estimated fair
value if input value is
increased(a)

1,340.4

Discounted cash flow

Credit spread

1.6% 18.9%

Decrease

402.0

Net asset valuation of
secured loans

Recoverability of assets 60.0% 100.0%

Increase

1,598.7

Net asset value

Net asset value / Price

N/A

Increase

207.3

100.9

69.6

Discounted cash flow

Credit spread

3.5%

3.6%

Net asset value

Net asset value / Price

Market comparable

Price/Earnings
multiple

N/A

10.0

N/A

10.0

Decrease

Increase

81.2

Market comparable

Book value multiple

1.3

Increase

40.5

Market comparable

Price/Earnings
multiple

26.2

Increase

Warrants(e)(6)
CPI-linked derivatives(e)(7)

73.1

39.6

Option pricing model

Equity volatility

24.6% 39.3%

Option pricing model

Inflation volatility

0.0%

3.7%

Increase

(a) Decreasing the input value would have the opposite effect on the estimated fair value.

(b) Classified within holding company cash and investments or bonds on the consolidated balance sheet.

(d) Classified within preferred stocks on the consolidated balance sheet.

(e) Classified within holding company cash and investments or derivatives and other invested assets on the consolidated

balance sheet.

(1) Valued using industry accepted discounted cash flow models that incorporate credit spreads of the issuers, which
are not market observable. At December 31, 2017 this asset class consisted of 7 investments, the largest being
$663.6. By increasing (decreasing) the credit spreads within a reasonably possible range, the fair value of these
private placement debt securities would decrease by $41.6 (increase by $44.3).

(2) At December 31, 2017 this asset class consisted of 2 investments, the larger being $253.0.

(3) Valued primarily based on net asset value statements provided by the respective third party fund managers and
general partners. The fair values in those statements are determined using quoted prices of the underlying assets,
and to a lesser extent, observable inputs where available and unobservable inputs, in conjunction with industry
accepted valuation models, where required. In some instances, such investments are classified as Level 3 because
they may require at least three months’ notice to liquidate. The company has not applied reasonably possible
alternative assumptions to the estimated fair value of these investments due to their diverse nature and resulting
dispersion of prices. At December 31, 2017 limited partnerships and other consisted of 47 investments, the
largest being $355.3.

(4) Valued using industry accepted discounted cash flow models that incorporate market unobservable credit

spreads of the preferred shares.

(5) Fair values are determined by reference to various valuation measures for comparable companies and
transactions, including relevant valuation multiples. In some instances, such investments are classified as
Level 3 because the valuation multiples applied by the company are adjusted for differences in attributes
between the investment and the underlying companies or transactions from which the valuation multiples
were derived.

(6) Valued using industry accepted option pricing models that incorporate market unobservable long-dated equity
volatilities. A higher equity volatility generally results in a higher fair value due to the higher probability of
obtaining a greater return from the warrant.

FAIRFAX FINANCIAL HOLDINGS LIMITED

(7) Valued based on broker-dealer quotes which management has determined utilize market observable inputs

except for inflation volatility which is an unobservable input.

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 (note 6)

2017

2016

117.5
441.9
(44.8)

33.4
622.4
(141.4)

514.6

514.4

2.1
71.1

73.2

11.2
55.6

66.8

(28.8)

(26.0)

559.0

555.2

200.5

24.2

Net gains (losses) on investments

2017

2016

Net

Net change

Net

Net change

realized

in unreal-

Net gains

realized

gains

ized gains

(losses) on

(losses)

investments

gains

(losses)

in unreal-

ized gains

Net gains

(losses) on

(losses)

investments

Bonds
Preferred stocks
Common stocks

Derivatives:

Common stock and equity index short positions
Common stock and equity index long positions
Equity index put options
Equity warrants and call options
CPI-linked derivatives
U.S. treasury bond forwards
Other

Foreign currency net gains (losses) on:

Investing activities
Underwriting activities
Foreign currency contracts

Gain on disposition of associates

Other

445.7
0.2
126.5

572.4

(485.6)(1)
21.6(1)
–
22.9
–
(174.5)
(8.4)

(624.0)

0.8
(74.9)
(21.0)

(95.1)

999.9(2)(3)

2.1

283.3
(6.4)
(71.0)

205.9

(1,179.8)
23.3
(13.1)
(4.0)
(196.2)
47.0
(7.4)

(167.7)
(0.5)
585.7

278.0
(0.3)
712.2

683.7
(68.0)(4)(5)
(162.2)(4)(6)

(400.4)

61.6(4)(5)
91.2(4)(6)

417.5

989.9

453.5

(247.6)

67.7
(2.0)
–
15.4
(71.0)
21.3
8.1

39.5

88.0
–
9.9

97.9

–

57.3

(417.9)
19.6
–
38.3
(71.0)
(153.2)
(0.3)

(915.8)(1)
10.4(1)
(20.3)
–
–
96.7
(70.6)

(264.0)
12.9
7.2
(4.0)
(196.2)
(49.7)
63.2

(584.5)

(899.6)

(430.6)

(1,330.2)

88.8
(74.9)
(11.1)

2.8

999.9

59.4

54.4
19.7
6.5

80.6

–

3.2

(191.3)
–
(18.8)

(210.1)

–

47.0

(136.9)
19.7
(12.3)

(129.5)

–

50.2

Net gains (losses) on investments

855.3

612.2

1,467.5

(362.3)

(841.3)

(1,203.6)

(1) Amounts recorded in net realized gains (losses) include net gains (losses) on total return swaps where the counterparties are
required to cash-settle on a quarterly or monthly basis the market value movement since the previous reset date
notwithstanding that the total return swap positions remain open subsequent to the cash settlement. The company
discontinued its economic equity hedging strategy during the fourth quarter of 2016 and closed out $6,350.6 notional
amount of short positions effected through equity index total return swaps (comprised of Russell 2000, S&P 500 and
S&P/TSX 60 short equity index total return swaps) (see notes 7 and 24).

(2) During 2017 the company sold a 24.3% equity interest in ICICI Lombard for net proceeds of $908.5 and recorded a net
realized gain of $595.6. The company’s remaining 9.9% equity interest in ICICI Lombard was reclassified to common
stock measured at FVTPL and re-measured to fair value for a net realized gain of $334.5 (see note 6).

(3) During 2017 the company acquired control of Grivalia Properties by increasing its equity interest to 52.7% and
commenced consolidating Grivalia Properties in the Other reporting segment. As a result, the company re-measured its
equity accounted carrying value of Grivalia Properties to fair value and recorded a net realized gain of $51.3 (see note 6).

(4) During 2016 the company recognized net realized losses of $220.3 and $103.7 on common and preferred stock
investments pursuant to the issuer’s plan of restructuring and subsequent emergence from bankruptcy protection. Prior
period unrealized losses on the common and preferred stock investments of $209.5 and $99.6 were reclassified to net
realized losses with a net impact of nil on the consolidated statement of earnings.

(5) During 2016 the company was required to convert a preferred stock investment into common shares of the issuer, resulting
in a net realized gain on investment of $35.1 (the difference between the share price of the underlying common stock at the
date of conversion and the exercise price of the preferred stock). Prior period unrealized gains on the preferred stock
investment of $41.7 were reclassified to net realized gains with a net impact of nil on the consolidated statement
of earnings.

(6) During 2016 the company increased its ownership interest in APR Energy to 49.0% and commenced applying the equity
method of accounting, resulting in the reclassification of an unrealized loss of $68.1 on APR Energy to realized losses with
a net impact of nil on the consolidated statement of earnings.

FAIRFAX FINANCIAL HOLDINGS LIMITED

Investments in Associates

The following summarizes the company’s investments in associates:

December 31, 2017

Carrying value

Ownership
percentage

Fair
value(a)

Associates
and joint
arrangements

Fairfax India
and Fairfax
Africa associates

Insurance and reinsurance:

Eurolife ERB Insurance Group Holdings S.A. (‘‘Eurolife’’)
Gulf Insurance Company (‘‘Gulf Insurance’’)
Thai Re Public Company Limited (‘‘Thai Re’’)(1)
Bank for Investment and Development of Vietnam Insurance Joint

Stock Corporation (‘‘BIC Insurance’’)

Singapore Reinsurance Corporation Limited (‘‘Singapore Re’’)
Ambridge Partners LLC (‘‘Ambridge Partners’’)
Go Digit Infoworks Services Private Limited (‘‘Digit’’)(2)
Falcon Insurance PLC (‘‘Falcon Thailand’’)
Camargue Underwriting Managers Group Ltd. (‘‘Camargue’’)
ICICI Lombard General Insurance Company Limited (‘‘ICICI

Lombard’’)(3)

Non-insurance:

Agriculture

Astarta Holding N.V. (‘‘Astarta’’)(4)
Farmers Edge Inc. (‘‘Farmers Edge’’)(5)

Real estate

KWF Real Estate Ventures Limited Partnerships (‘‘KWF LPs’’)(6)
Grivalia Properties REIC (‘‘Grivalia Properties’’)(7)
Other

India

Bangalore International Airport Limited (‘‘Bangalore Airport’’)(12)
IIFL Holdings Limited (‘‘IIFL Holdings’’)(13)
5paisa Capital Limited (‘‘5paisa’’)(13)
Fairchem Limited (‘‘Fairchem’’)(14)
Other

Africa

Atlas Mara Limited (‘‘Atlas Mara’’)(15)
AFGRI Holdings Proprietary Limited (‘‘AFGRI’’)(16)

Other

Resolute Forest Products Inc. (‘‘Resolute’’)(8)
APR Energy plc (‘‘APR Energy’’)(9)
Peak Achievement Athletics (‘‘Peak Achievement’’)(10)
Arbor Memorial Services Inc. (‘‘Arbor Memorial’’)
Partnerships, trusts and other(11)

Investments in associates

As presented on the consolidated balance sheet:

Investments in associates
Fairfax India cash and portfolio investments(12)(13)
Fairfax Africa cash and portfolio investments(15)(16)

(a)
See note 5 for fair value hierarchy information.
(b) These investments are considered joint arrangements.
(c)
Fairfax India associate.
(d) Fairfax Africa associate.

303.0
233.1
80.5

66.7
39.6
34.9
10.6
9.2
5.5

–

298.0(b)
185.4
80.3

48.6
38.5
34.9
10.6
9.2
5.5

–

783.1

711.0

140.6
88.1

228.7

213.4(b)

–
88.6(b)

302.0

–
102.7
6.6
–
–

109.3

–
–

–

320.6
309.4(b)
144.8(b)
61.4
299.8

1,136.0

1,776.0

2,487.0

101.2
95.0

196.2

213.4
–
88.7

302.1

608.3
1,185.1
26.6
–
0.6

1,820.6

168.7
119.0

287.7

334.0
336.4
153.5
111.8
303.9

1,239.6

3,846.2

4,629.3

2,824.3
1,517.3
287.7

4,629.3

43.3%
41.4%
34.9%

35.0%
27.8%
50.0%
45.3%
41.2%
50.0%

–

28.1%
46.1%

–
–
–

48.0%
35.5%
35.5%
–
–

43.3%
60.0%

33.8%
67.8%
42.6%
43.4%
–

Year ended
December 31,
2017

Share of
profit
(loss)(8)

117.6
7.7
(21.3)

1.6
3.2
4.4
–
–
0.7

24.0

137.9

15.8
(10.5)

5.3

12.2
12.8
9.0

34.0

15.8
36.5
–
0.2
–

52.5

1.6
(0.4)

1.2

0.3
(3.1)
(6.2)
10.6
(32.0)

(30.4)

62.6

200.5

Total

298.0
185.4
80.3

48.6
38.5
34.9
10.6
9.2
5.5

–

711.0

140.6
88.1

228.7

213.4
–
88.6

302.0

–
–
–

–
–
–
–
–
–

–

–
–

–

–
–
–

–

611.1(c) 611.1
317.2(c) 419.9
26.8
–
1.0

20.2(c)
–
1.0(c)

949.5 1,058.8

170.3(d) 170.3
49.5

49.5(d)

219.8

–
–
–
–
–

320.6
309.4
144.8
61.4
299.8

– 1,136.0

1,169.3 2,945.3

1,169.3 3,656.3

2,487.0
949.5
219.8

3,656.3

December 31, 2016

Carrying value

Ownership
percentage

Fair
value(a)

Associates
and joint
arrangements

Fairfax
India associates

Total

Year ended
December 31,
2016

Share of
profit
(loss)(8)

Insurance and reinsurance:

Eurolife ERB Insurance Group Holdings S.A. (‘‘Eurolife’’)

Gulf Insurance Company (‘‘Gulf Insurance’’)

Thai Re Public Company Limited (‘‘Thai Re’’)

Bank for Investment and Development of Vietnam Insurance Joint

Stock Corporation (‘‘BIC Insurance’’)

Singapore Reinsurance Corporation Limited (‘‘Singapore Re’’)

Ambridge Partners LLC (‘‘Ambridge Partners’’)

Falcon Insurance PLC (‘‘Falcon Thailand’’)

Camargue Underwriting Managers Group Ltd. (‘‘Camargue’’)

ICICI Lombard General Insurance Company Limited (‘‘ICICI Lombard’’)

Non-insurance:

Real estate

KWF Real Estate Ventures Limited Partnerships (‘‘KWF LPs’’)(6)
Grivalia Properties REIC (‘‘Grivalia Properties’’)

India

IIFL Holdings Limited (‘‘IIFL Holdings’’)

Fairchem Limited (‘‘Fairchem’’)

Other

Resolute Forest Products Inc. (‘‘Resolute’’)(8)
APR Energy plc (‘‘APR Energy’’)

Peak Achievement Athletics (‘‘Peak Achievement’’)

Arbor Memorial Services Inc. (‘‘Arbor Memorial’’)

Partnerships, trusts and other

Investments in associates

As presented on the consolidated balance sheet:

Investments in associates

Fairfax India cash and portfolio investments

(a)
See note 5 for fair value hierarchy information.
(b) These investments are considered joint arrangements.
(c)

Fairfax India associate.

Insurance and reinsurance associates

150.6(b)
195.7

94.7

48.4

34.6

31.4

8.8

5.2

371.1

940.5

202.8(b)
295.9

498.7

96.3

–

96.3

304.5
187.3(b)
82.7(b)
56.0

227.0

857.5

1,452.5

2,393.0

40.0%

41.4%

32.4%

35.0%

27.8%

50.0%

41.2%

50.0%

34.6%

–

40.6%

30.5%

44.9%

–

33.9%

45.0%

38.2%

43.4%

–

171.4

235.8

80.2

68.5

35.5

31.4

8.8

5.2

878.0

1,514.8

202.8

332.4

535.2

373.9

45.5

0.4

419.8

162.5

234.0

83.0

93.6

224.4

797.5

1,752.5

3,267.3

2,955.4

311.9

3,267.3

(6.4)

14.0

(1.8)

1.8

2.0

3.4

0.7

0.2

44.1

58.0

13.9

16.1

30.0

18.5

0.3

–

18.8

(73.6)

(29.0)

–

9.0

11.0

(82.6)

(33.8)

24.2

–

150.6

195.7

94.7

48.4

34.6

31.4

8.8

5.2

371.1

940.5

202.8

295.9

498.7

220.1(c) 316.4
19.4

19.4(c)
1.0(c)

1.0

240.5

336.8

–

304.5

187.3

82.7

56.0

227.0

857.5

240.5 1,693.0

240.5 2,633.5

2,393.0

240.5

2,633.5

(1) At December 31, 2017 Thai Re Public Company Limited’s (‘‘Thai Re’’) recoverable amount of $80.3 was
determined to be lower than its carrying value, resulting in a non-cash impairment charge of $17.7 recognized in
share of profit (loss) of associates in the consolidated statement of earnings.

(2) Through various transactions during 2017 the company acquired a 45.3% equity interest in Go Digit Infoworks
Private Limited (‘‘Digit’’) for cash consideration of $10.6 (694.4 million Indian rupees) and invested in
convertible preferred shares of Digit for $48.9 (3.2 billion Indian rupees). Digit is a newly formed Indian
company that has established and is operating an insurance company in India named Go Digit General
Insurance Limited.

FAIRFAX FINANCIAL HOLDINGS LIMITED

(3) On July 6, 2017 the company sold a 12.2% equity interest in ICICI Lombard General Insurance Company
Limited (‘‘ICICI Lombard’’) to private equity investors for net proceeds of $376.3 and a net realized investment
gain of $223.3. On September 19, 2017 the company sold an additional 12.1% equity interest through
participation in ICICI Lombard’s initial public offering for net proceeds of $532.2 and a net realized investment
gain of $372.3. The company’s remaining 9.9% equity interest in ICICI Lombard was reclassified from the equity
method of accounting to common stock at FVTPL, resulting in a $334.5 re-measurement gain.

Non-insurance associates

(4) Through various transactions between January 3, 2017 and May 10, 2017, the company acquired an aggregate
equity interest in Astarta Holding N.V. (‘‘Astarta’’) of 28.0% with an initial carrying value of $120.1 under the
equity method of accounting, comprised of cash consideration of $104.4 (420.1 million Polish zlotys) and
re-measurements to fair value of $15.7. Astarta specializes in sugar production, crop growing, soybean
processing and cattle farming, primarily in Ukraine.

(5) On March 1, 2017 the company acquired a 46.1% equity interest in Farmers Edge Inc. (‘‘Farmers Edge’’) for
purchase consideration of $95.0. Farmers Edge specializes in data science, precision agronomy (farming),
geographic information systems, hardware engineering, software development, soil science and sustainability.

(6) The KWF LPs are partnerships formed between the company and Kennedy-Wilson Holdings, Inc. and its
affiliates (‘‘Kennedy Wilson’’) to invest in U.S. and international real estate properties. The company participates
as a limited partner in the KWF LPs, with limited partnership interests ranging from 50% to 90%. Kennedy
Wilson is the general partner and holds the remaining limited partnership interest in each of the KWF LPs.

(7) On July 4, 2017 the company acquired control of Grivalia Properties REIC (‘‘Grivalia Properties’’) by increasing
its equity interest to 52.6% through the purchase of an additional 10.3% equity interest from Eurobank
Ergasias S.A. for cash consideration of $100.0 (A88.0). Accordingly, the company re-measured its equity
accounted carrying value of Grivalia Properties to fair value, recorded a net realized gain of $51.3 and
commenced consolidating Grivalia Properties (and its equity accounted investments with a fair value of $39.5)
in the Other reporting segment. Pursuant to Greek securities law, the company then made a tender offer for all
remaining outstanding shares of Grivalia Properties which expired on September 6, 2017, resulting in the
company increasing its equity interest by 0.1% to 52.7% for cash consideration of $0.6 (A0.5). Grivalia Properties
is a real estate investment company listed on the Athens Stock Exchange.

(8) At December 31, 2016 the carrying value of the company’s investment in Resolute Forest Products Inc.
(‘‘Resolute’’) exceeded its fair value as determined by the market price of Resolute shares. The company
performed a value-in-use analysis to establish the recoverable amount of its investment in Resolute and
recognized a non-cash impairment charge of $100.4 in share of profit of associates in the 2016 consolidated
statement of earnings.

(9) On July 20, 2017 the company increased its indirect equity interest in APR Energy plc (‘‘APR Energy’’) to 67.9%
through the acquisition of an additional 22.9% equity interest for purchase consideration of $109.0. APR Energy
continues to be reported under the equity method of accounting due to certain contractual arrangements
between Fairfax and the second-largest shareholder which preclude either party from exercising unilateral
control over APR Energy’s most relevant decisions governing its operations, including the appointment of
executive management and the approval of the detailed annual business plan. On October 13, 2017 APR Energy
obtained further capital financing through the issuance of common shares to existing shareholders for which
the company participated by investing an additional $13.2. The net impact of the common share issuance
reduced the company’s indirect equity interest to 67.8%.

(10) On March 1, 2017 the restructuring of Performance Sports Group Ltd. (‘‘PSG’’) was substantially completed after
all of the assets and certain related operating liabilities of PSG were sold to an intermediate holding company
(‘‘Performance Sports’’) co-owned by Fairfax and Sagard Holdings Inc. The company’s $153.5 equity investment
in Performance Sports represents a voting interest of 50.0% and an equity interest of 42.6%. On April 3, 2017
Performance Sports was renamed Peak Achievement Athletics Inc. (‘‘Peak Achievement’’).

(11) On August 2, 2017 the company acquired an 81.2% non-voting equity interest in Sigma Companies
International Corp. (‘‘Sigma’’) for cash consideration of $41.4. Sigma, through its subsidiary, is engaged in global
water and wastewater infrastructure projects.

Fairfax India

(12) On March 24, 2017 Fairfax India acquired a 38.0% equity interest in Bangalore International Airport Limited
(‘‘Bangalore Airport’’) for cash consideration of $385.5 (25.2 billion Indian rupees). On July 13, 2017 Fairfax
India increased its equity interest in Bangalore Airport to 48.0% through the acquisition of an additional 10.0%
equity interest from a wholly-owned subsidiary of GVK Power and Infrastructure Limited (‘‘GVK’’) for purchase
consideration of $200.1 (12.9 billion Indian rupees). A put option previously issued to GVK during the
company’s initial investment in Bangalore Airport was terminated by this transaction. Bangalore Airport, under
a concession agreement with the Government of India, operates and manages the Kempegowda International
Airport in Bengaluru, India through a public-private partnership.

(13) On October 20, 2017 IIFL Holdings Limited (‘‘IIFL Holdings’’) completed a spin-off of a wholly owned subsidiary
resulting in the entity 5paisa Capital Limited (‘‘5paisa’’). IIFL Holdings investors received 5paisa shares pro rata
based on existing ownership in IIFL Holdings. The transaction was recorded as a non-cash distribution that
reduced the carrying value of the company’s investment in IIFL Holdings. Subsequent to the spin-off
transaction, the company holds a 35.5% equity interest in 5paisa recorded at an initial carrying value of $26.4.
5paisa is a provider of a web-based, mobile technology platform that facilitates trading of securities on the BSE
and NSE of India.

(14) On March 14, 2017 Fairchem Speciality Limited (‘‘Fairchem’’) and Privi Organics Limited (‘‘Privi Organics’’)
completed their previously announced merger, with the merged entity continuing under the Fairchem name
and being consolidated by Fairfax India (see note 23).

Fairfax Africa

(15) On August 31, 2017 Fairfax Africa, through a series of transactions, acquired a 42.4% equity interest in Atlas
Mara Limited (‘‘Atlas Mara’’) for cash consideration of $155.8. On December 22, 2017 Fairfax Africa acquired an
additional 0.9% equity interest in Atlas Mara for cash consideration of $2.4. Atlas Mara is a financial services
institution listed on the London Stock Exchange that operates in seven sub-Saharan countries.

(16) On February 17, 2017 the company contributed its indirect equity ownership interest in AFGRI Holdings
Proprietary Limited (‘‘AFGRI’’) to Fairfax Africa (fair value of $72.8 and carrying value of $40.5) in exchange for
7,284,606 multiple voting shares of Fairfax Africa valued at $10.00 per multiple voting share (see note 23).
Despite the company’s significant equity interest, AFGRI is reported under the equity method of accounting due
to contractual arrangements between Fairfax Africa and certain other shareholders of AFGRI which preclude any
shareholders from exercising unilateral control over AFGRI’s most relevant decisions governing its operations,
including approval of significant transactions and the five-year business plan.

FAIRFAX FINANCIAL HOLDINGS LIMITED

Changes in the investments in associates balances for the years ended December 31 were as follows:

2017

Associates arrangements

Joint Fairfax India Fairfax Africa
associates

associates

Total

1,769.6

623.4

240.5

–

2,633.5

Balance – January 1
Share of pre-tax comprehensive income (loss) of associates and

joint arrangements:

Share of profit of associates and joint arrangements
Share of other comprehensive income (loss), excluding gains

(losses) on defined benefit plans

Share of gains (losses) on defined benefit plans

Dividends and distributions received
Purchases and acquisitions
Divestitures and other net changes in capitalization
Reclassifications(1)
Foreign exchange effect

25.6

22.9
12.4

60.9
(50.5)
367.4
(290.5)
(440.4)
20.5

128.2

45.5

1.2

200.5

46.4
–

174.6
(57.0)
301.6
(2.4)
–
9.8

(0.1)
(0.1)

45.3
(26.8)
682.9
(0.7)
(20.4)
28.7

949.5

(1.3)
–

(0.1)
–
219.9
–
–
–

67.9
12.3

280.7
(134.3)
1,571.8
(293.6)
(460.8)
59.0

219.8

3,656.3

Balance – December 31

1,437.0

1,050.0

(1) Comprised of the consolidation of Grivalia Properties, the reduction of the company’s investment in ICICI Lombard and the consolidation

of Fairchem subsequent to its merger with Privi Organics.

2016

Associates arrangements

Joint Fairfax India Fairfax Africa
associates

associates

Balance – January 1
Share of pre-tax comprehensive income (loss) of associates and

joint arrangements:

Share of profit (loss) of associates and joint arrangements
Share of other comprehensive loss, excluding losses on defined

benefit plans

Share of losses on defined benefit plans

Dividends and distributions received
Purchases and acquisitions
Divestitures and other net changes in capitalization
Foreign exchange effect

Balance – December 31

1,538.7

191.5

202.7

32.1

(21.5)

13.6

(24.9)
(43.5)

(36.3)
(45.6)
306.2
5.6
1.0

1,769.6

(14.4)
–

(35.9)
(47.8)
528.4
(11.6)
(1.2)

623.4

–
–

13.6
(4.6)
20.5
13.7
(5.4)

240.5

–

–
–

–
–
–
–
–

–

Total

1,932.9

24.2

(39.3)
(43.5)

(58.6)
(98.0)
855.1
7.7
(5.6)

2,633.5

The company’s strategic investment in 15.0% of Alltrust Insurance Company of China Ltd. had a carrying value of
$81.2 at December 31, 2017 (December 31, 2016 – $76.1) and is classified as FVTPL within common stocks on the
consolidated balance sheet.

7. Short Sales and Derivatives

The following table summarizes the company’s derivative financial instruments:

December 31, 2017

December 31, 2016

Notional

Fair value

Notional

Fair value

Cost amount Assets Liabilities Cost amount Assets Liabilities

Equity derivatives:

Equity index total return swaps – short positions

Equity total return swaps – short positions

Equity total return swaps – long positions

Equity and equity index call options

Warrants

CPI-linked derivative contracts

U.S. treasury bond forwards

Foreign exchange forward contracts

–

0.4

64.8

52.6

892.5

697.8

8.2

607.1

678.4 117,254.6

1,693.8

–

0.4

11.8

17.8

3.9

73.7

39.6

–

57.1

Total

204.3

126.2

–

12.1

15.6

–

43.3

1,623.0

213.1

– 16.2

1,104.4

–

6.5

32.2

– 670.0 110,365.5

28.8

69.7

–

3,013.4

0.6

10.4

9.4

12.8

6.5

83.4

–

80.2

203.3

–

78.1

5.1

–

49.7

101.4

234.3

The company is exposed to significant market risk (comprised of foreign currency risk, interest rate risk and other
price risk) through its investing activities. Certain derivative contracts entered into by the company are considered
economic hedges of certain market risks but are not designated as hedges for financial reporting.

Equity contracts

Throughout most of 2016 the company had economically hedged certain market risks associated with its equity and
equity-related holdings (comprised of common stocks, convertible preferred stocks, convertible bonds,
non-insurance investments in associates and equity-related derivatives) against a potential significant decline in
equity markets by way of short positions effected through equity and equity index total return swaps (including
short positions in certain equity indexes and individual equities) and equity index put options (S&P 500). The
company’s equity hedges were structured to provide a return that was inverse to changes in the fair values of the
indexes and certain individual equities.

The company discontinued its economic equity hedging strategy in the fourth quarter of 2016 after giving
consideration to the possible and actual outcome of the U.S. elections and the potential for fundamental changes
that could improve U.S. economic growth and equity markets. During 2016 the company closed out $6,350.6
notional amount of short positions effected through equity index total return swaps (comprised of Russell 2000,
S&P 500 and S&P/TSX 60 short equity index total return swaps) and recognized a net loss on investment of $955.2
(realized loss of $2,665.4 of which $1,710.2 had been recognized as unrealized losses in prior years). The company
continues to hold short equity and equity index total return swaps for investment purposes, but no longer regards
them as hedges of its equity and equity-related holdings. During 2017 the company paid net cash of $485.6 (2016 –
$915.8) in connection with the closures and reset provisions of its short equity and equity index total return swaps
(excluding the impact of collateral requirements).

At December 31, 2017 the company had entered into long equity total return swaps on individual equities for
investment purposes with an original notional amount of $706.3 (December 31, 2016 – $283.9). During 2017 the
company received net cash of $21.6 (2016 – $10.4) in connection with the reset provisions of its long equity total
return swaps (excluding the impact of collateral requirements).

FAIRFAX FINANCIAL HOLDINGS LIMITED

At December 31, 2017 the fair value of 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 $272.5
(December 31, 2016 – $322.9), comprised of collateral of $36.0 (December 31, 2016 – $86.4) securing amounts owed
to counterparties in respect of fair value changes since the most recent reset date, and collateral of $236.5
(December 31, 2016 – $236.5) required to be deposited to enter into such derivative contracts (principally related to
total return swaps).

U.S. treasury bond forward contracts

To reduce its exposure to interest rate risk (specifically with respect to U.S. state and municipal bonds and any
remaining long dated U.S. treasury bonds held in its fixed income portfolio following sales which occurred late in
2016 and in the first quarter of 2017), the company entered into forward contracts to sell long dated U.S. treasury
bonds. At December 31, 2017 these contracts had a notional amount of $1,693.8 (December 31, 2016 – $3,013.4) and
an average term to maturity of less than three months, and could be renewed at market rates.

CPI-linked derivative contracts

The company has purchased derivative contracts referenced to consumer price indexes (‘‘CPI’’) in the geographic
regions in which it operates to serve as an economic hedge against the potential adverse financial impact on the
company of decreasing price levels. At December 31, 2017 these contracts have a remaining weighted average life of
4.6 years (December 31, 2016 – 5.6 years) and notional amounts and fair values 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 a contract is limited to the
original cost of that contract. The CPI-linked derivative contracts are summarized as follows:

Averag

Notional amount

Floor
rate(1)

life Original
currency

(in years)

U.S.
dollars

December 31, 2017

Weighted

average

Index value

Market

at period
end

Cost in Market
value

bps(2)

value in Unrealized
gain (loss)

bps(2)

Cost

46,725.0

12,600.0

41,375.0

49,683.0

246.52

287.5

246.52

39.9

102.57

307.1

3,300.0

4,464.1

243.82

278.10

23.2

3,150.0

3,782.5

99.27

101.76

20.7

117,254.6

678.4

61.5

31.7

61.8

52.0

54.7

20.6

17.2

1.4

0.3

0.1

39.6

4.4

13.7

0.3

0.7

0.3

(266.9)

(22.7)

(305.7)

(22.9)

(20.6)

(638.8)

Average

Notional amount

life Original

U.S.

(in years)

currency

dollars

46,725.0

12,600.0

41,375.0

43,640.4

December 31, 2016

Weighted

average

Index value

Market

at period

Cost in Market

value in Unrealized

end

Cost

bps(2)

value

bps(2)

gain (loss)

3,300.0

4,077.6

243.82

267.10

22.6

3,150.0

3,322.5

99.27

100.66

20.7

110,365.5

670.0

241.43

286.9

241.43

39.5

101.26

300.3

61.4

31.3

68.8

55.4

62.3

35.2

34.3

12.5

0.5

0.9

83.4

7.5

27.2

2.9

1.2

2.7

(251.7)

(5.2)

(287.8)

(22.1)

(19.8)

(586.6)

Underlying CPI index

United States

European Union

United Kingdom

France

Underlying CPI index

United States

European Union

United Kingdom

France

0.0%

0.5%

0.0%

Floor
rate(1)

0.0%

0.5%

0.0%

4.7

6.8

4.0

4.9

5.1

4.6

5.7

7.8

5.0

5.9

6.1

5.6

strike
price

231.39

238.30

96.09

strike

price

231.39

238.30

96.09

(1) Contracts with a floor rate of 0.0% provide a payout at maturity if there is cumulative deflation over the life of the
contract. Contracts with a floor rate of 0.5% provide a payout at maturity based on an equivalent weighted average strike
price of 250.49 if cumulative inflation averages less than 0.5% per year over the life of the contract. At December 31, 2017
the equivalent weighted average strike price for the United States 0.5% CPI-linked derivative contracts was 242.20
(December 31, 2016 – 241.00).

(2) Expressed as a percentage of the notional amount.

During 2017 the company did not enter into any new CPI-linked derivative contracts. The company’s CPI-linked
derivative contracts produced net unrealized losses of $71.0 in 2017 (2016 – $196.2).

Foreign exchange forward contracts
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. These contracts have an average term to maturity of less than one year and can be
renewed at market rates.

Counterparty collateral
The company endeavours to limit counterparty risk through diligent selection of counterparties to its derivative
contracts and through the terms of negotiated agreements. The fair value of the collateral deposited for the benefit of
the company at December 31, 2017 consisted of cash of $3.6 and government securities of $35.9 (December 31,
2016 – $8.3 and $54.4). 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, 2017. The company’s exposure to
counterparty risk and the management thereof are discussed in note 24.

Hedge of net investment in Canadian subsidiaries
At December 31, 2017 the company has designated the carrying value of Cdn$2,212.9 principal amount of its
Canadian dollar denominated unsecured senior notes with a fair value of $1,868.6 (December 31, 2016 – principal
amount of Cdn$1,975.0 with a fair value of $1,618.1) as a hedge of its net investment in its Canadian subsidiaries for
financial reporting. During 2017 the company recognized pre-tax losses of $106.3 (2016 – $37.5) related to foreign
currency movements on the unsecured senior notes in losses on hedge of net investment in Canadian subsidiaries in
the consolidated statement of comprehensive income.

Insurance Contract Liabilities

Provision for unearned premiums
Provision for losses and loss adjustment

expenses

December 31, 2017

December 31, 2016

Gross
5,951.7

Ceded
1,169.0

Net
4,782.7

Gross
3,740.4

Ceded
539.8

Net
3,200.6

28,610.8

6,189.7

22,421.1

19,481.8

3,179.6

16,302.2

Total insurance contract liabilities

34,562.5

7,358.7

27,203.8

23,222.2

3,719.4

19,502.8

Current
Non-current

13,405.0
21,157.5

2,975.9
4,382.8

10,429.1
16,774.7

9,013.9
14,208.3

1,586.8
2,132.6

7,427.1
12,075.7

34,562.5

7,358.7

27,203.8

23,222.2

3,719.4

19,502.8

At December 31, 2017 the company’s net provision for losses and loss adjustment expenses of $22,421.1
(December 31, 2016 – $16,302.2) were comprised of case reserves of $9,731.5 and IBNR of $12,689.6 (December 31,
2016 – $7,537.2 and $8,765.0).

Provision for unearned premiums
Changes in the provision for unearned premiums for the years ended December 31 were as follows:

Provision for unearned premiums – January 1

Gross premiums written
Less: gross premiums earned

Acquisitions of subsidiaries (note 23)
Divestiture of subsidiary (note 23)
Foreign exchange effect and other

Provision for unearned premiums – December 31

2017

2016

3,740.4
12,207.5
(11,822.0)
1,906.2
(157.9)
77.5

3,284.8
9,534.3
(9,209.7)
111.1
–
19.9

5,951.7

3,740.4

FAIRFAX FINANCIAL HOLDINGS LIMITED

Provision for losses and loss adjustment expenses
Changes in the provision for losses and loss adjustment expenses for the years ended December 31 were as follows:

Provision for losses and loss adjustment expenses – January 1

Decrease in estimated losses and expenses for claims occurring in the prior years
Losses and expenses for claims occurring in the current year
Paid on claims occurring during:

the current year
the prior years

Acquisitions of subsidiaries (note 23)
Divestiture of subsidiary (note 23)
Foreign exchange effect and other

Provision for losses and loss adjustment expenses – December 31

2017

2016

19,481.8
(218.8)
9,736.5

19,816.4
(559.8)
6,247.8

(2,263.9)
(5,526.0)
7,377.6
(546.6)
570.2

(1,595.6)
(4,441.8)
143.1
–
(128.3)

28,610.8

19,481.8

Development of insurance losses, gross
The development of insurance liabilities illustrates the estimation uncertainty associated with these liabilities and
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 losses and loss adjustment expenses at the end of each calendar year, the
cumulative payments made in respect of those reserves in subsequent years and the re-estimated amount of each
calendar year’s provision for losses and loss adjustment expenses as at December 31, 2017.

Provision for losses and loss

adjustment expenses

Less: CTR Life(1)

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

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

Favourable (unfavourable)

development

Comprised of favourable

(unfavourable):
Effect of foreign currency

translation

Loss reserve development

Calendar year

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

14,467.2
34.9

14,504.8
27.6

16,049.3
25.3

17,232.2
24.2

19,648.8
20.6

19,212.8
17.9

17,749.1
15.2

19,816.4
14.2

19,481.8
12.8

28,610.8
8.7

14,432.3

14,477.2

16,024.0

17,208.0

19,628.2

19,194.9

17,733.9

19,802.2

19,469.0

28,602.1

3,136.0
5,336.4
7,070.7
8,318.7
9,189.1
10,039.4
10,705.5
11,379.9
11,857.8

14,746.0
14,844.4
14,912.4
15,127.5
15,091.0
15,011.7
14,873.6
15,028.8
15,231.4

3,126.6
5,307.6
6,846.3
7,932.7
8,936.9
9,721.1
10,456.1
10,975.6

14,616.0
14,726.6
14,921.6
14,828.9
14,663.1
14,433.0
14,551.5
14,744.2

3,355.9
5,441.4
7,063.1
8,333.3
9,327.0
10,202.6
10,823.4

15,893.8
15,959.7
15,705.6
15,430.4
15,036.2
15,099.0
15,252.1

3,627.6
6,076.7
7,920.3
9,333.4
10,458.7
11,263.6

4,323.5
7,153.1
9,148.0
10,702.8
11,783.3

17,316.4
17,013.6
16,721.0
16,233.9
16,269.6
16,331.8

19,021.2
18,529.4
17,820.5
17,735.5
17,830.5

4,081.1
6,787.6
8,775.5
10,212.4

3,801.6
6,364.5
8,172.7

4,441.4
7,283.6

4,608.0

18,375.6
17,475.0
17,307.9
17,287.2

16,696.4
16,269.2
16,114.0

19,169.3
18,973.6

19,343.1

(799.1)

(267.0)

771.9

876.2

1,797.7

1,907.7

1,619.9

828.6

125.9

(317.7)
(481.4)

82.0
(349.0)

264.2
507.7

265.1
611.1

575.6
1,222.1

476.0
1,431.7

248.5
1,371.4

(252.3)
1,080.9

(205.7)
331.6

(799.1)

(267.0)

771.9

876.2

1,797.7

1,907.7

1,619.9

828.6

125.9

(1) Guaranteed minimum death benefit retrocessional business written by Compagnie Transcontinentale de R´eassurance
(‘‘CTR Life’’), a wholly owned subsidiary of the company that was transferred to Wentworth and placed into run-off
in 2002.

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 foreign
currency risk and the management thereof are discussed 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.

Favourable loss reserve development in calendar year 2017 of $331.6 in the table above was principally comprised of
favourable loss emergence on the more recent accident years, partially offset by adverse development primarily
relating to asbestos and other latent reserves.

Development of losses and loss adjustment expenses for asbestos
A number of the company’s subsidiaries wrote general liability policies and reinsurance prior to their acquisition by
the company under which policyholders continue to present asbestos-related injury claims. The vast majority of
these claims are presented under policies written many years ago and reside primarily within the run-off 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 exposure on a gross and net basis for the years ended December 31:

2017

2016

Provision for asbestos claims and loss adjustment expenses – January 1

Losses and loss adjustment expenses incurred
Losses and loss adjustment expenses paid

Net

Gross

Gross
1,347.7 1,065.5 1,381.0
219.9
141.8
(253.2)
(174.0)

153.0
(208.6)

Net
1,043.8
218.7
(197.0)

Provision for asbestos claims and loss adjustment expenses – December 31

1,292.1 1,033.3 1,347.7

1,065.5

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

Insurance contracts
Ceded reinsurance contracts

December 31, 2017

December 31, 2016

Fair
value
33,807.2
6,948.7

Carrying
value
34,562.5
7,358.7

Fair
value
22,598.3
3,501.3

Carrying
value
23,222.2
3,719.4

The fair value of insurance contracts is comprised of the fair value of both unpaid claim liabilities and unearned
premiums. The fair value of ceded reinsurance contracts is comprised of the fair value of reinsurers’ share of unpaid
claim liabilities and unearned premiums. Both reflect the time value of money through discounting, whereas the
carrying values (including the reinsurers’ share thereof) do not. The calculation of the fair value of unearned
premiums includes acquisition expenses to reflect the deferral of these expenses at the inception of the insurance
contract. The estimated fair 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 the expected future cash flows. The difference between the sum of the undiscounted expected
future cash flows and the sum of the discounted expected future cash flows represents the time value of money. A
margin for risk and uncertainty is added to the discounted cash flows to reflect the volatility of the lines of business
written, quantity of reinsurance purchased, credit quality of reinsurers and the possibility of future changes in
interest rates.

FAIRFAX FINANCIAL HOLDINGS LIMITED

The table that follows illustrates the potential impact of interest rate fluctuations on the fair value of the company’s
insurance and reinsurance contracts:

December 31, 2017

December 31, 2016

Change in interest rates
100 basis point increase
100 basis point decrease

9. Reinsurance

Fair value of Fair value of Fair value of Fair value of
reinsurance
contracts
3,425.7
3,582.4

reinsurance
contracts
6,764.1
7,147.6

insurance
contracts
32,820.7
34,877.5

insurance
contracts
21,973.4
23,274.9

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

December 31, 2017

December 31, 2016

Gross
recoverable

Provision for Recoverable
from
reinsurers

from uncollectible
reinsurance(1)

reinsurers

Gross
recoverable

Provision for Recoverable
from
reinsurers

from uncollectible
reinsurance(1)

reinsurers

Provision for losses and loss adjustment expenses
Reinsurers’ share of paid losses
Provision for unearned premiums

6,216.2
593.7
1,169.0

7,978.9

(26.5)
(139.9)
–

6,189.7
453.8
1,169.0

3,210.0
432.2
539.8

(30.4)
(141.3)
–

3,179.6
290.9
539.8

(166.4)

7,812.5

4,182.0

(171.7)

4,010.3

Current
Non-current

3,418.6
4,393.9

7,812.5

1,846.6
2,163.7

4,010.3

(1) The company’s management of credit risk associated with its reinsurance recoverables is discussed in note 24.

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

Balance – January 1, 2017

Reinsurers’ share of losses paid to insureds
Reinsurance recoveries received
Reinsurers’ share of unpaid losses and premiums earned
Premiums ceded to reinsurers
Change in provision, recovery or write-off of impaired

balances

Acquisitions of subsidiaries (note 23)
Divestiture of subsidiary (note 23)
Foreign exchange effect and other

2017

Paid Unpaid
losses
losses
432.2 3,210.0
1,330.7 (1,330.7)
–
(1,314.0)
– 2,367.1
–
–

Unearned uncollectible
reinsurance
premiums
(171.7)
539.8
–
–
–
–
–
(2,100.6)
–
2,224.0

Provision for Recoverable
from
reinsurers
4,010.3
–
(1,314.0)
266.5
2,224.0

(0.2)

0.7
162.7 2,115.2
(237.8)
(29.0)
91.7
11.3

–
586.0
(86.8)
6.6

7.2
–
0.1
(2.0)

7.7
2,863.9
(353.5)
107.6

Balance – December 31, 2017

593.7 6,216.2

1,169.0

(166.4)

7,812.5

Balance – January 1, 2016

balances

Acquisitions of subsidiaries (note 23)
Foreign exchange effect and other

2016

Paid Unpaid
losses
losses
419.4 3,259.8
1,018.3 (1,018.3)
–
(1,017.4)
952.1
–
–
–

Unearned uncollectible
reinsurance
premiums
(187.0)
398.7
–
–
–
–
–
(1,347.5)
–
1,445.9

Provision for Recoverable
from
reinsurers
3,890.9
–
(1,017.4)
(395.4)
1,445.9

0.7
11.5
(0.3)

(11.3)
65.0
(37.3)

–
32.3
10.4

15.5
–
(0.2)

4.9
108.8
(27.4)

Balance – December 31, 2016

432.2 3,210.0

539.8

(171.7)

4,010.3

Commission income earned on premiums ceded to reinsurers in 2017 of $347.1 (2016 – $267.4) is included in
commissions, net in the consolidated statement of earnings.

10. Insurance Contract Receivables

Insurance contract receivables were comprised as follows:

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

December 31,
2017
2,752.3
1,086.4
659.8
218.7
(30.3)

December 31,
2016
1,906.2
788.8
181.8
68.3
(27.6)

4,686.9

2,917.5

FAIRFAX FINANCIAL HOLDINGS LIMITED

Changes in the insurance premiums receivable and reinsurance premiums receivable balances for the years ended
December 31 were as follows:

Balance – January 1

Gross premiums written
Premiums collected
Recovery (impairments)
Amounts due to brokers and agents
Acquisitions of subsidiaries (note 23)
Divestiture of subsidiary (note 23)
Foreign exchange effect and other

Balance – December 31

Insurance
premiums receivable

Reinsurance
premiums receivable

2017
1,906.2
9,329.9
(8,075.2)
0.5
(932.3)
604.1
(64.7)
(16.2)

2016
1,677.1
6,930.2
(6,050.5)
(1.6)
(707.8)
54.7
–
4.1

2017
788.8
2,877.6
(2,323.3)
(0.7)
(686.4)
445.2
(48.5)
33.7

2016
659.5
2,604.1
(1,876.5)
(1.2)
(581.2)
0.8
–
(16.7)

2,752.3

1,906.2

1,086.4

788.8

11. Deferred Premium Acquisition Costs

Changes in deferred premium acquisition costs for the years ended December 31 were as follows:

Balance – January 1

Premium acquisition costs deferred
Amortization
Divestiture of subsidiary (note 23)
Foreign exchange effect and other

Balance – December 31

2017

2016

693.1
2,380.2
(2,140.7)
(15.8)
10.7

532.7
1,851.1
(1,696.2)
–
5.5

927.5

693.1

12. Goodwill and Intangible Assets

Goodwill and intangible assets were comprised as follows:

Goodwill

Intangible assets

Total

Balance – January 1, 2017

Additions
Disposals
Amortization and impairment
Foreign exchange effect and other

Balance – December 31, 2017

Gross carrying amount
Accumulated amortization
Accumulated impairment

1,633.7
1,212.3
(1.7)
(0.1)
60.5

2,904.7

2,911.8
–
(7.1)

2,904.7

Lloyd’s
participation

Customer
and broker
Brand
rights(1) relationships names(1)
1,014.4
87.5
–
–
69.5

431.8
672.8
–
(67.9)
11.1

420.5
87.4
–
–
–

Computer
software
and other
347.1
172.9
(0.2)
(91.5)
12.4

3,847.5
2,232.9
(1.9)
(159.5)
153.5

507.9

507.9
–
–

507.9

1,047.8

1,171.4

440.7

6,072.5

1,266.7
(218.9)
–

1,171.4
–
–

767.7
(311.5)
(15.5)

6,625.5
(530.4)
(22.6)

1,047.8

1,171.4

440.7

6,072.5

Goodwill

Intangible assets

Total

Balance – January 1, 2016

Additions
Disposals
Amortization and impairment
Foreign exchange effect and other

Balance – December 31, 2016

Gross carrying amount
Accumulated amortization
Accumulated impairment

(1) Not subject to amortization.

1,428.2
216.0
–
(7.0)
(3.5)

1,633.7

1,640.7
–
(7.0)

1,633.7

Lloyd’s
participation

Customer
Brand
and broker
rights(1) relationships names(1)
723.3
280.9
–
–
10.2

385.6
73.8
–
(35.3)
7.7

420.5
–
–
–
–

Computer
software
and other
257.3
163.4
(0.1)
(68.9)
(4.6)

3,214.9
734.1
(0.1)
(111.2)
9.8

420.5

420.5
–
–

420.5

431.8

1,014.4

347.1

3,847.5

578.6
(146.8)
–

1,014.4
–
–

599.5
(237.7)
(14.7)

4,253.7
(384.5)
(21.7)

431.8

1,014.4

347.1

3,847.5

FAIRFAX FINANCIAL HOLDINGS LIMITED

Goodwill and intangible assets are allocated to the company’s cash-generating units (‘‘CGUs’’) as follows:

Allied World
Cara
Brit
Zenith National
Crum & Forster
Quess
Thomas Cook India
Northbridge
OdysseyRe
AMAG
All other(1)

December 31, 2017

December 31, 2016

Goodwill
938.9
222.3
154.3
317.6
188.8
229.0
150.0
95.7
119.7
44.7
443.7

Intangible
assets
763.7
1,073.6
571.3
115.5
129.4
21.8
54.2
77.1
51.6
110.2
199.4

Total Goodwill
–
211.5
154.3
317.6
186.5
23.7
115.3
88.3
119.7
72.6
344.2

1,702.6
1,295.9
725.6
433.1
318.2
250.8
204.2
172.8
171.3
154.9
643.1

Intangible
assets
–
990.3
576.6
121.4
145.1
18.5
50.1
64.5
55.2
63.0
129.1

Total
–
1,201.8
730.9
439.0
331.6
42.2
165.4
152.8
174.9
135.6
473.3

2,904.7

3,167.8

6,072.5

1,633.7

2,213.8

3,847.5

(1) Comprised primarily of balances related to NCML, Fairchem, Mosaic Capital, Boat Rocker, The Keg, U.S. Run-off

and Pethealth.

At December 31, 2017 goodwill and intangible assets were comprised primarily of amounts arising on the
acquisitions of Allied World and Manipal (by Quess) during 2017, St-Hubert and Original Joe’s (both by Cara) during
2016, Cara and Brit during 2015, Quess during 2013, Thomas Cook India during 2012, and Zenith National during
2010. Impairment tests for goodwill and intangible assets not subject to amortization were completed in 2017 and it
was concluded that no impairments had occurred. Allied World’s recoverable amount exceeded its carrying value
(inclusive of goodwill), but the excess was not significant as a result of being acquired only on July 6, 2017.

When testing for impairment, the recoverable amount of each CGU or group of CGUs was based on the higher of fair
value less costs of disposal or value in use, determined on the basis of 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 historic growth rate for the business in which each CGU operates.

A number of other assumptions and estimates including premium volumes, investment returns, revenues, expenses
and working capital requirements were required to be incorporated into the discounted cash flow models. The
forecasts were based on the best estimates of future premiums or revenues and operating expenses using historical
trends, general geographical market conditions, industry trends and forecasts and other available information. These
assumptions and estimates were reviewed by the applicable CGU’s management and by head office management.
The cash flow forecasts are adjusted by applying appropriate after-tax discount rates within a range of 7.8% to 15.4%
for insurance business and 9.2% to 21.3% for non-insurance business. A long term investment return of 5.0% was
applied to the investment portfolios of insurance businesses. The weighted average annual growth rate used to
extrapolate cash flows beyond five years for the majority of the CGUs was 3.0%.

13. Other Assets

Other assets were comprised as follows:

Premises and equipment

403.0

847.3

1,250.3

251.9

639.6

December 31, 2017

December 31, 2016

Insurance and

Non-
reinsurance insurance
companies companies

Insurance and

Non-
reinsurance insurance
companies companies

Total

Other reporting segment investment properties (note 23)

Other reporting segment sales receivables

Other reporting segment inventories

Receivables for securities sold but not yet settled

Prepaid expenses

Income taxes refundable

Accrued interest and dividends

Deferred compensation plans

Pension surplus (note 21)

Other

Current

Non-current

Total

891.5

–

295.2

235.5

42.1

124.1

202.7

106.8

63.4

50.8

–

207.3

83.7

83.1

105.2

67.1

49.1

565.5

1,168.4

470.0

320.7

–

102.5

63.9

16.2

–

470.0

320.7

207.3

186.2

147.0

121.4

67.1

49.1

–

15.6

59.7

174.7

97.3

63.4

50.8

–

295.2

235.5

26.5

64.4

28.0

9.5

–

275.3

840.8

307.3

199.0

506.3

1,564.0

3,264.3

4,828.3

1,020.7

1,497.7

2,518.4

788.5

775.5

1,069.0

1,857.5

2,195.3

2,970.8

487.5

533.2

792.9

704.8

1,280.4

1,238.0

1,564.0

3,264.3

4,828.3

1,020.7

1,497.7

2,518.4

14. Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities were comprised as follows:

December 31, 2017

December 31, 2016

Insurance and

Non-
reinsurance insurance
companies companies

Other reporting segment payables related to cost of sales

–

530.8

Payable to reinsurers

Salaries and employee benefit liabilities

Deferred gift card, hospitality and other revenue

Pension and post retirement liabilities (note 21)

Amounts withheld and accrued taxes

Ceded deferred premium acquisition costs

Accrued rent, storage and facilities costs

Amounts payable to agents and brokers

Accrued commissions

Accrued premium taxes

Accrued interest expense

Accrued legal and professional fees

Amounts payable for securities purchased but not yet settled

428.2

296.8

27.3

227.1

205.2

161.4

33.1

90.4

79.8

66.6

48.0

37.7

18.2

–

77.3

294.7

23.7

43.4

–

59.7

0.1

0.4

–

3.4

10.7

–

Insurance and

Non-
reinsurance insurance
companies companies

–

416.7

498.3

218.3

20.9

196.2

169.7

84.7

17.1

30.5

85.4

55.2

41.4

29.6

14.4

–

31.2

263.4

20.7

48.5

–

47.7

0.1

–

2.1

8.5

–

Total

530.8

428.2

374.1

322.0

250.8

248.6

161.4

92.8

90.5

80.2

66.6

51.4

48.4

18.2

Total

416.7

498.3

249.5

284.3

216.9

218.2

84.7

64.8

30.6

85.4

55.2

43.5

38.1

14.4

Administrative and other

621.7

243.8

865.5

453.3

134.7

588.0

Current

Non-current

2,341.5

1,288.0

3,629.5

1,915.0

973.6

2,888.6

1,429.7

1,019.7

2,449.4

911.8

268.3

1,180.1

1,174.7

740.3

770.8

202.8

1,945.5

943.1

2,341.5

1,288.0

3,629.5

1,915.0

973.6

2,888.6

FAIRFAX FINANCIAL HOLDINGS LIMITED

15. Borrowings

Borrowings – holding company
Fairfax unsecured notes:

7.375% due April 15, 2018(e)
7.50% due August 19, 2019 (Cdn$400.0)(d)(1)(7)
7.25% due June 22, 2020 (Cdn$275.0)(d)(7)
5.80% due May 15, 2021(d)
6.40% due May 25, 2021 (Cdn$400.0)(d)(7)
5.84% due October 14, 2022 (Cdn$450.0)(d)
4.50% due March 22, 2023 (Cdn$400.0)
4.875% due August 13, 2024(d)
4.95% due March 3, 2025 (Cdn$350.0)(d)
8.30% due April 15, 2026(e)
4.70% due December 16, 2026 (Cdn$450.0)
4.25% due December 6, 2027 (Cdn$650.0)(3)
7.75% due July 15, 2037(e)

Revolving credit facility
Purchase consideration payable due 2017 and other(2)

Borrowings – insurance and reinsurance companies
Allied World senior notes:

5.50% due November 1, 2020
4.35% due October 29, 2025

Allied World revolving credit facility and other borrowings
OdysseyRe floating rate unsecured senior notes due 2021
Brit 6.625% subordinated notes due December 9, 2030 (£135.0)
Brit floating rate revolving credit facility(4)
First Mercury trust preferred securities due 2036 and 2037
Zenith National 8.55% debentures due August 1, 2028(d)
Advent floating rate subordinated notes due June 3, 2035(d)
Advent floating rate unsecured senior notes due 2026(d)

Borrowings – non-insurance companies(c)
Fairfax India floating rate term loan due July 11, 2018(6)
Fairfax India subsidiary borrowings
Fairfax Africa floating rate term loan due January 31, 2018(5)
Grivalia Properties term loans and revolving facility
Cara floating rate term loan due September 2, 2019 (Cdn$150.0)
Cara floating rate credit facility expiring September 2, 2021
The Keg 7.5% note due May 31, 2042 (Cdn$57.0)
The Keg floating rate revolving facility and term loan due July 2,

2020

Loans and revolving credit facilities primarily at floating rates

December 31, 2017

December 31, 2016

Carrying

Fair

Principal

value(a) value(b) Principal

Carrying

Fair
value(a) value(b)

144.2
–
213.3
500.0
315.7
359.2
319.2
300.0
279.3
91.8
359.2
518.8
91.3
–
–

144.2
–
212.7
498.0
314.4
362.5
316.8
296.2
275.5
91.6
356.6
516.2
90.4
–
–

146.4
–
235.6
534.1
349.4
397.2
333.5
313.4
297.1
116.3
371.7
514.7
114.1
–
–

144.2
298.3
205.1
500.0
298.3
335.6
298.3
300.0
261.0
91.8
335.6
–
91.3
200.0
131.3

144.2
297.0
204.2
497.4
296.5
339.6
295.4
295.6
256.6
91.6
332.7
–
90.4
200.0
131.3

153.8
334.4
233.6
538.9
337.3
373.9
310.6
297.8
272.6
109.9
338.9
–
104.2
200.0
131.3

3,492.0

3,475.1 3,723.5

3,490.8

3,472.5 3,737.2

300.0
500.0
45.0
90.0
182.6
45.0
41.4
38.4
48.4
46.0

320.4
508.4
49.2
89.8
188.5
45.0
41.4
38.2
47.1
45.0

320.0
507.3
49.2
93.0
199.0
45.0
41.4
38.2
47.8
46.0

–
–
–
90.0
166.8
–
41.4
38.4
46.7
46.0

–
–
–
89.8
175.9
–
41.4
38.2
45.4
44.8

–
–
–
94.1
169.0
–
41.4
38.2
41.5
46.0

1,336.8

1,373.0 1,386.9

429.3

435.5

430.2

400.0
186.1
150.0
160.4
119.7
182.8
45.5

31.9
291.7

400.0
186.1
150.0
160.4
119.3
181.7
45.5

31.7
291.3

400.0
186.1
150.0
160.4
119.3
181.7
45.5

31.7
291.4

225.0
80.8
–
–
111.9
180.5
42.5

20.9
201.8

223.8
80.8
–
–
111.4
179.1
42.5

20.7
201.3

223.8
80.8
–
–
111.4
179.1
42.5

20.7
200.7

1,568.1

1,566.0 1,566.1

863.4

859.6

859.0

Total debt

6,396.9

6,414.1 6,676.5

4,783.5

4,767.6 5,026.4

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

(b) Based principally on quoted market prices with the remainder based on discounted cash flow models using market

observable inputs (Levels 1 and 2 respectively in the fair value hierarchy).

(d) Redeemable at the issuer’s option at any time at certain prices specified in the instrument’s offering document.

(e) This debt has no provision for redemption prior to the contractual maturity date.

During 2017 the company and its subsidiaries completed the following debt transactions:

(1) On December 29, 2017 the company completed an early redemption of its remaining Cdn$388.4 principal
amount 7.5% unsecured senior notes due August 19, 2019 for cash consideration of $340.6 (Cdn$430.6),
including accrued interest, and recognized a loss on repurchase of long term debt of $26.0 (Cdn$32.8) in other
expenses in the consolidated statement of earnings.

(2) On December 13, 2017 the company repaid $124.9 principal amount of purchase consideration payable

upon maturity.

(3) On December 4, 2017 the company completed an underwritten public offering of Cdn$650.0 principal amount
of 4.25% unsecured senior notes due December 6, 2027 at an issue price of 99.992 for net proceeds after discount,
commissions and expenses of $509.5 (Cdn$646.8). Commissions and expenses of $2.4 (Cdn$3.1) were included
as part of the carrying value of the notes. The notes are redeemable at any time prior to September 6, 2027, at the
company’s option, in whole or in part, at the greater of (i) a specified redemption price based on the then current
yield of a Government of Canada bond with an equal term to maturity or (ii) par, and at any time on or after
September 6, 2027 at par. The company has designated these senior notes as a hedge of a portion of its net
investment in its Canadian subsidiaries.

(4) On November 29, 2017 Brit drew $45.0 on its revolving credit facility that was subsequently repaid on

January 5, 2018.

(5) On August 31, 2017 Fairfax Africa entered into a $150.0 five-month floating rate term loan and a $153.9
(2 billion South African rand) non-revolving seven-month letter of credit facility with a Canadian chartered
bank that required cash collateral of $150.0 and $162.0 respectively. On December 11, 2017 the letter of credit
facility was terminated with the $162.0 cash collateral released on January 12, 2018. On January 31, 2018 Fairfax
Africa extended the maturity of the $150.0 term loan to August 31, 2018.

(6) On March 31, 2017 Fairfax India repaid its floating rate secured term loan of $225.0. On July 11, 2017 Fairfax
India entered into a $400.0 one-year floating rate term loan with a Canadian chartered bank and used a portion
of the proceeds to fund an additional investment in Bangalore Airport (note 6).

(7) On March 15, 2017 the company closed its tender offers to purchase a targeted aggregate principal amount of up
to Cdn$250.0 of certain of its outstanding senior notes. Pursuant to those tender offers, the company purchased
principal amounts of $8.7, $5.8 and $3.3 of its notes due in 2019, 2020 and 2021 for cash consideration of $9.7,
$6.6 and $3.7 respectively.

Changes in the carrying values of borrowings for the years ended December 31 were as follows:

2017

2016

Balance – January 1

Net cash inflows (outflows)

from issuances and
repayments

Non-cash changes:

Acquisitions (note 23)
Loss on redemption
Foreign exchange effect and

other

Insurance
and
Holding reinsurance

Non-
insurance
companies companies

Insurance
and
Holding reinsurance

Non-
insurance
companies companies

Total company

Total

435.5

859.6

4,767.6

2,599.0

468.5

284.0

3,351.5

company

3,472.5

(174.2)

67.5

425.6

318.9

832.3

–
28.6

860.5
–

221.5
–

1,082.0
28.6

–
–

–

–
–

515.2

1,347.5

60.4
–

148.2

9.5

59.3

217.0

41.2

(33.0)

–

8.2

Balance – December 31

3,475.1

1,373.0

1,566.0

6,414.1

3,472.5

435.5

859.6

4,767.6

FAIRFAX FINANCIAL HOLDINGS LIMITED

Principal repayments on borrowings are due as follows:

Holding company
Insurance and reinsurance companies
Non-insurance companies

2019

2018
144.2
5.0

2020
– 213.3
– 345.0
855.9 187.8 131.4

2022 Thereafter

2021
815.7 359.2
–
49.4

90.0
242.5

Total
1,959.6 3,492.0
896.8 1,336.8
101.1 1,568.1

Total

1,005.1 187.8 689.7 1,148.2 408.6

2,957.5 6,396.9

Credit Facility – Holding company

On December 21, 2017 the company increased its unsecured revolving credit facility with a syndicate of lenders to
$2.0 billion from $1.0 billion and extended the expiry to December 21, 2021 from May 11, 2019. The credit facility
contains certain financial covenants that require the company to maintain a ratio of consolidated debt to
consolidated capitalization of not more than 0.35:1 and consolidated shareholders’ equity attributable to
shareholders of Fairfax of not less than $9.5 billion. At December 31, 2017 there were no amounts drawn on the
credit facility and the company was in compliance with its covenants (consolidated debt to consolidated
capitalization ratio of 0.24:1 and consolidated shareholders’ equity attributable to shareholders of Fairfax of
$13.8 billion).

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 (cumulatively carrying 41.8% voting power) and an unlimited number
of subordinate voting shares carrying one vote per share.

Issued capital

Issued capital at December 31, 2017 included 1,548,000 (December 31, 2016 – 1,548,000) multiple voting shares and
27,904,801 (December 31, 2016 – 23,004,207) subordinate voting shares without par value prior to deducting
902,498 (December 31, 2016 – 659,411) subordinate voting shares reserved in treasury for share-based payment
awards. The multiple voting shares are not traded.

Common stock

The number of shares outstanding was as follows:

Subordinate voting shares – January 1

Issuances during the year
Repurchases for cancellation
Treasury shares acquired
Treasury shares reissued

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

in shareholder – beginning and end of year

Common stock effectively outstanding – December 31

2017
22,344,796
5,084,961
(184,367)
(277,364)
34,277

2016
21,465,089
1,000,000
(30,732)
(130,075)
40,514

27,002,303
1,548,000

22,344,796
1,548,000

(799,230)

27,751,073

23,093,566

During 2017 the company issued 5,084,961 subordinate voting shares, of which 5,075,894 shares with a fair value of
$2,191.6 were issued pursuant to the acquisition of Allied World as described in note 23.

During 2017 the company repurchased for cancellation 184,367 subordinate voting shares (2016 – 30,732) under the
terms of its normal course issuer bids at a cost of $96.2 (2016 – $14.1), of which $50.6 (2016 – $8.0) was charged to
retained earnings. Subsequent to December 31, 2017 and up to March 9, 2018 the company repurchased for
cancellation 20,000 subordinate voting shares under the terms of its normal course issuer bid at a cost of $9.9.

During 2017 the company repurchased for treasury 277,364 subordinate voting shares at a cost of $140.5 (2016 –
130,075 subordinate voting shares at a cost of $64.2) on the open market for use in its share-based payment awards.
Subsequent to December 31, 2017 and up to March 9, 2018 the company repurchased for treasury
47,372 subordinate voting shares at a cost of $24.3 on the open market for use in its share-based payment awards.

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

Date of declaration
January 3, 2018
January 4, 2017
January 5, 2016

Date of record
January 18, 2018
January 19, 2017
January 20, 2016

Date of payment
January 25, 2018
January 26, 2017
January 27, 2016

Preferred stock

The number of preferred shares outstanding was as follows:

Dividend
per share
$10.00
$10.00
$10.00

Total
cash
payment
$283.2
$237.4
$227.8

January 1, 2016

2016 activity:

6,016,384

3,983,616

3,967,134

3,572,044

7,432,952

2,567,048

10,465,553

1,534,447

9,500,000

9,200,000

58,239,178

–

Series C

Series D

Series E

Series F

Series G

Series H

Series I

Series J

Series K

Series M

Total

December 31, 2016

6,016,384

3,983,616

3,967,134

3,572,044

7,432,952

2,567,048

10,465,553

1,534,447

9,500,000

9,200,000

58,239,178

2017 activity:

–

December 31, 2017

6,016,384

3,983,616

3,967,134

3,572,044

7,432,952

2,567,048

10,465,553

1,534,447

9,500,000

9,200,000

58,239,178

The carrying value of preferred shares outstanding was as follows:

January 1, 2016

2016 activity:

Other

December 31, 2016

2017 activity:

December 31, 2017

Series C Series D Series E Series F

Series G Series H Series I

Series J

Series K Series M

Total

136.7

90.5

90.8

81.8

175.3

60.6

251.6

36.9

231.7

179.0

1,334.9

–

136.7

–

136.7

–

90.5

–

90.5

–

90.8

–

90.8

–

81.8

–

0.6

175.3

60.6

251.6

36.9

231.7

179.6

1,335.5

–

81.8

175.3

60.6

251.6

36.9

231.7

179.6

1,335.5

The terms of the company’s cumulative five-year rate reset preferred shares at December 31, 2017 were as follows:

Next possible
redemption and
conversion date(1)(2)

December 31, 2019
December 31, 2019
March 31, 2020
March 31, 2020
September 30, 2020
September 30, 2020
December 31, 2020
December 31, 2020
March 31, 2022
March 31, 2020

Number of
shares
outstanding

6,016,384
3,983,616
3,967,134
3,572,044
7,432,952
2,567,048
10,465,553
1,534,447
9,500,000
9,200,000

Stated capital

Cdn$150.4
Cdn$99.6
Cdn$99.2
Cdn$89.3
Cdn$185.8
Cdn$64.2
Cdn$261.6
Cdn$38.4
Cdn$237.5
Cdn$230.0

Liquidation
preference
per share

Cdn $25.00
Cdn $25.00
Cdn $25.00
Cdn $25.00
Cdn $25.00
Cdn $25.00
Cdn $25.00
Cdn $25.00
Cdn $25.00
Cdn $25.00

Fixed
dividend rate
per annum

Floating
dividend rate
per
annum(3)

4.58%
–
2.91%
–
3.32%
–
3.71%
–
4.67%
4.75%

–
4.02%
–
3.03%
–
3.43%
–
3.72%
–
–

Series C
Series D
Series E
Series F
Series G
Series H
Series I
Series J
Series K
Series M

(1) Fixed and floating rate cumulative preferred shares are redeemable at the company’s option at each stated redemption date

and on each subsequent five-year anniversary date at Cdn$25.00 per share.

(2) Holders of Series C, Series E, Series G, Series I, Series K and Series M fixed rate cumulative preferred shares will have the
right, at their option, to convert their shares into floating rate cumulative preferred shares Series D, Series F, Series H,

FAIRFAX FINANCIAL HOLDINGS LIMITED

Series J, Series L and Series N respectively, at the conversion dates specified in the table above, and on each subsequent
five-year anniversary date. Holders of Series D, Series F, Series H and Series J floating rate cumulative preferred shares will
have the right, at their option, to convert their shares into fixed rate cumulative preferred shares Series C, Series E, Series G
and Series I respectively, at the conversion dates specified in the table above, and on each subsequent five-year
anniversary date.

(3) The Series D, Series F, Series H, and Series J preferred shares, and the Series L and Series N preferred shares (of which none
are currently issued), have a floating dividend rate equal to the three-month Government of Canada treasury bill yield plus
3.15%, 2.16%, 2.56%, 2.85%, 3.51% and 3.98% respectively, with rate resets at the end of each calendar quarter.

During 2017 the company paid aggregate preferred share dividends of $44.6 (2016 – $44.0).

Accumulated other comprehensive income (loss)

The amounts related to each component of accumulated other comprehensive income (loss) attributable to
shareholders of Fairfax were as follows:

Items that may be subsequently reclassified

to net earnings
Currency translation account
Share of accumulated other comprehensive loss
of associates, excluding share of net losses on
defined benefit plans of associates

Items that will not be subsequently

reclassified to net earnings
Share of net losses on defined benefit plans of

associates

Net losses on defined benefit plans

December 31, 2017

December 31, 2016

Income tax

Pre-tax
amount

(expense) After-tax
amount
recovery

Pre-tax
amount

(expense) After-tax
amount
recovery

(166.6)

2.8

(163.8)

(356.6)

(7.6)

(364.2)

(22.0)

(188.6)

0.5

3.3

(21.5)

(157.1)

(185.3)

(513.7)

26.3

18.7

(130.8)

(495.0)

(30.3)
(60.9)

(91.2)

3.5
8.9

12.4

(26.8)
(52.0)

(42.6)
(28.0)

(78.8)

(70.6)

10.8
6.9

17.7

(31.8)
(21.1)

(52.9)

Accumulated other comprehensive loss

attributable to shareholders of Fairfax

(279.8)

15.7

(264.1)

(584.3)

36.4

(547.9)

Non-controlling interests

Non-controlling interests for the years ended December 31 were as follows:

Subsidiary
Allied World(1)
Fairfax India(2)
Cara(3)
Grivalia Properties(4)
Brit(5)
Thomas Cook India(6)
Fairfax Africa(7)
All other

Domicile

Switzerland
Canada
Canada
Greece
U.K.
India
Canada
–

2017

2016

Minority
voting
percentage

Carrying
value

Minority
voting
percentage

Carrying
value

32.6%
6.4%
43.3%
47.3%
27.5%
32.4%
1.2%

1,229.4
1,110.7
578.0
517.6
435.3
391.2
191.6
147.1

4,600.9

–
4.7%
43.4%
–
27.5%
32.3%
–

–
743.7
523.9
–
463.4
139.6
–
129.4

Net earnings
(loss) attributable to
non-controlling
interests

Year ended
December 31,

2017

(182.3)
(59.9)
55.7
20.0
(19.1)
28.2
4.3
27.4

2016

–
24.4
30.8
–
50.4
2.4
–
9.8

2,000.0

(125.7)

117.8

Pursuant to the transactions described in note 23:

(1) During the third quarter of 2017 the company acquired an indirect 67.4% equity interest in Allied World.

(2) The increase in carrying value of Fairfax India’s non-controlling interests at December 31, 2017 compared to
December 31, 2016 was primarily due to common shares issued as a result of Fairfax India’s public offering and
private placement on January 13, 2017, the acquisition of a 51.0% interest in Saurashtra Freight, the merger of
Fairchem and Privi Organics, and the impact of foreign currency translation (principally the strengthening of
the Indian rupee relative to the U.S. dollar), partially offset by non-controlling interests’ share of net loss.

(3) The increase in carrying value of Cara’s non-controlling interests at December 31, 2017 compared to
December 31, 2016 was primarily due to net earnings and the impact of foreign currency translation
(strengthening of the Canadian dollar relative to the U.S. dollar), partially offset by repurchase of shares by Cara
and dividends paid.

(4) On July 4, 2017 the company increased its equity interest in Grivalia Properties to 52.6% and commenced

consolidating Grivalia Properties in the Other reporting segment.

(5) On March 3, 2017 Brit paid a dividend of $45.8 to its minority shareholder (OMERS).

(6) The increase in carrying value of Thomas Cook India’s non-controlling interests at December 31, 2017 compared
to December 31, 2016 was primarily due to a reduction in the company’s indirect ownership of Quess from
42.1% to 33.1%.

(7) On February 17, 2017 the company acquired a 64.2% equity interest in Fairfax Africa.

Non-controlling interest voting percentages in the table above are consistent with economic ownership for each
subsidiary at December 31, 2017 except for Fairfax India, Cara, and Fairfax Africa whose non-controlling interest
economic ownership percentages were 69.8%, 59.8%, and 35.8% respectively.

Other net changes in capitalization

Other net changes in capitalization on the consolidated statement of changes in equity generally reflect the impact
of capital transactions and changes in ownership interests of consolidated subsidiaries where the company
maintains control after the transaction. During 2017 other net changes in capitalization increased both equity
attributable to shareholders of Fairfax ($236.6) and non-controlling interests ($184.0), and principally reflected the
impact of capital transactions and changes in ownership interest related to Fairfax India’s public offering and private
placement, Thomas Cook India’s partial sale of Quess shares, Quess’ private placement of its own shares, shares
issued by Quess to acquire Manipal, and the acquisition of the remaining shares of Allied World AG. See note 23
for details.

17. Earnings per Share

Net earnings (loss) per share is calculated based upon the weighted average common shares outstanding as follows:

Net earnings (loss) 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

2017

1,740.6
(44.6)

1,696.0

2016

(512.5)
(44.0)

(556.5)

25,411,246
689,571

23,017,184
–

26,100,817

23,017,184

$
$

66.74
64.98

$
$

(24.18)
(24.18)

Share-based payment awards of 567,450 were not included in the calculation of net loss per diluted common share
for the year ended December 31, 2016 as inclusion of the awards would be anti-dilutive.

FAIRFAX FINANCIAL HOLDINGS LIMITED

18. Income Taxes

The company’s provision (recovery) for income taxes for the years ended December 31 were 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
Change in tax rate related to U.S. tax reform
Other

Provision (recovery) for income taxes

2017

2016

200.6
(22.6)

95.1
19.1

178.0

114.2

(22.5)
24.3
222.4
6.1

(265.6)
2.9
–
(11.1)

230.3

(273.8)

408.3

(159.6)

A significant portion of the company’s earnings or losses before income taxes may be earned or incurred outside of
Canada. The statutory income tax rates for jurisdictions outside of Canada generally differs from the Canadian
statutory income tax rate (and may be significantly higher or lower). The company’s earnings (loss) before income
taxes by jurisdiction and the associated provision (recovery) for income taxes for the years ended December 31 are
summarized in the following table:

2017

2016

Canada(1) U.S.(2) U.K.(3)

Other(4)

Total Canada(1)

U.S.(2)

U.K.(3)

Other(4)

Total

Earnings (loss) before income

taxes

Provision (recovery) for

income taxes

(141.3) 543.5

(72.1)

1,693.1 2,023.2

(258.5)

(428.4)

42.2

90.4 (554.3)

52.9 420.5

(24.6)

(40.5)

408.3

69.6 (234.6)

(23.7)

29.1 (159.6)

Net earnings (loss)

(194.2) 123.0

(47.5)

1,733.6 1,614.9

(328.1)

(193.8)

65.9

61.3 (394.7)

(1)

Includes Fairfax India and Fairfax Africa.

(2) Principally comprised of Crum & Forster, Zenith National, OdysseyRe (notwithstanding that certain operations of

OdysseyRe conduct business outside of the U.S.), U.S. Run-off and other associated holding company results.

(3) Principally comprised of Brit, Riverstone UK, Advent and other associated holding company results.

(4)

Includes India, Asia, non-U.K. European companies and Allied World (acquired on July 6, 2017; notwithstanding that
certain operations of Allied World conduct business in the U.S. and the U.K., the majority of Allied World’s net earnings
(loss) is sourced from its Bermuda operations).

The decrease in the pre-tax loss in Canada in 2017 compared to 2016 primarily reflected an improvement in
investment results. The increase in pre-tax earnings in the U.S. in 2017 compared to 2016 primarily reflected an
improvement in investment results, partially offset by weaker underwriting results (reflecting increased catastrophe
losses). The increase in the pre-tax loss in the U.K. in 2017 compared to 2016 primarily reflected weaker underwriting
results (reflecting increased catastrophe losses). The increase in pre-tax earnings in Other in 2017 compared to 2016
primarily reflected the gains on sale of First Capital and a portion of the company’s investment in ICICI Lombard,
partially offset by the underwriting loss at Allied World (reflecting catastrophe losses).

Reconciliations of the provision (recovery) for income taxes calculated at the Canadian statutory income tax rate to
the provision (recovery) for income taxes at the effective tax rate in the consolidated financial statements for the
years ended December 31 are summarized in the following table:

Canadian statutory income tax rate

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

Provision (recovery) for income taxes

2017

26.5%

536.1
(445.3)
(116.2)
210.2
222.4
2.2
(15.6)
12.8
1.7

2016

26.5%

(146.9)
(65.3)
(74.7)
117.5
–
(15.1)
11.3
(8.4)
22.0

408.3

(159.6)

The tax rate differential on income and losses incurred outside Canada of $445.3 in 2017 principally reflected the
impact of net gains on the sales of ICICI Lombard and First Capital which were not taxable in the jurisdictions in
which they were held (income tax rate benefits of $246.5 in Mauritius and $269.9 in Barbados respectively), partially
offset by income in the U.S. that is taxed at rates higher than the Canadian statutory rate and losses at Allied World
and in the U.K. that are taxed at rates lower than the Canadian statutory rate. The tax rate differential on income and
losses incurred outside Canada of $65.3 in 2016 principally reflected income in the U.K. that is taxed at rates lower
than the Canadian statutory rate and losses in the U.S. which are taxed at rates higher than the Canadian
statutory rate.

Non-taxable investment income of $116.2 in 2017 (2016 – $74.7) was principally comprised of dividend income,
non-taxable interest income, the 50% of net capital gains which are not taxable in Canada and share of profit of
associates in certain jurisdictions.

The change in unrecorded tax benefit of losses and temporary differences of $210.2 in 2017 principally reflected
deferred tax assets in Canada of $70.8 (2016 – $117.9) that were not recorded (as it was considered not probable that
those losses could be utilized) and a reduction in tax credits and operating losses capitalized in prior years in the
U.S. of $89.7 (2016 – nil), primarily driven by the effects of U.S. tax reform as discussed later in this note.

The change in tax rate related to U.S. tax reform of $222.4 (2016 – nil) principally reflected the impact of the
reduction of the U.S. federal corporate income tax rate on the net deferred income tax asset. Other including
permanent differences included an income tax rate benefit of $7.4 related to the impact of the transition tax under
U.S. tax reform. The impact of U.S. tax reform on the company’s consolidated financial statements is discussed later
in this note.

Income taxes refundable and payable were as follows:

Income taxes refundable
Income taxes payable

Net income taxes refundable

December 31,
2017

December 31,
2016

147.0
(95.6)

51.4

202.7
(35.4)

167.3

FAIRFAX FINANCIAL HOLDINGS LIMITED

Changes in net income taxes refundable during the years ended December 31 were as follows:

Balance – January 1

Amounts recorded in the consolidated statements of earnings
Payments made during the year
Acquisitions of subsidiaries (note 23)
Foreign exchange effect and other

Balance – December 31

2017

2016

167.3
(178.0)
33.4
18.8
9.9

12.1
(114.2)
267.1
3.9
(1.6)

51.4

167.3

Changes in the net deferred income tax asset during the years ended December 31 were as follows:

Operating
and

Provision
for losses Provision
for

and loss

Deferred
premium Intan-

2017

Balance – January 1, 2017

188.8

182.3

126.6

(120.0)

(347.6) 331.9 224.3 146.3 732.6

capital adjustment unearned acquisition
costs
expenses premiums

losses

gible Invest-
assets ments credits Other Total

Tax

Amounts recorded in the consolidated

statement of earnings

Amounts recorded in total equity
Acquisitions of subsidiaries (note 23)
Foreign exchange effect and other

(41.2)
–
33.1
7.0

(72.3)
–
20.5
0.8

(15.0)
–
(19.8)
0.1

(0.6)
–

111.0 (140.1) (106.0) 33.9 (230.3)
(5.1)
(20.7)
5.4 (101.5)
0.7
4.0

(15.5)
0.9
0.3

(0.1)
–
(0.1)

–
53.6 (195.2)
(11.7)

0.3

Balance – December 31, 2017

187.7

131.3

91.9

(66.7)

(443.5) 177.5

118.1 184.5 380.8

2016

Operating
and

Provision
for losses Provision
for

and loss

Deferred
premium Intan-

Balance – January 1, 2016

235.4

204.2

92.8

(96.9)

(325.4)

49.0 174.9 129.9 463.9

capital adjustment unearned acquisition
costs
expenses premiums

losses

gible Invest-
assets ments credits Other Total

Tax

Amounts recorded in the consolidated

statement of earnings

Amounts recorded in total equity
Acquisitions of subsidiaries (note 23)
Foreign exchange effect and other

(57.8)
–
9.7
1.5

(22.7)
–
–
0.8

31.8
–
(0.3)
2.3

(24.1)
–
0.7
0.3

27.9
–
(47.7)
(2.4)

266.9
17.7
(1.1)
(0.6)

19.6

2.4 273.8
49.4
37.3
–
– (14.5) (53.2)
10.8
–

8.9

Balance – December 31, 2016

188.8

182.3

126.6

(120.0)

(347.6) 331.9 224.3 146.3 732.6

Management expects that the deferred income tax asset will be realized in the normal course of operations. The most
significant temporary differences included in the deferred income tax asset at December 31, 2017 related to
investments and provision for losses and loss adjustment expenses, partially offset by a deferred income tax liability
related to intangible assets. The temporary differences related to investments are primarily due to net unrealized
investment losses in the U.S. In these consolidated financial statements, investment gains and losses are primarily
recognized on a mark-to-market basis but are only recognized for tax purposes when realized (particularly in the U.S.
and several other jurisdictions). The provision for losses and loss adjustment expenses is recorded on an
undiscounted basis in these consolidated financial statements but is recorded on a discounted basis in certain
jurisdictions for tax purposes, resulting in temporary differences. Deferred taxes on intangible assets primarily relates
to intangible assets recognized on acquisitions (principally Allied World, Cara and Brit) that are typically not
deductible in the determination of income taxes payable. Other deferred taxes include temporary differences related
to pensions and premises and equipment.

Management conducts ongoing reviews of the recoverability of the deferred income tax asset and adjusts, as
necessary, to reflect its anticipated realization. As at December 31, 2017 management has not recorded deferred
income tax assets of $878.3 (December 31, 2016 – $590.0) related primarily to operating and capital losses and

U.S. foreign tax credits. The losses for which deferred income tax assets have not been recorded are comprised of
$1,516.4 of losses in Canada (December 31, 2016 – $1,064.7), $635.7 of losses in Europe (December 31, 2016 –
$585.7), $44.6 of losses in the U.S. (December 31, 2016 – $44.6), and $159.0 of foreign tax credits in the
U.S. (December 31, 2016 – $59.0). The losses in Canada expire between 2026 and 2037. The losses and foreign tax
credits in the U.S. expire between 2020 and 2035. Substantially all of 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 $3.1 billion at
December 31, 2017 (December 31, 2016 – $3.1 billion) and are not likely to be repatriated in the foreseeable future.

The United States Tax Cuts and Jobs Act (‘‘U.S. tax reform’’) that was signed into law on December 22, 2017
introduced a number of significant changes to U.S. corporate income tax for tax years beginning after December 31,
2017: it reduces the U.S. federal corporate income tax rate from 35% to 21%, requires companies to pay a one-time
transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, repeals the alternative
minimum tax (‘‘AMT’’) regime, modifies rules pertaining to loss reserve discounting, introduces a new minimum
base erosion and anti-abuse tax (‘‘BEAT’’) on certain payments to foreign affiliates, and implements a U.S. tax on
foreign earnings for certain global intangible low-taxed income (‘‘GILTI’’).

Under IFRS, deferred income tax assets and liabilities are measured at the enacted or substantively enacted tax rate
expected to apply when temporary differences are to be realized or settled. The resulting deferred income tax is
recognized in the consolidated statement of earnings, except to the extent that it relates to items previously
recognized directly in equity. The company selected December 31, 2017 as the revaluation date for its U.S. net
deferred income tax asset as the impact between the date of enactment and December 31, 2017 was not considered
significant. The reduction in the U.S. corporate income tax rate decreased the U.S. net deferred income tax asset
related to operating and capital losses and other timing differences by $229.2, of which $222.4 was recorded in the
consolidated statement of earnings and $6.8 was recorded in other comprehensive income. The company also
decreased its recognized U.S. foreign tax credit carry forwards by $100.0 at December 31, 2017 as the reduction in the
U.S. corporate income tax rate will make utilization of foreign tax credit carry forwards recognized in prior years
more difficult, requiring increased U.S. and foreign source income in the future.

For tax years beginning before January 1, 2018, U.S. tax reform requires that U.S. companies include in income the
mandatory deemed repatriation of post-1986 undistributed foreign earnings (the ‘‘transition tax’’). For the year
ended December 31, 2017, the company included $79.1 of previously untaxed foreign earnings in taxable income.
Future repatriation of this amount will not incur additional U.S. tax. The company utilized current and prior year
foreign tax credits (rather than net operating loss carry forwards) to offset this income to reduce the transition tax
liability payable in cash to nil. The recognition of the transition tax caused the company to record reductions to a
deferred tax liability of $34.5 related to previously deferred earnings of OdysseyRe’s U.K. operations and to foreign
tax credit carry forwards of $27.1 that no longer have value due to the mandatory repatriation.

The tax effects included in these consolidated financial statements represent the company’s best estimate based upon
the information available, notwithstanding that the company is still analyzing certain aspects of U.S. tax reform and
may refine its computations, which could potentially affect the measurement of deferred taxes or give rise to
additional current tax liabilities. The repeal of the AMT regime did not have a significant impact on the company and
the company continues to reflect the AMT credit carryforwards as part of its net deferred income tax asset. The
company will recognize charges related to BEAT and GILTI, if any, in the periods in which they are incurred, and has
not included their impacts in measuring its net deferred income tax asset at December 31, 2017.

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 dividend restrictions. The
company’s capital requirements and management thereof are discussed in note 24. The company’s share of
dividends paid in 2017 by the insurance and reinsurance subsidiaries, which are eliminated on consolidation, was
$418.1 (2016 – $445.8). In addition, the company received proceeds from the sale of First Capital as described in
note 23 and the partial sale of ICICI Lombard as described in note 6.

FAIRFAX FINANCIAL HOLDINGS LIMITED

Based on the surplus and net earnings (loss) of the primary insurance and reinsurance subsidiaries as at and for the
year ended December 31, 2017, the maximum dividend capacity available in 2018 at each of those subsidiaries,
payable to all shareholders (including non-controlling interests) is as follows:

Allied World
OdysseyRe
Northbridge(1)
Crum & Forster
Zenith National
Brit

December 31,
2017
688.0
324.9
149.1
130.2
86.0
195.1

1,573.3

(1) Subject to prior regulatory approval.

When determining the amount of dividends to be paid from its insurance and reinsurance subsidiaries, the company
considers not only regulatory capital requirements, but also rating agency capital tests, future capital levels required
to support growth and tax planning matters, among other factors. In addition, the co-investors in Allied World and
Brit have a dividend in priority to the company.

20. Contingencies and Commitments

Lawsuits

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. On April 27, 2017, the appeals court
issued a decision reinstating certain claims but affirming the dismissal of the major portion of the claims. On July 10,
2017, Fairfax filed with the New Jersey Supreme Court a petition for certification of the appeal court’s decision. On
October 20, 2017, that petition was denied by the court. The company is considering all its options. 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 anticipated recovery from the lawsuit.

Other

The Autorit ´e des march ´es financiers (the ‘‘AMF’’), the securities regulatory authority in the Province of Quebec, is
conducting an investigation of Fairfax, its CEO, Prem Watsa, and its President, Paul Rivett. The investigation
concerns the possibility of illegal insider trading and/or tipping (not involving any personal trading by the
individuals) in connection with the December 15, 2011 takeover offer by Resolute Forest Products Inc. for shares of
Fibrek Inc. Except as set out below, further details concerning the investigation are, by law, not permitted to
be disclosed.

The AMF has authorized Fairfax to make the above-mentioned disclosure. Fairfax and its management are solely
responsible for the content of the disclosure set out in the three following paragraphs; the AMF has not in any way
endorsed that content.

Resolute’s above-mentioned takeover offer was made to all Fibrek shareholders, including Fairfax. Fairfax agreed in
that transaction to a hard lock-up agreement with Resolute whereby Fairfax agreed to tender its shares of Fibrek,
representing approximately 26% of Fibrek’s outstanding shares, to the Resolute takeover offer at the same price as all
other Fibrek shareholders. At the time of the Resolute takeover offer for Fibrek, Fairfax’s position in Fibrek was valued
at approximately Cdn$32, representing less than 1⁄6 of 1% of Fairfax’s total invested assets at that time.

Fibrek actively opposed the Resolute takeover offer. ln 2012, the Fibrek transaction was the subject of numerous
regulatory hearings in Quebec and court proceedings relating to Fibrek’s anti-takeover tactics and the hard lock-ups
given by various selling shareholders, including Fairfax. Allegations were made in those hearings concerning the
possibility of non-compliance with the takeover bid rules. Resolute’s takeover offer was allowed to proceed and
resulted in Resolute acquiring Fibrek.

Fairfax believes it has an unblemished record for honesty and integrity and is fully cooperating with the AMF’s
investigation. Fairfax continues to be confident that in connection with the Resolute takeover offer, it had no
material non-public information, that it did not engage in illegal insider trading or tipping, and that there is no
reasonable basis for any proceedings in this connection. To the best of Fairfax’s knowledge, the AMF investigation is
still ongoing. If the AMF commences legal proceedings, no assurance can be given at this time by Fairfax as to
the outcome.

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 position,
financial performance or cash flows.

OdysseyRe, Brit, Allied World, Advent and RiverStone (UK) (‘‘the Lloyd’s participants’’) underwrite in the Lloyd’s of
London insurance market through their participation in certain Lloyd’s syndicates. The Lloyd’s participants have
pledged cash and securities with fair values of $361.9 and $1,566.1 at December 31, 2017 as capital to support those
underwriting activities. Pledged securities and restricted cash consist of cash, fixed income and equity investments
which are included within portfolio investments on the consolidated balance sheet. The Lloyd’s participants have
the ability to substitute other securities for these pledged securities, subject to certain admissibility criteria. The
Lloyd’s participants’ liability in respect of assets pledged as capital 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.

The company’s maximum capital commitments for potential investments in common stocks, limited partnerships
and associates at December 31, 2017 was $966.3, with a further amount of approximately $367 committed for
investments described in note 23.

21. Pensions and Post Retirement Benefits

The funded status of the company’s defined benefit pension and post retirement plans were as follows:

Benefit obligation
Fair value of plan assets

Funded status of plans – deficit
Impact of asset ceiling

Net accrued liability (notes 13 and 14)(1)

Defined benefit
pension plans
December 31

Post retirement
benefit plans
December 31

2017
(918.3)
836.1

(82.2)
(1.0)

2016
(803.7)
747.9

(55.8)
(1.0)

2017
(118.5)
–

(118.5)
–

2016
(109.3)
–

(109.3)
–

(83.2)

(56.8)

(118.5)

(109.3)

Weighted average assumptions used to determine benefit obligations:
Discount rate
Rate of compensation increase
Health care cost trend

3.2%
2.8%
–

3.6%
3.6%
–

4.1%
3.3%
5.0%

4.2%
3.5%
5.7%

(1) The defined benefit pension plan net accrued liability at December 31, 2017 of $83.2 (December 31, 2016 – $56.8) was
comprised of pension surpluses of $49.1 and pension deficits of $132.3 (December 31, 2016 – $50.8 and $107.6).

FAIRFAX FINANCIAL HOLDINGS LIMITED

Pension and post retirement expenses recognized in the consolidated statements of earnings for the years ended
December 31 were as follows:

Defined benefit pension plan expense
Defined contribution pension plan expense
Defined benefit post retirement expense

2017
17.3
45.6
10.3

2016
27.7
32.2
8.0

73.2

67.9

Pre-tax actuarial net losses recognized in the consolidated statements of comprehensive income for the years ended
December 31 were comprised as follows:

Defined benefit pension plans

Actuarial net gains on plan assets and change in asset ceiling
Actuarial net losses on benefit obligations

Post retirement benefit plans – actuarial net gains (losses) on benefit obligations

2017

2016

18.6
(53.0)

(34.4)
0.3

54.5
(76.4)

(21.9)
(1.4)

(34.1)

(23.3)

During 2017 the company contributed $30.7 (2016 – $21.8) to its defined benefit pension and post retirement
benefit plans, and expects to make contributions of $28.2 in 2018.

22. Operating Leases

During 2017 the company incurred operating lease costs of $216.2 (2016 – $155.7).

Aggregate future minimum operating lease commitments at December 31, 2017 relating to premises, automobiles
and equipment for various terms up to ten years were as follows:

2018
2019
2020
2021
2022
Thereafter

23. Acquisitions and Divestitures

Subsequent to December 31, 2017

Receipt of Fairfax India Performance Fee

188.5
173.2
153.4
139.5
113.0
458.2

Pursuant to the company’s investment advisory agreement with Fairfax India, on March 9, 2018 the company
received a performance fee of $114.4 for the period January 30, 2015 to December 31, 2017 in the form of
7,663,685 newly issued Fairfax India subordinate voting shares, which increased the company’s equity interest in
Fairfax India to 33.6% from 30.2% at December 31, 2017.

Acquisition of certain businesses of Carillion Canada Inc.

On March 7, 2018 the company acquired the services business carried on in Canada by Carillion Canada Inc. and
certain affiliates thereof (collectively ‘‘Carillion’’) relating to facilities management of airports, commercial and retail
properties, defense facilities, select healthcare facilities and on behalf of oil, gas and mining clients. The transaction
was approved by the Ontario Superior Court of Justice in Carillion’s proceedings under the Companies’ Creditors
Arrangement Act (Canada). Carillion is an infrastructure services company that provides asset management and
operations solutions to industries and governments.

Sale of The Keg to Cara

On February 22, 2018 the company completed the sale of its 51.0% ownership interest in The Keg to Cara for
consideration of $74.6 (Cdn$94.7), comprised of cash of $7.9 (Cdn$10.0) and 3,400,000 Cara subordinate voting
shares. The other shareholders of The Keg sold their 49.0% ownership interest to Cara for $82.7 (Cdn$105.0),
comprised of cash of $74.8 (Cdn$95.0) and 401,123 Cara subordinate voting shares. Cara may be required to pay up
to an additional $24 (Cdn$30) of cash consideration to the other shareholders of The Keg, contingent on the
achievement of certain financial objectives within the first three years subsequent to closing. The transaction
increased the company’s equity interest in Cara to 43.2% from 40.2% at December 31, 2017.

Investment in The Catholic Syrian Bank Ltd.

On February 20, 2018 Fairfax India entered into an agreement to acquire a 51.0% equity interest in The Catholic
Syrian Bank Ltd. (‘‘CS Bank’’) for approximately $186 (12.1 billion Indian rupees). The transaction is subject to
customary closing conditions and is expected to close in the first half of 2018. CS Bank, headquartered in Thrissur,
Kerala, offers banking services across India.

Year ended December 31, 2017

Divestiture of First Capital Insurance Limited

On December 28, 2017 the company completed the sale of its 97.7% interest in First Capital to Mitsui Sumitomo
Insurance Company Limited of Tokyo, Japan (‘‘Mitsui Sumitomo’’) for gross proceeds of $1,683.3 and realized a net
after-tax gain of $1,018.6. The transaction was completed pursuant to an agreement with Mitsui Sumitomo to pursue
a global strategic alliance. The company expects to enter into a quota share participation in First Capital’s insurance
portfolio in 2018.

Acquisition of Allied World Assurance Holdings AG

On July 6, 2017 the company completed the acquisition of 94.6% of the outstanding shares of Allied World
Assurance Company Holdings, AG (‘‘Allied World AG’’) for purchase consideration of $3,977.9, consisting of
$1,905.6 in cash and $2,072.3 by the issuance of 4,799,497 subordinate voting shares. In addition, Allied World AG
declared a special pre-closing cash dividend of $5.00 per share ($438.0). Contemporaneously with the closing of the
acquisition of Allied World AG, Ontario Municipal Employees Retirement System (‘‘OMERS’’), the pension plan
manager for government employees in the province of Ontario, Alberta Investment Management Corporation
(‘‘AIMCo’’), an investment manager for pension, endowment and government funds in the province of Alberta, and
certain other third parties (together ‘‘the co-investors’’) invested $1,580.0 for an indirect equity interest in Allied
World AG. The remaining 5.4% of the outstanding shares of Allied World AG were acquired on August 17, 2017 for
purchase consideration of $229.0, consisting of $109.7 in cash and $119.3 by the issuance of 276,397 subordinate
voting shares, in a merger transaction under Swiss law pursuant to which Allied World Assurance Company
Holdings, GmbH (‘‘Allied World’’) became the surviving entity. This merger resulted in the co-investors holding an
indirect ownership interest in Allied World of 32.6%. The co-investors will have a dividend in priority to the
company, and the company will have the ability to purchase the shares owned by the co-investors over the next
seven years. Allied World is a global property, casualty and specialty insurer and reinsurer.

Quess Corp. Transactions

On December 27, 2017 Quess acquired the facility management and catering business of Manipal Integrated Services
Private Limited (‘‘Manipal’’) for $152.5 (9.8 billion Indian rupees), primarily comprised of the issuance of $117.7
(7.5 billion Indian rupees) of Quess common shares to Manipal shareholders and the reinvestment of $34.3
(2.2 billion Indian rupees) of Quess’ existing holdings of Manipal preferred shares upon cancellation of those shares.
In November of 2017 Thomas Cook India sold a 5.4% equity interest in Quess for cash proceeds of $96.8 (6.3 billion
Indian rupees). On August 18, 2017 Quess raised $132.2 (8.5 billion Indian rupees) in net proceeds following the
completion of a private placement of common shares with institutional investors. These transactions at
Thomas Cook India and Quess collectively reduced the company’s indirect ownership of Quess from 42.1% to 33.1%
and resulted in an increase in non-controlling interest of $210.0 and a dilution gain of $135.6, which are included in
other net changes in capitalization in the consolidated statement of changes in equity. Quess is a provider of staffing
and facilities management services.

FAIRFAX FINANCIAL HOLDINGS LIMITED

Additional investment in Grivalia Properties REIC

On July 4, 2017 the company acquired control of Grivalia Properties REIC (‘‘Grivalia Properties’’) by increasing its
equity interest to 52.6% through the purchase of an additional 10.3% equity interest from Eurobank Ergasias S.A. for
cash consideration of $100.0 (A88.0). Accordingly, the company re-measured its equity accounted carrying value of
Grivalia Properties to fair value, recorded a net realized gain of $51.3 and commenced consolidating Grivalia
Properties in the Other reporting segment. Pursuant to Greek securities law, the company then made a tender offer
for all remaining outstanding shares of Grivalia Properties which expired on September 6, 2017, resulting in the
company increasing its equity interest by 0.1% to 52.7% for cash consideration of $0.6 (A0.5). Grivalia Properties is a
real estate investment company listed on the Athens Stock Exchange.

Acquisition of certain American International Group, Inc. operations in Latin America and Central and Eastern Europe

On October 18, 2016 the company agreed to acquire from American International Group, Inc. (‘‘AIG’’) its insurance
operations in Argentina, Chile, Colombia, Uruguay, Venezuela and Turkey, and certain assets and renewal rights with
respect to the portfolio of local business written by AIG Europe in Bulgaria, Czech Republic, Hungary, Poland,
Romania and Slovakia, for total consideration of approximately $240.

The company, through Colonnade Insurance, has completed the acquisition of the business and renewal rights of
the insurance operations of AIG in Hungary, Czech Republic and Slovakia (effective from April 30, 2017), Turkey
(on May 2, 2017 and sold to Gulf Insurance on the same day), Bulgaria (effective from May 31, 2017), Poland
(effective from June 30, 2017) and Romania (effective October 31, 2017). Through an ongoing partnership, the
company is providing claims handling and run-off management services to AIG in the European countries where
business operations were acquired.

The company has completed the acquisition of the insurance operations of AIG in Chile and Colombia (effective
from July 31, 2017), Argentina (effective from September 30, 2017) and Uruguay (effective from January 31, 2018)
(collectively ‘‘Fairfax Latam’’), and continues to work through the legal, regulatory and operational requirements to
complete the acquisition in Venezuela.

Merger of Fairchem Speciality Limited and Privi Organics Limited

On March 14, 2017 Fairchem Speciality Limited (‘‘Fairchem’’) and Privi Organics Limited (‘‘Privi Organics’’)
completed their previously announced merger, with the merged entity continuing under the Fairchem name. As a
result of the merger, Fairfax India, which had acquired a 44.7% interest in Fairchem on February 8, 2016 and a 50.8%
interest in Privi Organics on August 26, 2016, became the dominant shareholder in Fairchem with a 48.7% interest.
Prior to the merger, the company consolidated Privi Organics and applied the equity method of accounting to its
investment in Fairchem. Subsequent to the merger, the assets and liabilities and results of operations of Fairchem
were consolidated in the Other reporting segment.

Investment in Fairfax Africa Holdings Corporation

On February 17, 2017 the company acquired 22,715,394 multiple voting shares in a private placement and
2,500,000 subordinate voting shares as part of the initial public offering of Fairfax Africa Holdings Corporation
(‘‘Fairfax Africa’’) for total cash consideration of $252.2. The company also contributed its indirect equity interest in
AFGRI Proprietary Limited (‘‘AFGRI’’) with a fair value of $72.8 to Fairfax Africa in exchange for 7,284,606 multiple
voting shares. Through its initial public offering, private placements and exercise of the over-allotment option by the
underwriters, Fairfax Africa raised net proceeds of $493.3 after issuance costs and expenses, inclusive of the
contribution of the investment in AFGRI. Following those transactions, the company’s $325.0 ($10.00 per share)
investment represented 98.8% of the voting rights and 64.2% of the equity interest in Fairfax Africa. Fairfax Africa
was established, with the support of Fairfax, to invest in public and private equity and debt instruments of African
businesses or other businesses with customers, suppliers or business primarily conducted in, or dependent on, Africa.
The assets and liabilities and results of operations of Fairfax Africa were consolidated in the Other reporting segment.

Acquisition of Saurashtra Freight Private Limited

On February 14, 2017 Fairfax India acquired a 51.0% interest in Saurashtra Freight Private Limited (‘‘Saurashtra
Freight’’) for cash consideration of $30.0 (2.0 billion Indian rupees). Saurashtra Freight operates a container freight
station at the Mundra Port in the Indian state of Gujarat. The assets and liabilities and results of operations of
Saurashtra Freight were consolidated in the Other reporting segment.

Investment in Mosaic Capital Corporation

On January 26, 2017 the company invested $114.5 (Cdn$150.0) in securities of Mosaic Capital Corporation (‘‘Mosaic
Capital’’) issued through a private placement comprised of: (i) Cdn$100.0 principal amount of 6.00% senior
preferred securities; (ii) Cdn$50.0 principal amount of 5.00% senior secured debentures; and (iii) warrants entitling
the company to acquire up to 17,026,106 common shares of Mosaic Capital at a price of Cdn$8.81 per common
share at any time until January 26, 2024 (the ‘‘Mosaic warrants’’). Pursuant to IFRS, the company’s investment in
Mosaic Capital warrants represent a potential voting interest of approximately 62% (assuming all holders of Mosaic
Capital convertible securities, including the company, exercised their options to convert), giving the company the
ability to control Mosaic Capital. Consequently, the assets and liabilities and results of operations of Mosaic Capital
were consolidated in the Other reporting segment. Mosaic Capital is a Canadian investment company that owns a
portfolio of established businesses in the infrastructure, printing, oil and gas services, technology, manufacturing
and real estate industries.

Additional Investment in Fairfax India Holdings Corporation

On January 13, 2017 the company acquired 12,340,500 subordinate voting shares of Fairfax India for $145.0 ($11.75
per share) in a private placement. Through that private placement and a contemporaneous bought deal public
offering, Fairfax India raised proceeds of $493.5 net of commissions and expenses. Combined with various open
market purchases of Fairfax India subordinate voting shares, the company’s multiple voting shares and subordinate
voting shares represented 93.6% of the voting rights and 30.2% of the equity interest in Fairfax India at the close of
the private placement and public offering. These transactions collectively resulted in an increase in non-controlling
interest of $336.3 and a dilution loss of $3.3, which are included in other net changes in capitalization in the
consolidated statement of changes in equity.

FAIRFAX FINANCIAL HOLDINGS LIMITED

The determination of the fair value of assets acquired and liabilities assumed in connection with the acquisitions
described above is currently underway and will be finalized within twelve months of the respective acquisition dates.
Provisionally recorded amounts primarily include intangible assets, deferred income taxes, goodwill and the excess
of fair value of net assets acquired over purchase consideration. The company has substantially completed its
valuation of Allied World’s intangible assets.

Acquisition date
Percentage of common shares acquired
Assets:

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

Liabilities:

Accounts payable and accrued liabilities
Income taxes payable
Deferred income taxes
Funds withheld payable to reinsurers
Insurance contract liabilities
Borrowings

Non-controlling interests
Purchase consideration
Excess of fair value of net assets acquired over

purchase consideration

Allied
World

Grivalia
Properties

Fairfax
Latam

Other(1)
July 6, 2017 July 4, 2017 Throughout 2017 Throughout 2017

94.6%

52.6%

100.0%

1,212.5
8,568.7
2,363.6
–

1,726.9(3)
223.5

14,095.2

300.7
3.4
118.0
193.5
8,467.7
860.5

9,943.8
173.5
3,977.9

–

–
139.1
–
0.3
–
1,020.4

1,159.8

25.3
4.2
–
–
–
137.6

167.1
470.5
519.7

2.5

235.8
250.4
597.7
48.3
23.3
51.1

1,206.6

172.3
9.0
21.5
9.8
826.1
–

1,038.7
–
167.9

–

14,095.2

1,159.8

1,206.6

0.4
76.0
0.7
5.0
385.5
288.7

756.3

167.4
1.1
4.3
0.1
3.0
83.9

259.8
8.1
488.4

–

756.3

(1) Primarily comprised of the acquisitions of Mosaic Capital and certain AIG branches in Central and Eastern Europe, the
acquisition of Pickle Barrel by Cara, the acquisition of Saurashtra Freight and consolidation of Fairchem by Fairfax India,
and various acquisitions by Quess, Thomas Cook India, Mosaic Capital, and Boat Rocker.

(2)

Included subsidiary cash and cash equivalents of Allied World ($1,195.4, of which $4.8 was restricted), Grivalia
Properties ($26.3) and Fairfax Latam ($67.2).

(3) Comprised of goodwill of $937.9 and intangible assets of $789.0 (primarily broker relationships of $574.0, Lloyd’s

participation rights of $87.0 and brand names of $71.0).

Allied World contributed revenue of $1,050.5 and a net loss of $555.4 to the company’s consolidated financial results
for the year ended December 31, 2017. Had Allied World been acquired on January 1, 2017, the company’s pro-forma
consolidated revenue and net earnings would have been $17,514.6 and $1,766.4 for the year ended
December 31, 2017.

Year ended December 31, 2016

Acquisition of Zurich Insurance Company South Africa Limited

On December 7, 2016 the company acquired a 100% interest in Zurich Insurance Company South Africa Limited
(subsequently rebranded Bryte Insurance Company Limited (‘‘Bryte Insurance’’)) from Zurich Insurance
Company Ltd. for $128.0 (1.8 billion South African rand). Bryte Insurance is a property and casualty insurer in South
Africa and Botswana. The assets and liabilities and results of operations of Bryte Insurance were consolidated in the
Insurance and Reinsurance – Other reporting segment.

Acquisition of Original Joe’s Franchise Group Inc.

On November 28, 2016 Cara acquired an 89.2% interest in Original Joe’s Franchise Group Inc. (‘‘Original Joe’s’’) for
$83.8 (Cdn$112.5), comprised of cash consideration of $69.3 (Cdn$93.0) and contingent consideration valued at
$14.5 (Cdn$19.5). Original Joe’s is a Canadian multi-brand restaurant company based in the province of Alberta.

Acquisition of Golf Town Limited

On October 31, 2016 the company acquired a 60.0% indirect interest in Golf Town Limited (‘‘Golf Town’’) for $31.4
(Cdn$42.0). Golf Town is a Canadian specialty retailer of golf equipment, consumables, golf apparel and accessories.
The assets and liabilities and results of operations of Golf Town were consolidated in the Other reporting segment.

Acquisition of PT Asuransi Multi Artha Guna Tbk

On October 10, 2016 the company acquired an 80.0% interest in PT Asuransi Multi Artha Guna Tbk. (‘‘AMAG’’) from
PT Bank Pan Indonesia Tbk. (‘‘Panin Bank’’) for $178.9 (2.322 trillion Indonesian rupiah). AMAG will distribute its
insurance products through a long-term bancassurance partnership with Panin Bank. AMAG is a general insurer in
Indonesia. The assets and liabilities and results of operations of AMAG were consolidated in the Fairfax Asia reporting
segment. On December 31, 2016 Fairfax Indonesia was merged into AMAG.

Acquisition of Asian Alliance General Insurance Limited

On October 3, 2016 Union Assurance acquired a 100% equity interest in Asian Alliance General Insurance Limited
(subsequently renamed Fairfirst Insurance Limited (‘‘Fairfirst Insurance’’)) for $10.2 (1,488.9 million Sri Lankan
rupees). Fairfirst Insurance is a general insurer in Sri Lanka. The assets and liabilities and results of operations of
Fairfirst Insurance were consolidated in the Fairfax Asia reporting segment. On February 28, 2017 Union Assurance
was merged into Fairfirst Insurance.

Acquisition of Groupe St-Hubert Inc.

On September 2, 2016 Cara acquired a 100% equity interest in Groupe St-Hubert Inc. (‘‘St-Hubert’’) for $413.8
(Cdn$538.7), comprised of cash consideration of $372.4 (Cdn$484.8) and the issuance of $41.4 (Cdn$53.9) of Cara
subordinate voting shares to St-Hubert shareholders. A portion of the cash consideration was financed through a
private placement of 7,863,280 Cara subordinate voting shares at a price of Cdn$29.25 for gross proceeds of $179.2
(Cdn$230.0), of which 3,418,804 shares were acquired by the company and its subsidiaries to maintain its equity and
voting interests in Cara. St-Hubert is a Canadian full-service restaurant operator and fully integrated food
manufacturer in the province of Quebec.

Acquisition of Privi Organics Limited

On August 26, 2016 Fairfax India acquired a 50.8% equity interest in Privi Organics for $55.0 (3.7 billion Indian
rupees) through the purchase of newly issued shares and shares acquired from existing shareholders. Privi Organics is
a supplier of aroma chemicals to the fragrance industry.

Acquisition of Eastern European Insurers

On December 16, 2014 the company entered into an agreement with QBE Insurance (Europe) Limited (‘‘QBE’’) to
acquire QBE’s insurance operations in the Czech Republic, Hungary and Slovakia (the ‘‘QBE insurance operations’’).
A new Luxembourg insurer, Colonnade Insurance S.A. (‘‘Colonnade Insurance’’), was licensed in July 2015 and
branches of Colonnade Insurance were established in each of the Czech Republic, Hungary and Slovakia during the
fourth quarter of 2015. The business and renewal rights of QBE’s Hungarian, Czech and Slovakian insurance
operations were transferred to Colonnade Insurance on February 1, 2016, April 1, 2016 and May 2, 2016,
respectively. The QBE insurance operations write business across a range of general insurance classes, including
property, travel, general liability and product protection.

FAIRFAX FINANCIAL HOLDINGS LIMITED

The fair value of assets acquired and liabilities assumed in connection with the 2016 acquisitions described above are
summarized in the table that follows:

Acquisition date

December 7, 2016 October 10, 2016

September 2, 2016

Bryte
Insurance

AMAG

St-Hubert

Other(1)
Throughout 2016

Percentage of common shares acquired

100.0%

80.0%

100.0%(2)

Assets:

Insurance contract receivables
Portfolio investments(3)
Recoverable from reinsurers

Deferred income taxes

Goodwill and intangible assets

Other assets

Liabilities:

Accounts payable and accrued liabilities

Deferred income taxes

Funds withheld payable to reinsurers

Insurance contract liabilities

Borrowings

Non-controlling interests

Purchase consideration

Excess of fair value of net assets acquired

over purchase consideration

45.0

220.4

85.8

11.4
16.8(4)
10.8

390.2

88.4

–

1.4

172.4

–

262.2

–

128.0

–

390.2

8.9

99.9

26.4

–

161.2(5)
25.9

322.3

16.6

11.1

5.4

76.3

–

109.4

34.0

178.9

–

322.3

–

319.4(6)
180.0

499.4

30.7

54.9

–

85.6

–

413.8

–

499.4

41.3

22.1

1.1

8.5

146.1

205.3

424.4

48.3

12.2

0.4

59.7

48.1

168.7

57.3

191.6

6.8

424.4

(1)

Includes the acquisitions of Fairfirst Insurance, Privi Organics, the QBE insurance operations and Golf Town, and Cara’s
acquisition of Original Joe’s.

(2) The company’s economic interest in St-Hubert was 38.9% as a result of acquiring St-Hubert through 38.9%-owned Cara.

(3)

Included subsidiary cash and cash equivalents of Bryte Insurance ($48.4) and AMAG ($6.2).

(4) Comprised of goodwill of $11.5 and intangible assets of $5.3.

(5) Comprised of goodwill of $43.0 and intangible assets of $118.2.

(6) Comprised of goodwill of $85.2 and intangible assets of $234.2 (primarily brand names of $183.1).

24. Financial Risk Management

Overview

The primary goals of the company’s financial risk management are to ensure that the outcomes of activities
involving elements of risk are consistent with the company’s objectives and risk tolerance, while maintaining an
appropriate balance between risk and reward and protecting the company’s consolidated balance sheet from events
that have the potential to materially impair its financial strength. The company’s exposure to potential loss from its
insurance and reinsurance operations and investment activities primarily relates to underwriting risk, credit risk,
liquidity risk and various market risks. Balancing risk and reward is achieved through identifying risk appropriately,
aligning risk tolerances with business strategy, diversifying risk, pricing appropriately for risk, 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, 2017 compared to those identified at December 31, 2016, 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
subsidiary 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
Officers, 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. The company’s management, in
consultation 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
company’s 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 company’s 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, 2017 compared to
December 31, 2016. While the acquisition of Allied World was significant, the company has determined that Allied
World’s exposure to underwriting risk and framework to monitor, evaluate and manage underwriting risk are
consistent with those of its own.

Principal lines of business

The company’s principal lines of business and the significant insurance risks inherent therein are as follows:

• 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, commercial and personal property and crop;

• Casualty, which insures against accidents (including workers’ compensation and automobile) and also
includes employers’ liability, accident and health, medical malpractice, professional liability and umbrella
coverage;

• Specialty, which insures against marine, aerospace and surety risk, and other miscellaneous risks and liabilities

that are not identified above; and

• Reinsurance which includes, but is not limited to, property, casualty and liability exposures.

An analysis of net premiums earned by line of business is included in note 25.

FAIRFAX FINANCIAL HOLDINGS LIMITED

The table below shows the company’s concentration of risk by region and line of business based on gross premiums
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) in
2017 by line of business amounted to $992.3 for property (2016 – $463.5), $916.3 for casualty (2016 – $699.9) and
$315.4 for specialty (2016 – $282.5).

For the years ended
December 31

Property
Casualty
Specialty

Total

Insurance
Reinsurance

Canada

United States

Asia(1)

International(2)

Total

2017

646.8
602.6
143.4

2016

2017

2016

582.7 1,878.6 1,466.0
528.5 4,899.4 4,002.9
485.6
548.8
126.4

2017

586.5
400.8
275.1

2016

464.8
352.3
231.9

2017

995.7
805.0
424.8

2016

502.7
465.1
325.4

2017

2016

4,107.6 3,016.2
6,707.8 5,348.8
1,392.1 1,169.3

1,392.8 1,237.6 7,326.8 5,954.5 1,262.4 1,049.0 2,225.5 1,293.2 12,207.5 9,534.3

1,295.3 1,134.6 5,855.4 4,607.0
103.0 1,471.4 1,347.5

97.5

684.9
577.5

516.3 1,494.3
731.2
532.7

672.3
620.9

9,329.9 6,930.2
2,877.6 2,604.1

1,392.8 1,237.6 7,326.8 5,954.5 1,262.4 1,049.0 2,225.5 1,293.2 12,207.5 9,534.3

(1) The Asia geographic segment comprises countries located throughout Asia, including China, India, Sri Lanka, Malaysia,

Singapore, Indonesia and Thailand, and the Middle East.

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

Pricing risk

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 significantly
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.

Reserving risk

Reserving risk arises because actual claims experience can differ adversely from the assumptions included in setting
reserves, in large part due to the length of time between the occurrence of a loss, the reporting of the loss to the
insurer and the ultimate resolution of the claim. 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. 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.

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, environmental pollution, workers’
compensation and product liability. Information concerning the loss event and ultimate cost of a long-tail claim may
not be readily available, making the reserving analysis of long-tail lines of business more difficult and subject to
greater uncertainties than for short-tail lines of business. In the extreme cases of long-tail claims like those involving
asbestos and environmental pollution, it may take upwards of 40 years to settle. 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 advisors.

The establishment of provisions for losses and loss adjustment expenses is an inherently uncertain process that can
be affected by internal factors such as 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
homogeneity of the underlying data used in carrying out the reserve analyses; 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 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 portfolio
of issued policies makes it difficult to predict whether material prior year reserve development will occur and, if it
does occur, the location and the timing of such an occurrence.

Catastrophe risk

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. As 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 recoveries. This volatility may also be
contingent upon political and legal developments after the occurrence of the event. The company evaluates
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 company
operates.

Each operating company has developed and applies strict underwriting guidelines for the amount of catastrophe
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 monitors the
group’s exposure. Independent exposure limits for each entity in the group are aggregated to produce an exposure
limit for the group as there is presently no model capable of simultaneously projecting the magnitude 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 catastrophe 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 more than once in every 250 years.

Management of underwriting risk

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 requirements for specific
approvals of transactions involving new products or 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 improvement. 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. The company also 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. Steps are
taken to actively reduce the volume of insurance and reinsurance underwritten on particular types of risks when the
company 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

FAIRFAX FINANCIAL HOLDINGS LIMITED

reinsurance of individual risks as agreed by the company and the reinsurer. The company follows the policy of
underwriting and reinsuring contracts of insurance and reinsurance which, depending on the type of contract,
generally limits the liability of the individual insurance and reinsurance subsidiaries on any policy to a maximum
amount on any one loss. Reinsurance decisions are made by the subsidiaries 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 layers, 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 historical
results reflects, among other factors, recent loss experience of the company and of the industry in general.
Notwithstanding the significant current period catastrophe losses suffered by the industry in 2017, capital adequacy
within the reinsurance market remains strong and alternative forms of reinsurance capacity continue to be available.
As a result, reinsurance pricing of loss affected business has increased modestly while non-loss affected property has
increased to a lesser extent.

The company will remain opportunistic in its use of reinsurance, balancing capital requirements and the cost
of reinsurance.

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, 2017 compared to December 31, 2016.

The company’s gross credit risk exposure at December 31, 2017 (without taking into account amounts held by the
company as collateral) was comprised as follows:

Cash and short term investments
Investments in debt instruments:

U.S. sovereign government
Other sovereign government rated AA/Aa or higher(1)
All other sovereign government(2)
Canadian provincials
U.S. states and municipalities
Corporate and other

Receivable from counterparties to derivative contracts
Insurance contract receivables
Recoverable from reinsurers
Other assets

December 31, December 31,
2016
11,235.6

2017
19,198.8

1,779.3
615.4
1,268.4
93.8
2,452.1
4,081.8
126.7
4,686.9
7,812.5
1,723.0

1,117.3
596.1
891.5
196.9
4,732.2
2,633.5
196.4
2,917.5
4,010.3
1,065.4

Total gross credit risk exposure

43,838.7

29,592.7

(1) Primarily comprised of bonds issued by the governments of Germany, Australia, the U.K, and Canada with fair values of

$105.3, $97.9, $90.9 and $84.4 (December 31, 2016 – $201.7, $31.7, $23.4 and $311.4).

(2) Primarily comprised of bonds issued by the governments of India, Poland and Brazil with fair values of $734.7, $125.1

and $101.7 (December 31, 2016 – $602.2, $117.2 and $80.3).

The company had income taxes refundable of $147.0 at December 31, 2017 (December 31, 2016 – $202.7).

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 company operates. At December 31, 2017, 87.4% of these balances were
held in Canadian and U.S. financial institutions, 9.1% in European financial institutions and 3.5% in other foreign
financial institutions (December 31, 2016 – 85.1%, 8.1% and 6.8% respectively). 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 others
considered to be more stable.

Investments in debt instruments

The company’s risk management strategy for debt instruments is to invest primarily in 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 portfolio 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.

Investment in sovereign bonds rated AA/Aa or higher, considered by the company to present only a nominal risk of
default, with a fair value of $2,394.7 at December 31, 2017 (December 31, 2016 – $1,713.4), represented 6.1% of the
total investment portfolio (December 31, 2016 – 6.0%) and consisted primarily of bonds issued by the governments
of the U.S., U.K., Germany, Australia and Canada. Investments in debt instruments considered by the company to be
subject to credit risk, with a fair value of $7,896.1 at December 31, 2017 (December 31, 2016 – $8,454.1), represented
20.1% of the total investment portfolio (December 31, 2016 – 29.7%) and consisted primarily of all other sovereign
government bonds rated A/A or lower and all bonds included in Canadian provincials, U.S. states and municipalities
and corporate and other.

The composition of the company’s investments in debt instruments 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(1)
Unrated(2)

Total

December 31, 2017

December 31, 2016

Amortized
cost
2,476.3
2,149.5
823.1
1,617.1
151.1
448.7
554.1
1,594.4

Fair
value
2,432.0
2,408.8
819.8
1,764.8
154.0
447.6
432.7
1,831.1

Amortized
cost
2,042.0
3,669.1
649.3
910.4
98.5
339.0
392.1
1,416.7

%
23.7
23.4
8.0
17.1
1.5
4.3
4.2
17.8

Fair
value
1,915.8
4,383.3
728.5
1,024.0
117.6
261.6
320.5
1,416.2

%
18.8
43.1
7.2
10.1
1.2
2.5
3.2
13.9

9,814.3

10,290.8

100.0

9,517.1

10,167.5

100.0

(1) Lower than B/B is primarily comprised of the fair value of the company’s investments in EXCO Resources, Inc. of $402.0

(December 31, 2016 – $292.4).

(2) Unrated is primarily comprised of the fair value of the company’s investments in Blackberry Limited of $663.6
(December 31, 2016 – $461.2), Sanmar Chemicals Group of $333.2 (December 31, 2016 – $299.1), Chorus
Aviation Inc. $155.2 (December 31, 2016 – nil) and FBD Insurance plc. of $112.0 (December 31, 2016 – $76.8).

At December 31, 2017, 72.2% (December 31, 2016 – 79.2%) of the fixed income portfolio carrying value was rated
investment grade or better, with 47.1% (December 31, 2016 – 61.9%) being rated AA or better (primarily consisting of
government obligations). The increase in the fair value of bonds rated AAA/Aaa, A/A and BBB/Baa primarily reflected
the consolidation of Allied World’s bond portfolio. The decrease in the fair value of bonds rated AA/Aa primarily
reflected net sales in 2017 of long dated U.S. state and municipal bonds (net proceeds of $2,346.5), partially offset by
the consolidation of Allied World’s bond portfolio. The increase in the fair value of bonds rated lower than B/B
primarily reflected unrealized appreciation. The increase in bonds that were unrated primarily reflected unrealized
appreciation related to convertible bonds and purchases of certain corporate and other bonds. Except as described

FAIRFAX FINANCIAL HOLDINGS LIMITED

above, there were no other significant changes to 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 at December 31, 2017
compared to December 31, 2016.

At December 31, 2017 holdings of bonds in the ten issuers (excluding U.S., Canadian, U.K. and German sovereign
government bonds) to which the company had the greatest exposure totaled $3,398.7 (December 31, 2016 –
$4,178.6), which represented approximately 8.7% (December 31, 2016 – 14.7%) of the total investment portfolio.
Exposure to the largest single issuer of corporate bonds at December 31, 2017 was $663.6 (December 31, 2016 –
$461.2), which represented approximately 1.7% (December 31, 2016 – 1.6%) of the total investment portfolio.

The consolidated investment portfolio included $2.5 billion at December 31, 2017 (December 31, 2016 –
$4.7 billion) of U.S. state and municipal bonds (approximately $2.3 billion tax-exempt, $0.2 billion taxable), a large
portion of which were purchased during 2008 within subsidiary investment portfolios. At December 31, 2017
approximately $1.5 billion (December 31, 2016 – $2.1 billion) of those U.S. state and municipal bonds are insured by
Berkshire Hathaway Assurance Corp. for the payment of interest and principal in the event of issuer default, and are
therefore all rated AA or better.

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 be insufficient collateral pledged in favour
of the company to support that obligation; second, collateral deposited by the company to a counterparty 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 diligent selection of counterparties to its derivative
contracts and through the terms of negotiated agreements. 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 based on the then daily fair value of the derivative contracts. 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.

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 company 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 credit risk related to derivative
contract counterparties, assuming all such counterparties are simultaneously in default:

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, December 31,
2016
196.4
(53.8)
(54.0)
12.2
5.0

2017
126.7
(38.6)
(39.1)
9.0
8.2

Net derivative counterparty exposure after net settlement and collateral

arrangements

66.2

105.8

(1) Excludes equity warrants and equity call options which are not subject to counterparty risk.

(2) Excludes $0.4 (December 31, 2016 – $8.7) of excess collateral pledged by counterparties.

Collateral deposited for the benefit of the company at December 31, 2017 consisted of cash of $3.6 and government
securities of $35.9 (December 31, 2016 – $8.3 and $54.4). The company had not exercised its right to sell or repledge
collateral at December 31, 2017.

100

Recoverable from reinsurers

Credit risk on the company’s recoverable from reinsurers balance existed at December 31, 2017 to the extent that any
reinsurer may be unable or unwilling to reimburse the company under the terms of the relevant reinsurance
arrangements. The company is also exposed to the credit risk assumed in fronting arrangements and to potential
reinsurance capacity constraints. The company regularly assesses the creditworthiness of reinsurers with whom it
transacts business. Internal guidelines generally require reinsurers to have strong A.M. Best ratings and to maintain
capital and surplus in excess of $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 for each individual reinsurer.

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. This department also collects and maintains individual and group reinsurance exposures
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 recoverable from reinsurer
(Munich Reinsurance Company) represented 6.5% of shareholders’ equity attributable to shareholders of Fairfax at
December 31, 2017 (December 31, 2016 – 3.6%) and is rated A+ by A.M. Best.

The company’s gross exposure to credit risk from its reinsurers increased at December 31, 2017 compared to
December 31, 2016, principally reflecting the impact from the consolidation of the recoverable from reinsurers of
Allied World and Fairfax Latam and current period catastrophe losses ceded to reinsurers. Changes that occurred in
the provision for uncollectible reinsurance during the period are disclosed in note 9.

The following table presents the gross recoverable from reinsurers classified according to the financial strength
ratings of the reinsurers. Pools and associations, shown separately, are generally government or similar insurance
funds carrying limited credit risk.

December 31, 2017

December 31, 2016

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

Liquidity Risk

Gross
recoverable
from
reinsurers
429.6
3,878.4
2,311.9
245.5
22.2
3.1
5.4
948.2
134.6

7,978.9
(166.4)

7,812.5

Outstanding
balances

Net
Gross
unsecured
for which recoverable recoverable
from
reinsurers
390.0
1,551.0
1,130.8
299.7
22.0
2.0
11.9
703.3
71.3

from
reinsurers
397.7
3,611.2
2,216.5
230.4
21.0
2.3
2.4
454.4
130.1

security
is held
31.9
267.2
95.4
15.1
1.2
0.8
3.0
493.8
4.5

Outstanding
balances

Net
unsecured
for which recoverable
from
reinsurers
362.8
1,399.0
1,063.5
279.8
20.6
0.8
3.0
484.8
65.7

security
is held
27.2
152.0
67.3
19.9
1.4
1.2
8.9
218.5
5.6

912.9

7,066.0
(166.4)

4,182.0
(171.7)

6,899.6

4,010.3

502.0

3,680.0
(171.7)

3,508.3

Liquidity risk is the potential for loss if the company is unable to meet financial commitments in a timely manner at
reasonable cost as they fall due. The company’s policy is 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 regularly at both the holding company and subsidiary
company levels to ensure that future cash needs are met or exceeded by cash flows generated from operating
companies.

101

FAIRFAX FINANCIAL HOLDINGS LIMITED

The holding company’s known significant commitments for 2018 consist of payment of the $283.2 dividend on
common shares ($10.00 per share paid January 2018), interest and corporate overhead expenses, preferred share
dividends, income tax payments, the purchase prices related to the acquisitions of certain businesses of Carillion and
the insurance operations of AIG in Uruguay (completed January 31, 2018) and Venezuela, and potential cash
outflows related to derivative contracts.

The company believes that holding company cash and investments, net of holding company short sale and
derivative obligations at December 31, 2017 of $2,356.9 provides adequate liquidity to meet the holding company’s
known commitments in 2018. 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 $2.0 billion unsecured revolving credit facility (described in note 15).

The liquidity requirements of the insurance and reinsurance subsidiaries principally relate to the liabilities associated
with underwriting, operating costs and expenses, the payment of dividends to the holding company, contributions
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 on debt investments, 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 subsidiaries
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 investments. At
December 31, 2017 portfolio investments net of short sale and derivative obligations totaled $36.9 billion
(December 31, 2016 – $27.1 billion). Portfolio investments include investments that may lack liquidity or are
inactively traded, including corporate debentures, preferred stocks, common stocks, limited partnership interests
and other invested assets. At December 31, 2017 these asset classes represented approximately 12.3% (December 31,
2016 – 9.6%) of the carrying value of the insurance and reinsurance subsidiaries’ portfolio investments. Fairfax India
and Fairfax Africa held investments that may lack liquidity or are inactively traded with a carrying value of $1,054.7
at December 31, 2017 (December 31, 2016 – $326.6).

The insurance and reinsurance subsidiaries may experience cash inflows or outflows on occasion related to their
derivative contracts, including collateral requirements. During 2017 the insurance and reinsurance subsidiaries paid
net cash of $285.0 (2016 – $814.4) in connection with long and short equity and equity index total return swap
derivative contracts (excluding the impact of collateral requirements). The closure in the fourth quarter of 2016 of all
of the company’s short positions effected through total return swaps in the Russell 2000, S&P 500 and S&P/TSX
60 equity indexes significantly reduced cash flow volatility related to derivatives in 2017.

The non-insurance companies have principal repayments coming due in 2018 of $855.9 primarily related to the
Fairfax India and Fairfax Africa term loans. Borrowings of the non-insurance companies are non-recourse to the
holding company and are generally expected to be settled through a combination of refinancing and operating
cash flows.

102

The following tables set out the maturity profile of the company’s financial liabilities based on the expected
undiscounted cash flows from the end of the year to the contractual maturity date or the settlement date:

Accounts payable and accrued liabilities(1)
Funds withheld payable to reinsurers
Provision for losses and loss adjustment expenses
Borrowings – principal
Borrowings – interest

December 31, 2017

Less than 3 months
to 1 year
3 months

1,564.5
186.6
2,108.8
47.1
45.6

578.8
553.2
5,344.5
958.0
270.1

1 – 3 years

3 – 5 years

485.3
41.9
8,272.0
877.5
542.9

216.8
1.4
4,557.3
1,556.8
381.5

More than
5 years

93.5
67.1
8,328.2
2,957.5
745.6

Total

2,938.9
850.2
28,610.8
6,396.9
1,985.7

3,952.6

7,704.6

10,219.6

6,713.8

12,191.9

40,782.5

December 31, 2016

Less than 3 months
to 1 year
3 months

1,257.4
125.1
1,383.5
478.1
51.5

433.9
252.0
3,890.0
237.6
197.6

1 – 3 years

3 – 5 years

347.4
25.8
5,664.4
650.8
443.1

113.3
1.5
3,428.0
1,299.6
334.5

More than
5 years

131.8
11.8
5,115.9
2,117.4
610.0

Total

2,283.8
416.2
19,481.8
4,783.5
1,636.7

3,295.6

5,011.1

7,131.5

5,176.9

7,986.9

28,602.0

(1) Excludes pension and post retirement liabilities, ceded deferred premium acquisition costs and accrued interest. Operating

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, 2017 the company had income taxes payable
of $95.6 (December 31, 2016 – $35.4).

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:

Equity total return swaps – short positions
Equity total return swaps – long positions
Foreign exchange forward contracts
U.S. treasury bond forwards

December 31, 2017

December 31, 2016

Less than
3 months
12.1
15.6
58.1
28.8

3 months
to 1 year
–
–
11.6
–

Total
12.1
15.6
69.7
28.8

Less than
3 months
78.1
5.1
89.0
49.7

3 months
to 1 year
–
–
12.4
–

Total
78.1
5.1
101.4
49.7

114.6

11.6

126.2

221.9

12.4

234.3

Market Risk

Market risk (comprised of foreign currency risk, interest rate risk and other price risk) is the risk that the fair value or
future cash flows of a financial instrument will fluctuate because of changes in market prices. 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 at the subsidiary level and in total at
the holding company level. The following is a discussion of the company’s primary market risk exposures and how
those exposures are managed.

103

FAIRFAX FINANCIAL HOLDINGS LIMITED

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. Typically, 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 a change in interest rates. The company’s
interest rate risk management strategy is to position its fixed income 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, 2017 the company’s investment portfolio
included fixed income securities with an aggregate fair value of $10.3 billion that is subject to interest rate risk.

The company’s exposure to interest rate risk remained relatively unchanged in 2017 compared to 2016 on a pre-tax
basis. Allied World’s bond portfolio ($5,337.2, acquired on July 6, 2017) was re-balanced to reflect the company’s
interest rate risk tolerance. Net sales of long dated U.S. state and municipal bonds (net proceeds of $2,346.5) were
broadly in line with the decrease in the notional amount of forward contracts to sell long dated U.S. treasury bonds
(notional amount of $1,693.8 at December 31, 2017 compared to $3,013.4 at December 31, 2016). The table below,
which displays the potential impact on net earnings of changes in interest rates on the company’s fixed income
portfolio, incorporates the anticipated effects of U.S. tax reform on the company’s effective tax rate in 2017. There
were no significant changes to the company’s framework used to monitor, evaluate and manage interest rate risk at
December 31, 2017 compared to December 31, 2016.

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, consequently, the value
of fixed income securities held. These risks are monitored by the company’s senior portfolio managers and CEO, and
taken into consideration when managing the consolidated bond portfolio.

The table below displays the potential impact of changes in interest rates on the company’s fixed income portfolio
based on parallel 200 basis point shifts up and down, in 100 basis point increments. This analysis was performed on
each individual security to determine the hypothetical effect on net earnings.

Change in interest rates
200 basis point increase
100 basis point increase
No change
100 basis point decrease
200 basis point decrease

Fair value
of fixed
income
portfolio

9,897.4
10,090.1
10,290.8
10,498.6
10,720.5

December 31, 2017

December 31, 2016

Hypothetical

Fair value

Hypothetical

$ change effect Hypothetical
on net % change in
fair value(1)

earnings(1)

of fixed $ change effect Hypothetical
on net % change in
income
fair value(1)
portfolio

earnings(1)

(306.2)
(155.6)
–
161.3
332.0

(3.8)
(2.0)
–
2.0
4.2

9,758.6
9,962.2
10,167.5
10,338.3
10,480.2

(295.1)
(148.2)
–
124.6
228.6

(4.0)
(2.0)
–
1.7
3.1

(1)

Includes the impact of forward contracts to sell long dated U.S. treasury bonds with a notional amount of $1,693.8
(December 31, 2016 – $3,013.4).

Certain shortcomings are inherent in the method of analysis presented above. Computations of the prospective
effects of hypothetical interest rate changes are based on numerous assumptions, including the maintenance of the
level and composition of fixed income securities at the indicated date, and should not be relied on as indicative of
future results. 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 may include
non-parallel shifts in the term structure of interest rates and changes in individual issuer credit spreads.

104

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 foreign 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, 2017 compared to December 31, 2016 are described
below.

The company discontinued its economic equity hedging strategy in the fourth quarter of 2016 after giving
consideration to the possible and actual outcome of the U.S. elections and the potential for fundamental changes
that could improve U.S. economic growth and equity markets. During 2016 the company closed out $6,350.6
notional amount of short positions effected through equity index total return swaps (comprised of Russell 2000,
S&P 500 and S&P/TSX 60 short equity index total return swaps) and recognized a net loss on investment of $955.2
(realized loss of $2,665.4 of which $1,710.2 had been recognized as unrealized losses in prior years). The company
continues to hold short equity and equity index total return swaps for investment purposes, but no longer regards
them as hedges of its equity and equity-related holdings. During 2017 the company closed out $1,202.9 notional
amount of short equity total return swaps and recognized a net loss on investment of $237.9 (realized loss of $553.1
of which $315.2 was recognized as unrealized losses in prior years). In the first quarter of 2018 the company closed
out an additional $481.3 notional amount of short equity and equity index total return swaps and recognized a net
loss on investment of $8.1 (realized loss of $199.0 of which $190.9 was recognized as unrealized losses in prior years),
which reduced the notional amount of remaining short equity and equity index total return swaps to
approximately $509.

105

FAIRFAX FINANCIAL HOLDINGS LIMITED

The following table summarizes the net effect of the company’s equity and equity-related holdings (long exposures
net of short exposures) on the company’s financial position as at December 31, 2017 and 2016 and results of
operations for the years then ended. The company considers the fair value of $3,846.2 (December 31, 2016 –
$1,752.5) of its non-insurance investments in associates (see note 6) as a component of its equity and equity-related
holdings when assessing its net equity exposures.

Year ended

December 31, December 31,

December 31, 2017

December 31, 2016

2017

2016

Exposure/

Pre-tax

Notional Carrying

Notional

Carrying

earnings

amount

value

amount

value

(loss)

Long equity exposures:
Common stocks(1)
Preferred stocks – convertible
Bonds – convertible
Investments in associates(2)
Derivatives and other invested assets:

5,578.1 5,578.1
68.1
833.8
3,846.2 2,945.3

68.1
833.8

4,181.4 4,181.4
9.1
638.2
1,752.5 1,693.0

9.1
638.2

Equity total return swaps – long positions
Equity warrants and call options(4)

697.8
77.6

2.2
77.6

213.1
19.3

4.3
19.3

707.8
(1.6)
233.1
69.8

19.6
38.3

(78.0)
(6.6)
(39.4)
–

23.3
(4.0)

Total equity and equity related holdings

11,101.6 9,505.1

6,813.6 6,545.3

1,067.0

(104.7)

Short equity exposures and equity hedges(3):

Derivatives and other invested assets:

Equity total return swaps – short positions
Equity index total return swaps – short positions
Equity index put options(4)

(892.5)
(52.6)
–

(0.3)
0.4
–

(1,623.0)
(43.3)
–

(67.7)
0.6
–

(408.7)
(9.2)
–

(208.0)
(971.8)
(13.1)

(945.1)

0.1

(1,666.3)

(67.1)

(417.9)

(1,192.9)

Net equity exposures and financial effects

10,156.5

5,147.3

649.1

(1,297.6)

(1) The company excludes other funds that are invested principally in fixed income securities with a carrying value of $90.9 at

December 31, 2017 (December 31, 2016 – $157.1) when measuring its equity and equity-related exposure.

(2) Excludes the company’s insurance and reinsurance investments in associates which are considered long term strategic

holdings. See note 6 for details.

(3) Prior to the fourth quarter of 2016 the short equity exposures were considered economic hedges of certain market risks

associated with the company’s equity and equity-related holdings.

(4) The company does not consider the notional amounts of the S&P 500 call options and put options in its assessment of its

net equity exposures if they are out-of-the-money.

The table that follows illustrates the potential impact on net earnings of changes in the fair value of the company’s
equity and equity-related holdings (long exposures net of short exposures) as a result of changes in global equity
markets at December 31, 2017 and 2016. The analysis assumes variations of 5% and 10% which the company

106

believes to be reasonably possible based on analysis of the return on various equity indexes and management’s
knowledge of global equity markets.

December 31, 2017

December 31, 2016

Fair value
of equity
and equity-
related holdings

Hypothetical

$ change effect Hypothetical
% change

Fair value
of equity
and equity-
in fair value related holdings

Hypothetical

$ change effect Hypothetical
% change
in fair value

on net
earnings

Change in global
equity markets

10% increase
5% increase
No change
5% decrease
10% decrease

6,887.9
6,597.9
6,310.3
6,023.0
5,738.1

479.9
239.0
–
(238.5)
(475.0)

9.2
4.6
–
(4.6)
(9.1)

3,755.3
3,569.7
3,394.7
3,233.5
3,082.9

248.6
119.6
–
(106.7)
(204.5)

10.6
5.2
–
(4.7)
(9.2)

The changes in fair value of non-insurance investments in associates have been excluded from each of the scenarios
presented above as any 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.

The company’s risk management objective with respect to market price fluctuations places primary emphasis on the
preservation of invested capital. Subsequent to the economic downturn in 2008, the company became increasingly
concerned about the risk of a potential significant decline in global equity markets. From 2010 until the fourth
quarter of 2016, the company relied on certain derivative financial instruments to protect its equity and equity-
related holdings. In the latter part of 2016, the company’s sentiment with respect to U.S. economic growth and
improvements in the global equity markets improved, resulting in the discontinuation of the economic equity
hedging strategy. In the foreseeable future, the company does not expect to apply equity hedging strategies and will
remain focused on its long-term value-oriented investment philosophy, seeking investments that are attractively
priced, are selling at a discount to intrinsic value and afford a margin of safety.

At December 31, 2017 the company’s exposure to the ten largest issuers of common stock owned in its investment
portfolio was $3,138.1, which represented 8.0% of the total investment portfolio (December 31, 2016 – $2,113.8,
7.4%). The exposure to the largest single issuer of common stock held at December 31, 2017 was $549.0, which
represented 1.4% of the total investment portfolio (December 31, 2016 – $391.7, 1.4%).

Risk of decreasing price levels

The risk of decreases in the general price level of goods and services is the potential for negative impacts on the
consolidated balance sheet (including the company’s equity and equity-related holdings and fixed income
investments in non-sovereign debt) and the 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 consumer price indexes (‘‘CPI’’) in the geographic
regions in which it operates to serve as an economic hedge against the potential adverse financial impact on the
company of decreasing price levels. At December 31, 2017 these contracts have a remaining weighted average life of
4.6 years (December 31, 2016 – 5.6 years), a notional amount of $117.3 billion (December 31, 2016 – $110.4 billion)
and a fair value of $39.6 (December 31, 2016 -$83.4). As the average remaining life of a contract declines, the fair
value of the contract (excluding the impact of CPI changes) will generally decline. The company’s maximum
potential loss on any contract is limited to the original cost of that contract. During 2017 the company did not enter
into any new CPI-linked derivative contracts. The company’s CPI-linked derivative contracts produced net
unrealized losses of $71.0 in 2017 (2016 – $196.2).

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

107

FAIRFAX FINANCIAL HOLDINGS LIMITED

transactions conducted in currencies other than the U.S. dollar, and also through its investments in associates and
net investment in subsidiaries that have a functional currency other than the U.S. dollar. Long and short foreign
exchange forward contracts primarily denominated in the euro, the British pound sterling and the Canadian dollar
are used to manage foreign currency exposure on foreign currency denominated transactions. Foreign currency
denominated liabilities may be used to manage the company’s foreign currency exposures to net investments in
foreign operations having a functional currency other than the U.S. dollar. The company’s exposure to foreign
currency risk was not significantly different at December 31, 2017 compared to December 31, 2016.

The company’s foreign currency risk management objective is to mitigate the impact of foreign currency exchange
rate fluctuations on total equity, notwithstanding the company’s exposure to the Indian rupee resulting from its
investment in Fairfax India. At the consolidated level the company accumulates, and matches, all significant asset
and liability foreign currency exposures, thereby identifying any net unmatched positions, whether long or short.
The company may then take action to cure an unmatched position through the acquisition of a derivative contract
or the purchase or sale of investments denominated in the exposed currency.

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, 2017 the company had designated the carrying value of Cdn$2,212.9 principal amount of its
Canadian dollar denominated unsecured senior notes with a fair value of $1,868.6 (December 31, 2016 – principal
amount of Cdn$1,975.0 with a fair value of $1,618.1) as a hedge of its net investment in its Canadian subsidiaries for
financial reporting. In 2017 the company recognized pre-tax losses of $106.3 (2016 – $37.5) related to exchange rate
movements on the unsecured senior notes in losses on hedge of net investment in Canadian subsidiaries in the
consolidated statement of comprehensive income.

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 forward contracts

Foreign currency net gains (losses) included in pre-tax earnings (loss)

2017

2016

88.8
(74.9)
(11.1)

(136.9)
19.7
(12.3)

2.8

(129.5)

The table below shows the approximate effect of a 5% appreciation of the U.S. dollar against each of the Canadian
dollar, euro, British pound sterling, Indian rupee and all other currencies, respectively, on pre-tax earnings (loss), net
earnings (loss), pre-tax other comprehensive income (loss) and other comprehensive income (loss). Certain
shortcomings are inherent in the method of analysis presented, including the assumption that the 5% appreciation
of the U.S. dollar occurred at December 31, 2017 with all other variables held constant.

Pre-tax earnings (loss)
Net earnings (loss)
Pre-tax other

comprehensive
income (loss)

Other comprehensive

income (loss)

Canadian
dollar

Euro

British
pound
sterling

Indian rupee

All other
currencies

2017
32.5
24.3

2016
40.6
28.0

2017
6.2
5.0

2016
9.5
7.8

2017
5.7
5.4

2016
15.6
11.7

2016

2017

2017
2016
(64.8) (31.2) (55.7) 24.0
(57.3) (21.9) (45.4) 13.8

Total

2017
(76.1)
(68.0)

2016
58.5
39.4

(75.3) (66.1) (60.8)

(1.7) (33.6) (29.9) (128.5) (99.3) (54.3) (60.0) (352.5) (257.0)

(73.8) (66.0) (54.7)

4.3 (33.4) (28.5) (126.8) (94.0) (50.9) (60.0) (339.6) (244.2)

108

The hypothetical impact in 2017 of the foreign currency movements on pre-tax earnings (loss) in the table above
principally related to the following:

Canadian dollar: Foreign exchange forward contracts used as economic hedges of operational exposure at
OdysseyRe (including OdysseyRe’s net investment in its Canadian branch where the net assets are translated
through other comprehensive income), the translation of the company’s Canadian dollar denominated senior
notes not included as part of the hedge of net investment in Canadian subsidiaries and certain net assets of
Allied World (consolidated during 2017).

Euro: Foreign exchange forward contracts at OdysseyRe and Crum & Forster used as economic hedges of euro
denominated operational exposure and portfolio investments, and certain net liabilities of Allied World
(consolidated during 2017) and Run-off (principally provision for losses and loss adjustment expenses, partially
offset by portfolio investments).

British pound sterling: Certain net liabilities at OdysseyRe (principally insurance contract liabilities net of
recoverable from reinsurers and portfolio investments) and Allied World (consolidated during 2017), partially
offset by certain net assets at Brit (principally portfolio investments and recoverable from reinsurers, net of
insurance contract liabilities).

Indian rupee: The company’s 9.9% equity interest in ICICI Lombard (reclassified from investments in associates
to holding company cash and investments within Fairfax Asia during 2017) and portfolio investments held
broadly across the company.

All other currencies: U.S. dollar denominated portfolio investments held in entities where the functional
currency is other than the U.S. dollar (primarily at OdysseyRe’s Paris branch and Newline syndicate), foreign
exchange forward contracts used as economic hedges of operational exposure at OdysseyRe and certain net
assets of Allied World (consolidated during 2017), partially offset by certain net liabilities at Fairfax India
(primarily U.S. dollar long term debt).

The hypothetical impact in 2017 of the foreign currency movements on pre-tax other comprehensive income (loss)
in the table above principally related to the translation of the company’s non-U.S. dollar net investments in
subsidiaries and investments in associates as follows:

Canadian dollar: Net investments in Northbridge and Canadian subsidiaries within the Other reporting
segment, partially offset by the impact of the hedge of net investment in Canadian subsidiaries.

Euro: Net investments in Grivalia Properties (consolidated during 2017) and investments in associates
(primarily Eurolife, Astarta and KWF LPs), partially offset by net liabilities in OdysseyRe’s Paris branch.

British pound sterling: Net investments in Newline syndicate (OdysseyRe) and RiverStone Insurance in the U.K.
(European Run-off).

Indian rupee: Net investments in Fairfax India and Thomas Cook India.

All other currencies: Net investments in Fairfax Latin America (Argentine peso, Chilean peso, Colombian peso),
Bryte Insurance (South African rand), Polish Re (Polish zloty), AMAG (Indonesian rupiah), Fairfirst Insurance
(Sri Lankan rupee) and Pacific Insurance (Malaysian ringgit), and investments in associates (primarily Kuwaiti
dinar at Gulf Insurance, South African rand at AFGRI and Vietnamese dong at BIC Insurance).

109

FAIRFAX FINANCIAL HOLDINGS LIMITED

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. Effective
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, 2017, comprising total debt, shareholders’
equity attributable to shareholders of Fairfax and non-controlling interests, was $24,826.1 compared to $16,587.7 at
December 31, 2016. The company manages its capital based on the following financial measurements and ratios to
provide an indication of the company’s ability to issue and service debt without impacting the operating companies
or their portfolio investments:

Holding company cash and investments (net of short sale and derivative obligations)

Borrowings – holding company
Borrowings – insurance and reinsurance companies
Borrowings – non-insurance companies

Total debt

Net debt(1)

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)

December 31, December 31,
2016
1,329.4

2017
2,356.9

3,475.1
1,373.0
1,566.0

3,472.5
435.5
859.6

6,414.1

4,767.6

4,057.2

3,438.2

12,475.6
1,335.5
4,600.9

8,484.6
1,335.5
2,000.0

18,412.0

11,820.1

22.0%
18.1%
25.8%
7.1x
6.0x

29.1%
22.5%
28.7%
n/a
n/a

(1) Net debt is is calculated by the company as total debt less holding company cash and investments (net of short sale and

derivative obligations).

(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 pre-tax equivalent at the company’s Canadian statutory income tax rate.

During 2017 the company completed an underwritten public offering of Cdn$650.0 principal amount of 4.25%
senior notes due 2027 for net proceeds of $509.5. Those net proceeds were used to redeem the company’s remaining
Cdn$388.4 principal amount 7.5% senior notes for cash consideration of $340.6 (including accrued interest), repay
$124.9 principal amount of purchase consideration payable upon maturity and reduce the amount outstanding on
the company’s revolving credit facility (note 15). The company also issued 5,075,894 subordinate voting shares with
a fair value of $2,191.6 as part of the acquisition of Allied World (note 23).

The company’s capital management objectives include maintaining sufficient liquid resources at the holding
company to be able to pay interest on debt, dividends to 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 5 of the table above.

110

In the United States, 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, 2017 Crum &
Forster, Zenith National, Allied World, OdysseyRe and U.S. Run-off subsidiaries had capital and surplus in excess of
the regulatory minimum requirement of two times the authorized control level.

In Bermuda, the Bermuda Insurance Act 1978 imposes solvency and liquidity standards on Bermuda insurers and
reinsurers. There is a requirement to hold available statutory economic capital and surplus equal to or in excess of an
enhanced capital and target capital level as determined by the Bermuda Monetary Authority under the Bermuda
Solvency Capital Requirement model. The target capital level is measured as 120% of the enhanced capital
requirements. At December 31, 2017 Allied World was in compliance with Bermuda’s regulatory requirements.

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, 2017 Northbridge’s subsidiaries had a weighted average MCT ratio in excess of the 150% minimum
supervisory target.

In countries other than the U.S., Canada, the U.K. and Bermuda where the company operates, the company met or
exceeded the applicable regulatory capital requirements at December 31, 2017.

25. Segmented Information

The company identifies its operating segments by operating company, consistent with its management structure.
Certain of the operating segments have been aggregated into reporting segments, with reporting segments
categorized by type of business as described below. The accounting policies of the reporting segments are the same as
those described in note 3. Transfer prices for inter-segment transactions are set at arm’s length. Geographic premiums
are determined based on the domicile of the various subsidiaries and where the primary underlying risk of the
business resides.

Insurance and Reinsurance

Northbridge – A national commercial property and casualty insurer in Canada providing property and casualty
insurance products through its Northbridge Insurance and Federated subsidiaries.

OdysseyRe – A U.S.-based reinsurer that provides a full range of property and casualty products on a worldwide basis,
and that underwrites specialty insurance, primarily in the U.S. and in the U.K., both directly and through the Lloyd’s
market in London.

Crum & Forster – A national commercial property and casualty insurer in the U.S. writing a broad range of
commercial coverages, principally specialty coverages.

Zenith National – An insurer primarily engaged in workers’ compensation business in the U.S.

Brit – A market-leading global Lloyd’s of London specialty insurer and reinsurer.

Allied World – A global property, casualty and specialty insurer and reinsurer with a presence at Lloyd’s.

Fairfax Asia – This reporting segment includes the company’s operations that underwrite insurance and reinsurance
coverages in Singapore (First Capital, sold on December 28, 2017), Hong Kong (Falcon), Malaysia (Pacific Insurance),
Indonesia (AMAG, acquired on October 10, 2016), and Sri Lanka (Fairfirst Insurance, acquired on October 3, 2016).
Fairfax Asia also includes the company’s equity accounted interests in Vietnam-based BIC Insurance (35.0%),
Thailand-based Falcon Thailand (41.2%) and Mumbai-based ICICI Lombard (partially sold during 2017 and
reclassified to a common stock investment).

111

FAIRFAX FINANCIAL HOLDINGS LIMITED

Insurance and Reinsurance – Other – This reporting segment is comprised of Group Re, Bryte Insurance (acquired on
December 7, 2016), Advent, Fairfax Latin America and Fairfax Central and Eastern Europe (‘‘Fairfax CEE’’). 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 programs
on the same terms as third party reinsurers. Group Re also writes third party business. Bryte Insurance is an
established property and casualty insurer in South Africa and Botswana. Advent is a specialty property reinsurance
and insurance company operating through Syndicate 780 at Lloyd’s. Fairfax Latin America is comprised of Fairfax
Brasil, which writes commercial property and casualty insurance in Brazil, and Fairfax Latam, consisting of property
and casualty insurance operations in Chile, Colombia and Argentina. Fairfax CEE is comprised of Polish Re, which
writes reinsurance in Central and Eastern Europe, and Colonnade Insurance, a Luxembourg property and casualty
insurer with branches in each of the Czech Republic, Hungary, Slovakia, Poland, Bulgaria and Romania, and an
insurance subsidiary in Ukraine.

Run-off

The Run-off reporting segment principally comprises RiverStone (UK), Syndicate 3500 at Lloyd’s (managed by
RiverStone Managing Agency Limited), RiverStone Insurance (European Run-off) and TIG Insurance (U.S. Run-off).

Other

The Other reporting segment is comprised of the company’s non-insurance operations, including Cara and its
subsidiaries St-Hubert (acquired on September 2, 2016), Original Joe’s (acquired on November 28, 2016) and Pickle
Barrel (acquired on December 1, 2017), The Keg, Thomas Cook India and its subsidiaries Quess and Sterling Resorts,
Grivalia Properties (consolidated on July 4, 2017), Mosaic Capital (consolidated on January 26, 2017), Pethealth,
Praktiker, Sporting Life, William Ashley, Boat Rocker, Golf Town (acquired on October 31, 2016), Fairfax Africa (since
its initial public offering on February 17, 2017), and Fairfax India and its subsidiaries NCML, Fairchem (merged on
March 14, 2017 with Privi Organics (acquired on August 26, 2016)) and Saurashtra Freight (acquired on
February 14, 2017).

Corporate and Other

Corporate and Other includes the parent entity (Fairfax Financial Holdings Limited), its subsidiary intermediate
holding companies and Hamblin Watsa, an investment management company.

112

Sources of Earnings by Reporting Segment

Sources of earnings by reporting segment for the years ended December 31 were as follows:

2017

Gross premiums written

External

Intercompany

Insurance and Reinsurance

Crum &

Zenith

Allied Fairfax

Operating

Corporate Eliminations

and

Northbridge OdysseyRe

Forster National

Brit World(1)

Asia Other companies Run-off

Other

Other adjustments Consolidated

1,180.4

2,725.7

2,120.0

849.0

2,048.1

1,447.6

667.9 1,160.4

12,199.1

6.6

57.4

54.5

–

8.9

–

2.5

83.9

213.8

1,187.0

2,783.1

2,174.5

849.0

2,057.0

1,447.6

670.4 1,244.3

12,412.9

–

12,207.5

(213.8)

–

(213.8)

12,207.5

Net premiums written

1,064.9

2,495.9

1,863.4

837.4

1,530.9

991.9

327.5

863.3

9,975.2

Net premiums earned

External

Intercompany

1,023.7

2,318.3

1,822.1

814.1

1,537.3

1,041.3

369.3

775.2

9,701.3

(4.0)

15.1

30.7

(2.5)

(0.4)

(12.6)

(41.7)

15.4

–

Underwriting expenses(2)

(1,010.7)

(2,273.4) (1,849.6)

(694.4)

(1,738.8)

(1,615.3)

(289.4)

(871.2)

(10,342.8)

(227.5)

1,019.7

2,333.4

1,852.8

811.6

1,536.9

1,028.7

327.6

790.6

9,701.3

20.1

Underwriting profit (loss)

9.0

60.0

3.2

117.2

(201.9)

(586.6)

38.2

(80.6)

(641.5)

(207.4)

Interest income

Dividends

Investment expenses

56.1

9.5

(11.5)

131.0

15.6

53.4

3.4

26.8

3.8

41.9

3.7

76.8

2.2

31.3

3.2

38.7

11.8

456.0

53.2

37.2

4.6

29.7

9.1

(21.7)

(23.0)

(7.2)

(13.0)

(13.1)

(5.4)

(12.0)

(106.9)

(12.9)

(143.7)

Interest and dividends

54.1

124.9

33.8

23.4

32.6

65.9

29.1

38.5

402.3

28.9

(104.9)

8.4

–

8.4

8.3

20.1

–

(8.3)

6.3

(2.1)

(4.1)

Share of profit (loss) of

associates

Other

Revenue

Expenses

Operating income (loss)

Net gains (losses) on

investments

Gain on sale of subsidiary

Loss on repurchase of long

term debt (note 15)

Interest expense

Corporate overhead

–

66.3

44.8

–

3.2

7.2

(1.1)

(9.8)

9.2

(17.6)

29.4

3.0

23.5

(6.1)

55.4

127.7

–

3,257.6

– (2,996.0)

–

261.6

–

192.1

35.9

130.8

(160.1)

(538.3)

96.7

(39.1)

(215.7)

(184.6)

212.1

123.6

236.8

253.1

27.9

26.6

79.0

(26.5) 1,083.9

69.5

–

(3.3)

(1.8)

–

(3.3)

(8.2)

(12.5)

(9.2)

– 1,018.6

–

(4.8)

–

(2.6)

(22.2)

–

(15.6)

(27.9)

1,558.3

1,018.6

–

(41.3)

(131.6)

73.3

7.2

(171.3)

–

(65.8)

–

(28.6)

(224.1)

93.1

–

(236.8)

(8.7)

(27.4)

(25.4)

Pre-tax income (loss)

102.4

414.5

36.6

145.9

(102.8)

(608.3) 2,196.6

3.4

2,188.3

(111.3)

153.5

(207.3)

–

Income taxes

Net earnings

Attributable to:

Shareholders of Fairfax

Non-controlling interests

–

236.8

–

9,983.5

9,721.4

–

9,721.4

(10,570.3)

(848.9)

514.6

73.2

(28.8)

559.0

200.5

3,257.6

(2,996.0)

261.6

172.2

1,467.5

1,018.6

(28.6)

(331.2)

(275.3)

2,023.2

(408.3)

1,614.9

1,740.6

(125.7)

1,614.9

(1)

(2)

Allied World is included in the company’s financial reporting with effect from July 6, 2017.

Total underwriting expenses for the year ended December 31, 2017 are comprised as shown below. Accident year total underwriting expenses exclude the impact of favourable or unfavourable prior year claims
reserve development.

Loss & LAE – accident year
Commissions
Premium acquisition costs and other underwriting

expenses

Insurance and Reinsurance

Northbridge OdysseyRe

Forster National

Brit World

Asia Other companies

Crum &

Zenith

Allied Fairfax

Operating

760.1
164.5

1,827.7 1,209.8
292.4

492.5

477.9 1,117.8 1,293.1
32.6
424.8

83.5

263.1 563.8
4.7 148.4

7,513.3
1,643.4

179.6

241.3

357.6

209.4

205.7

217.7

73.9 192.6

1,677.8

Total underwriting expenses – accident year
Unfavourable (favourable) claims reserve development

1,104.2
(93.5)

2,561.5 1,859.8
(10.2)

(288.1)

770.8 1,748.3 1,543.4
71.9
(76.4)

(9.5)

341.7 904.8
(52.3) (33.6)

10,834.5
(491.7)

Total underwriting expenses – calendar year

1,010.7

2,273.4 1,849.6

694.4 1,738.8 1,615.3

289.4 871.2

10,342.8

113

FAIRFAX FINANCIAL HOLDINGS LIMITED

2016

Gross premiums written

External

Intercompany

Insurance and Reinsurance

Crum &

Zenith

Fairfax

Operating

Corporate Eliminations

and

Northbridge OdysseyRe

Forster National

Brit

Asia Other companies Run-off

Other

adjustments Consolidated

1,052.3

2,355.8

2,011.8

831.7

1,904.3

636.1

558.4

9,350.4

183.9

2.8

24.9

43.2

–

7.9

12.6

84.9

176.3

–

1,055.1

2,380.7

2,055.0

831.7

1,912.2

648.7

643.3

9,526.7

183.9

Net premiums written

942.6

2,100.2

1,801.1

819.4

1,480.2

303.1

458.4

7,905.0

183.4

Net premiums earned

External

Intercompany

915.8

2,083.9

1,738.6

809.3

1,396.5

348.5

406.1

7,698.7

163.5

(7.0)

(9.8)

30.9

(2.0)

2.8

(46.0)

31.1

–

Underwriting expenses(1)

(862.5)

(1,838.9) (1,737.1)

(643.2) (1,370.2)

(261.4)

(409.5)

(7,122.8)

(348.6)

908.8

2,074.1

1,769.5

807.3

1,399.3

302.5

437.2

7,698.7

163.5

Underwriting profit (loss)

Interest income

Dividends

46.3

56.6

8.4

235.2

32.4

164.1

29.1

41.1

27.7

575.9

(185.1)

158.5

23.9

72.8

5.8

33.0

4.3

66.5

2.6

26.6

3.4

32.2

2.7

446.2

51.1

58.6

5.9

21.3

8.2

Investment expenses

(12.8)

(28.7)

(12.8)

(7.7)

(13.7)

(3.3)

(8.3)

(87.3)

(13.3)

(12.8)

Interest and dividends

52.2

153.7

65.8

29.6

55.4

26.7

26.6

410.0

51.2

16.7

(11.5)

Share of profit (loss) of

associates

Other

Revenue

Expenses

5.2

17.3

(22.6)

1.2

3.4

48.1

0.7

53.3

(15.5)

13.6

(27.2)

–

2,061.6

– (1,958.4)

–

103.2

–

(11.7)

1.6

(1.4)

–

9,534.3

(176.3)

–

(176.3)

9,534.3

–

88.8

–

8,088.4

7,862.2

–

7,862.2

(7,471.4)

390.8

514.4

66.8

(26.0)

555.2

24.2

2,061.6

(1,958.4)

103.2

Operating income (loss)

103.7

406.2

75.6

194.9

87.9

115.9

55.0

1,039.2

(149.4)

133.5

(38.7)

88.8

1,073.4

Net gains (losses) on

investments(3)
Interest expense

Corporate overhead

(161.3)

(318.7)

(184.7)

(168.2)

–

(6.6)

(2.8)

(30.2)

(1.6)

(20.4)

(3.3)

(8.4)

87.3

(14.2)

(9.2)

(1.7)

(90.0)

(837.3)

(225.2)

–

(4.2)

(0.1)

–

(26.1)

(74.9)

–

30.1

(28.3)

–

(171.2)

(188.4)

(17.6)

Pre-tax income (loss)

(64.2)

54.5

(131.1)

15.0

151.8

114.1

(39.2)

100.9

(374.6)

135.3

(415.9)

Income taxes

Net loss

Attributable to:

Shareholders of Fairfax

Non-controlling

interests

–

(88.8)

–

(1,203.6)

(242.8)

(181.3)

(554.3)

159.6

(394.7)

(512.5)

117.8

(394.7)

(1)

Total underwriting expenses for the year ended December 31, 2016 are comprised as shown below. Accident year total underwriting expenses exclude the impact of favourable or unfavourable
prior year claims reserve development.

Loss & LAE – accident year
Commissions
Premium acquisition costs and other underwriting

expenses

Insurance and Reinsurance

Crum &

Zenith

Fairfax

Operating

Northbridge

OdysseyRe

Forster

National

651.1
150.6

1,438.4
431.4

1,136.1
283.2

459.3
81.9

Brit(1)

909.7
292.3

Asia

Other

companies

252.5
(6.5)

290.1
101.8

5,137.2
1,334.7

173.6

235.6

326.1

203.0

221.7

67.5

78.0

1,305.5

Total underwriting expenses – accident year
Favourable claims reserve development

975.3
(112.8)

2,105.4
(266.5)

1,745.4
(8.3)

744.2
(101.0)

1,423.7
(53.5)

313.5
(52.1)

469.9
(60.4)

7,777.4
(654.6)

Total underwriting expenses – calendar year

862.5

1,838.9

1,737.1

643.2

1,370.2

261.4

409.5

7,122.8

114

Investments in Associates, Additions to Goodwill, Segment Assets and Segment Liabilities

Investments in associates, additions to goodwill, segment assets and segment liabilities by reporting segment as at
and for the years ended December 31 were as follows:

Investments in
associates

Additions to
goodwill

Segment assets

Segment liabilities

2017

2016

2017

2016

2017

2016

2017

2016

Insurance and Reinsurance

Northbridge
OdysseyRe
Crum & Forster
Zenith National
Brit
Allied World(1)
Fairfax Asia
Other

218.6
355.7
263.2
162.9
231.4
210.5
100.9
92.0

206.9
373.5
153.5
146.9
217.8
–
487.3
127.4

Operating companies
Run-off
Other
Corporate and Other and eliminations and

1,635.2
252.0
1,250.8

1,713.3
308.2
255.3

1.1
–
–
–
–
937.9
(24.2)
19.6

934.4
–
277.9

–
–
7.8
–
–
–
69.5
11.5

88.8
–
127.2

4,527.2
11,316.1
6,290.6
2,586.8
7,480.1
14,584.4
1,930.7
4,321.3

53,037.2
5,207.2
8,684.0

4,149.9
10,334.8
6,294.1
2,590.7
6,579.5
–
2,684.7
2,656.2

35,289.9
5,709.5
4,740.2

2,804.6
7,248.4
4,651.1
1,653.8
5,930.1
10,937.2
674.5
3,223.5

37,123.2
3,456.5
3,245.8

2,630.2
6,370.5
4,625.7
1,633.1
4,915.7
–
1,457.7
1,850.1

23,483.0
3,970.4
2,029.8

adjustments

Consolidated

518.3

356.7

–

(2,838.3)

(2,355.2)

1,852.6

2,081.1

3,656.3

2,633.5

1,212.3

216.0

64,090.1

43,384.4

45,678.1

31,564.3

(1) Allied World is included in the company’s financial reporting with effect from July 6, 2017.

Product Line

Net premiums earned by product line for the years ended December 31 was as follows:

Property

Casualty

Specialty

Total

2017

2016

2017

2016

2017

2016

2017

2016

Net premiums earned – Insurance and
Reinsurance

Northbridge
OdysseyRe
Crum & Forster
Zenith National
Brit
Allied World(1)
Fairfax Asia
Other

Operating companies
Run-off

Consolidated net premiums earned
Interest and dividends
Share of profit of associates
Net gains (losses) on investments
Gain on sale of subsidiary
Other

Consolidated revenue

449.1
1,206.0
238.9
32.1
427.1
360.9
65.6
405.9

3,185.6
–

395.6
1,159.9
237.0
29.3
402.7
–
57.4
191.9

2,473.8
0.4

474.4
901.5
1,518.0
779.5
755.7
607.4
219.2
221.9

5,477.6
22.9

423.8
714.5
1,426.6
778.0
664.3
–
191.2
146.1

4,344.5
162.6

96.2
225.9
95.9
–
354.1
60.4
42.8
162.8

1,038.1
(2.8)

89.4
199.7
105.9
–
332.3
–
53.9
99.2

880.4
0.5

3,185.6

2,474.2

5,500.5

4,507.1

1,035.3

880.9

1,019.7
2,333.4
1,852.8
811.6
1,536.9
1,028.7
327.6
790.6

9,701.3
20.1

9,721.4
559.0
200.5
1,467.5
1,018.6
3,257.6

908.8
2,074.1
1,769.5
807.3
1,399.3
–
302.5
437.2

7,698.7
163.5

7,862.2
555.2
24.2
(1,203.6)
–
2,061.6

16,224.6

9,299.6

Allocation of net premiums earned

32.8%

31.5%

56.6%

57.3%

10.6%

11.2%

(1) Allied World is included in the company’s financial reporting with effect from July 6, 2017.

115

FAIRFAX FINANCIAL HOLDINGS LIMITED

Geographic Region

Net premiums earned by geographic region for the years ended December 31 was as follows:

Canada

United States

Asia(1)

International(2)

Total

2017

2016

2017

2016 2017

2016

2017

2016

2017

2016

Net premiums earned – Insurance and
Reinsurance

Northbridge
OdysseyRe
Crum & Forster
Zenith National
Brit
Allied World(3)
Fairfax Asia
Other

Operating companies
Run-off

Consolidated net premiums earned
Interest and dividends
Share of profit of associates
Net gains (losses) on investments
Gain on sale of subsidiary
Other

Consolidated revenue

1,007.2
76.8
–
–
83.1
20.5
0.1
9.1

899.5

9.3
12.5
72.5 1,539.2 1,319.3
– 1,852.6 1,769.3
807.3
–
942.1
–
0.3
142.6

811.6
77.1 1,036.5
773.7
–
98.9

–
0.1
3.9

1,196.8 1,053.1 6,125.0 4,990.2
162.6

23.7

–

–
247.2
–
–
60.3
88.2
319.0
108.0

822.7
–

–
231.4
–
–
54.0
–
293.2
105.7

684.3
–

–
470.2
0.2
–
357.0
146.3
8.5
574.6

1,556.8
(3.6)

–
450.9
0.2
–
326.1
–
8.9
185.0

971.1
0.9

1,196.8 1,053.1 6,148.7 5,152.8

822.7

684.3

1,553.2

972.0

1,019.7
2,333.4
1,852.8
811.6
1,536.9
1,028.7
327.6
790.6

908.8
2,074.1
1,769.5
807.3
1,399.3
–
302.5
437.2

9,701.3
20.1

7,698.7
163.5

9,721.4
559.0
200.5

7,862.2
555.2
24.2
1,467.5 (1,203.6)
–
1,018.6
2,061.6
3,257.6

16,224.6

9,299.6

Allocation of net premiums earned

12.3% 13.4% 63.2% 65.5% 8.5% 8.7%

16.0% 12.4%

(1) The Asia geographic segment comprises countries located throughout Asia, including China, India, Sri Lanka, Malaysia, Singapore,

Indonesia and Thailand, and the Middle East.

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

(3) Allied World is included in the company’s financial reporting with effect from July 6, 2017.

116

26. Expenses

Losses on claims, net, operating expenses and other expenses for the years ended December 31 were comprised
as follows:

Losses and loss adjustment expenses
Other reporting segment cost of sales
Wages and salaries
Employee benefits
Depreciation, amortization and

impairment charges

Operating lease costs
Audit, legal and tax professional fees
Premium taxes
Information technology costs
Other reporting segment marketing

costs

Share-based payments to directors and

employees

Restructuring costs
Loss on repurchase of long term debt

(note 15)(2)

Administrative expense and other

2017

2016

Insurance and

reinsurance Non-insurance
companies(2)
companies(1)

6,880.0
–
1,072.0
242.1

136.5
79.3
155.7
152.7
122.2

–

58.4
30.6

–
266.9

–
1,821.4
495.2
76.9

144.0
136.9
27.2
–
16.2

65.4

5.4
3.1

28.6
204.3

Total

6,880.0
1,821.4
1,567.2
319.0

280.5
216.2
182.9
152.7
138.4

65.4

63.8
33.7

28.6
471.2

reinsurance Non-insurance
companies(2)
companies(1)

4,478.3
–
876.6
213.1

98.4
60.6
116.2
101.4
99.8

–

48.1
2.9

–
220.9

–
1,095.2
351.8
63.8

93.3
95.1
17.4
–
6.7

43.9

5.5
0.3

–
185.4

Total

4,478.3
1,095.2
1,228.4
276.9

191.7
155.7
133.6
101.4
106.5

43.9

53.6
3.2

–
406.3

9,196.4

3,024.6

12,221.0

6,316.3

1,958.4

8,274.7

(1)

Total expense of the insurance and reinsurance companies is comprised of losses on claims, net and operating expenses as presented in the consolidated
statement of earnings.

(2) Other expenses as presented in the consolidated statement of earnings is comprised of cost of sales and operating expenses of the non-insurance companies,

and loss on repurchase of long term debt of the holding company.

117

FAIRFAX FINANCIAL HOLDINGS LIMITED

27. Supplementary Cash Flow Information

Cash and cash equivalents as presented in the consolidated balance sheets and the consolidated statements of cash
flows were comprised 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:

Treasury bills and other eligible bills

Fairfax India:

Cash and balances with banks
Treasury bills and other eligible bills

Fairfax Africa:

Cash and balances with banks

Cash and cash equivalents as presented in the consolidated balance

sheet

Less: Cash and cash equivalents – restricted(1)

Holding company cash and cash equivalents – restricted:

Cash and balances with banks

Subsidiary cash and cash equivalents – restricted:

Cash and balances with banks
Treasury bills and other eligible bills

December 31, December 31,
2016

2017

129.1
866.3

995.4

2,355.5
5,028.6

7,384.1

16.8

44.0
–

44.0

131.9
401.3

533.2

1,668.2
2,275.2

3,943.4

–

44.5
128.7

173.2

329.7

–

8,770.0

4,649.8

1.7

546.8
286.5

835.0

2.8

180.8
247.1

430.7

Cash and cash equivalents as presented in the consolidated

statement of cash flows

7,935.0

4,219.1

(1) Cash, cash equivalents and bank overdrafts as presented in the consolidated statements of cash flows excludes balances
that are restricted. Restricted cash and cash equivalents are comprised primarily of amounts required to be maintained on
deposit with various regulatory authorities to support the operations of the insurance and reinsurance subsidiaries.

118

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

(a) Net sales of securities classified as FVTPL

Short term investments
Bonds
Preferred stocks
Common stocks
Derivatives, short sales and other invested assets

(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

Interest and dividends received
Interest paid

(d) Net income taxes paid

28. Related Party Transactions

2017

2016

(2,816.5)
5,677.1
(249.6)
778.3
(710.9)

(2,688.0)
4,514.5
(42.4)
170.4
(835.2)

2,678.4

1,119.3

(245.4)
1,842.1
395.2
(428.4)
(1,168.5)
(32.4)
182.0
174.0
46.5
(209.7)

(55.1)
(355.7)
326.2
(296.6)
(34.6)
(36.5)
87.9
110.6
(54.1)
(300.0)

555.4

(607.9)

531.9
(277.9)

782.4
(216.2)

254.0

566.2

(33.4)

(267.1)

Compensation for the company’s key management team for the years ended December 31 determined in accordance
with the company’s IFRS accounting policies was as follows:

Salaries and other short-term employee benefits
Share-based payments

2017
9.7
3.1

12.8

Compensation for the company’s Board of Directors for the years ended December 31 was as follows:

Retainers and fees
Share-based payments

2017
0.8
0.3

1.1

2016
8.2
2.5

10.7

2016
0.8
0.1

0.9

During 2017 the company entered into an investment management contract on normal commercial terms pursuant
to which effectively Benjamin Watsa, a member of the company’s Board of Directors and the son of Prem Watsa, the
company’s Chairman and CEO and effectively controlling shareholder, would manage up to $50.0 for operating
companies within the Fairfax group.

119

FAIRFAX FINANCIAL HOLDINGS LIMITED

Subsequent to December 31, 2017

Pursuant to the company’s investment advisory agreement with Fairfax India, a performance fee of $114.4 in the
form of newly issued Fairfax India subordinate voting shares was received on March 9, 2018. See note 23.

29. Subsidiaries

During 2017 the company acquired controlling interests in Allied World, Grivalia Properties, Mosaic Capital,
Saurashtra Freight and Fairchem (through Fairfax India), and sold First Capital. The foregoing transactions are
described in note 23. The company has wholly-owned subsidiaries not presented in the tables below that are
intermediate holding companies of investments in subsidiaries and intercompany balances, all of which are
eliminated on consolidation.

December 31, 2017
Insurance and Reinsurance
Northbridge Financial Corporation (Northbridge)
Odyssey Re Holdings Corp. (OdysseyRe)

Hudson Insurance Company (Hudson Insurance)

Crum & Forster Holdings Corp. (Crum & Forster)
Zenith National Insurance Corp. (Zenith National)
Brit Limited (Brit)
Allied World Assurance Company Holdings, GmbH (Allied World)
Advent Capital (Holdings) Ltd. (Advent)
Fairfax Central and Eastern Europe, which consists of:

Domicile

Canada
United States
United States
United States
United States
United Kingdom
Switzerland
United Kingdom

Polskie Towarzystwo Reasekuracji Sp ´olka Akcyjna (Polish Re)
Colonnade Insurance S.A. (Colonnade Insurance)

Poland
Luxembourg

Fairfax Latin America, which consists of:

Fairfax Brasil Seguros Corporativos S.A. (Fairfax Brasil)
SBS Seguros Colombia S.A. (SouthBridge Colombia)
Southbridge Compa ˜n´ıa de Seguros Generales S.A. (SouthBridge

Chile)

La Meridional Compa ˜n´ıa Argentina de Seguros S.A. (La Meridional

Argentina)

Bryte Insurance Company Limited (Bryte Insurance)
Group Re, which underwrites business in:
CRC Reinsurance Limited (CRC Re)
Wentworth Insurance Company Ltd. (Wentworth)

Fairfax Asia, which consists of:

Falcon Insurance Company (Hong Kong) Limited (Falcon)
The Pacific Insurance Berhad (Pacific Insurance)
PT Asuransi Multi Artha Guna TBK (AMAG)
Fairfirst Insurance Limited (Fairfirst Insurance)

Run-off
TIG Insurance Company (TIG Insurance)
RiverStone Insurance (UK) Limited (RiverStone (UK))
RiverStone Insurance Limited (RiverStone Insurance)
RiverStone Managing Agency Limited

Brazil
Colombia

Chile

Argentina
South Africa

Barbados
Barbados

Hong Kong
Malaysia
Indonesia
Sri Lanka

United States
United Kingdom
United Kingdom
United Kingdom

Fairfax’s ownership
(100% other than
as shown below)

72.5%
67.4%

85.0%
80.0%
78.0%

120

December 31, 2017
Other reporting segment
Hamblin Watsa Investment Counsel Ltd.

(Hamblin Watsa)

Domicile

Fairfax’s
ownership

Primary business

Canada

100.0% Investment management

Fairfax Africa Holdings Corporation (Fairfax

Canada

Africa)

Grivalia Properties Real Estate Investment

Company S.A. (Grivalia Properties)

Greece

64.2%(1) Invests in public and private
African businesses
52.7% Real Estate investment company

Mosaic Capital Corporation (Mosaic Capital)

Canada

—(2) Invests in private Canadian

Pethealth Inc. (Pethealth)

Canada

100.0% Pet medical insurance and

database services

Boat Rocker Media Inc. (Boat Rocker)

Canada

58.2% Development, production,

businesses

marketing and distribution of
television programs

Restaurants and Retail
Cara Operations Limited (Cara) which owns:

Canada

40.2%(1) Franchisor, owner and operator

of restaurants

100.0% of Groupe St-Hubert Inc. (St-Hubert)

Canada

40.2% Full-service restaurant operator

and a fully integrated food
manufacturer

89.2% of Original Joe’s Franchise Group Inc.

Canada

35.9% Multi-brand restaurant owner

(Original Joe’s)

and operator

100.0% of Pickle Barrel Restaurants Inc. (Pickle

Canada

40.2% Owner and operator of

Barrel)

Keg Restaurants Ltd. (The Keg)

Canada

Praktiker Hellas Commercial Societe Anonyme

Greece

(Praktiker)

Sporting Life Inc. (Sporting Life)

William Ashley China Corporation (William

Ashley)

Golf Town Limited (Golf Town)

India focused
Fairfax India Holdings Limited (Fairfax India)

which owns:
89.5% of National Collateral Management

Services Limited (NCML)

Canada

India

restaurants and catering
business

51.0% Owner and operator of premium
dining restaurants
100.0% Retailer of home improvement

goods

75.0% Retailer of sporting goods and

sports apparel
100.0% Retailer of tableware and gifts

60.0%(3) Retailer of golf equipment,

consumables, athletic apparel
and accessories

30.2%(1) Invests in public and private
Indian businesses

27.0% Provider of agricultural
commodities storage

48.7% of Fairchem Specialty Limited (Fairchem)

India

14.7% Manufacturer, supplier and

exporter of aroma chemicals

51.0% of Saurashtra Freight Private Limited

India

15.4% Container freight station

(Saurashtra Freight)

operator

Thomas Cook (India) Limited (Thomas Cook

India) which owns:
49.0% of Quess Corp Limited (Quess)

100.0% of Sterling Holiday Resorts Limited

(Sterling Resorts)

India

67.6% Provider of integrated travel and
travel-related financial services
33.1% Provider of staffing and facilities
management services

67.6% Owner and operator of holiday

resorts

(1) The company holds multiple voting shares that give it voting rights of 56.7% in Cara, 98.8% in Fairfax Africa and 93.6%

in Fairfax India.

(2) The company holds Mosaic Capital warrants representing a potential voting interest of approximately 62%.

(3) The company holds 100% of the voting rights in Golf Town.

121

FAIRFAX FINANCIAL HOLDINGS LIMITED

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 . . . . . .
Overview of Consolidated Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Business Developments

Acquisitions and Divestitures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sources of Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Premiums Earned by Geographic Region . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sources of Net Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Earnings by Reporting Segment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance Sheets by Reporting Segment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Components of Net Earnings

Underwriting and Operating Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Gains (Losses) on Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate Overhead and Other
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-controlling Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Components of Consolidated Balance Sheets

Consolidated Balance Sheet Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for Losses and Loss Adjustment Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asbestos, Pollution and Other Hazards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recoverable from Reinsurers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Investments

Hamblin Watsa Investment Counsel Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overview of Investment Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share of Profit of Associates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Gains (Losses) on Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Return on the Investment Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common Stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivatives and Derivative Counterparties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Float . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Financial Condition

Capital Resources and Management
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Book Value per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liquidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contractual Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contingencies and Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Accounting and Disclosure Matters

Management’s Evaluation of Disclosure Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Report on Internal Control Over Financial Reporting . . . . . . . . . . . . . . . . . . . . . . . .
Critical Accounting Estimates and Judgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Significant Accounting Policy Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Future Accounting Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Risk Management

Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issues and Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other

Quarterly Data (unaudited)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock Prices and Share Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compliance with Corporate Governance Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forward-Looking Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

123
124

125
127
128
131
133
136
137

139
157
157
157
157
158
158

159
161
163
165

168
169
170
170
171
173
175
175
176
177

178
181
183
185
186

186
186
187
187
187

189
189

199
200
200
200

122

Management’s Discussion and Analysis of Financial Condition and Results of Operations
(as of March 9, 2018)

(Figures and amounts are in US$ and $ millions except per share amounts and as otherwise indicated. Figures may not add due
to rounding.)

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

(1) Readers of the Management’s Discussion and Analysis of Financial Condition and Results of Operations
(‘‘MD&A’’) should review the entire Annual Report for additional commentary and information. Additional
information relating to the company, including its annual information form, can be found on SEDAR at
www.sedar.com. Additional information can also be accessed from the company’s website www.fairfax.ca.

(2) Management analyzes and assesses the underlying insurance, reinsurance and run-off operations and the
financial position of the consolidated group in various ways. Certain of the measures and ratios provided in
this Annual Report, which have been used historically and disclosed regularly in Fairfax’s Annual Reports
and interim financial reporting, do not have a prescribed meaning under IFRS and may not be comparable
to similar measures presented by other companies.

(3) The company presents information on gross premiums written and net premiums written throughout this
MD&A. These two measures are used in the insurance industry and by management in evaluating operating
results. Gross premiums written represents the total premiums on policies issued during a specified period,
irrespective of the portion earned, and is an indicator of the volume of new business generated by the
company. Net premiums written represents gross premiums written less amounts ceded to reinsurers and is
considered a measure of the insurance risk that the company has chosen to retain from the new business it
has generated.

(4) The combined ratio is the traditional performance measure of underwriting results of property and casualty
companies and is calculated by the company as the sum of the loss ratio (claims losses and loss adjustment
expenses expressed as a percentage of net premiums earned) and the expense ratio (commissions, premium
acquisition costs and other underwriting expenses expressed as a percentage of net premiums earned).
Other ratios used by the company include the commission expense ratio (commissions expressed as a
percentage of net premiums earned) and the accident year combined ratio (calculated in the same manner
as the combined ratio but excluding the net favourable or adverse development of reserves established for
claims that occurred in previous accident years). These ratios are calculated from information disclosed in
note 25 (Segmented Information) to the consolidated financial statements for the year ended December 31,
2017 and are used by management for comparisons to historical underwriting results and to the
underwriting results of competitors and the broader property and casualty industry.

(5) 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 instrument (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 instrument 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.
The company’s consolidated interest and dividend income is shown net of total return swap expense.

(6) The measures ‘‘pre-tax income before net gains (losses) on investments’’, ‘‘net realized gains (losses) on
investments’’, and ‘‘net change in unrealized gains (losses) on investments’’ are each shown separately in
this MD&A to present more meaningfully the results of the company’s investment management strategies.
The two measures ‘‘net realized gains (losses) on investments’’, and ‘‘net change in unrealized gains (losses)
on investments’’ are derived from the details of net gains (losses) on investments as presented in note 5
(Cash and Investments) to the consolidated financial statements for the year ended December 31, 2017, and
their sum is equal to ‘‘net gains (losses) on investments’’ as presented in the consolidated statement
of earnings.

(7)

In this MD&A the term ‘‘equity hedges’’ refers to equity and equity-related short positions held in the
company’s investment portfolio as part of the company’s economic hedging strategy that was discontinued

123

FAIRFAX FINANCIAL HOLDINGS LIMITED

in the fourth quarter of 2016; the term ‘‘short equity exposures’’ refers to equity and equity-related short
positions held for investment purposes since discontinuing the economic hedging strategy.

(8) Ratios 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. Those
performance measures are used by the company to assess the amount of leverage employed in its operations.
The company also calculates an interest coverage ratio and an interest and preferred share dividend
distribution coverage ratio as measures of its ability to service its debt and pay dividends to its preferred
shareholders. These ratios are calculated using amounts presented in the company’s consolidated financial
statements for the year ended December 31, 2017 and are explained in detail in note 24 (Financial Risk
Management, under the heading of Capital Management).

(9) Average annual return on average equity is a performance measure 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, using net earnings and equity amounts from segment operating results and segment balance
sheets respectively.

(10) Book value per basic share (also referred to as book value per share) is a performance measure calculated by

the company as common shareholders’ equity divided by the number of common shares outstanding.

(11) Intercompany shareholdings of insurance and reinsurance affiliates are presented as ‘‘Investments in Fairfax
insurance and reinsurance affiliates’’ and intercompany shareholdings of non-insurance affiliates are
presented within ‘‘Portfolio investments’’ on the segmented balance sheets and carried at cost. Total
intercompany shareholdings are presented as ‘‘Investments in Fairfax affiliates’’ within the ‘‘Capital’’
section of the segmented balance sheets.

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

operations.

Overview of Consolidated Performance

The insurance and reinsurance operations produced an underwriting loss of $641.5 and a combined ratio of 106.6%
in 2017 compared to an underwriting profit of $575.9 and a combined ratio of 92.5% in 2016. The underwriting loss
in 2017 principally reflected the impact of higher current period catastrophe losses, lower net favourable prior year
reserve development and an increase in non-catastrophe loss experience related to the current accident year. The
insurance and reinsurance operations reported an operating loss (excluding net gains (losses) on investments) of
$215.7 in 2017 compared to operating income of $1,039.2 in 2016 primarily as a result of the underwriting loss
incurred in 2017, and lower share of profit of associates. Net premiums written by the insurance and reinsurance
operations increased by 26.2% in 2017, principally reflecting the acquisition of Allied World on July 6, 2017,
increased business volumes at OdysseyRe, and the consolidation of full year results for acquisitions made in 2016
(primarily Bryte Insurance, AMAG and Fairfirst Insurance).

Net investment gains of $1,467.5 in 2017 (compared to net investment losses of $1,203.6 in 2016) were principally
due to the gain on the company’s reduction of its equity accounted interest in ICICI Lombard, and net gains on net
equity exposure, partially offset by net losses on CPI-linked derivatives and U.S. treasury bond forward contracts that
reduce exposure to interest rate risk. Interest and dividends increased to $559.0 in 2017 from $555.2 in 2016,
primarily reflecting lower total return swap expense, the consolidation of Allied World’s interest and dividends of
($65.9) and increased interest income earned on cash equivalents and short term investments, partially offset by
lower interest income earned as a result of sales of U.S. treasury and municipal bonds late in 2016 and in the first
quarter of 2017. At December 31, 2017 subsidiary cash and short term investments of $17,545.0 (excluding Fairfax
India and Fairfax Africa) accounted for 47.5% of portfolio investments.

Net earnings of $1,740.6 in 2017 (compared to a net loss of $512.5 in 2016) primarily reflected net investment gains
(compared to net investment losses in 2016), a gain on the sale of the company’s 97.7% interest in First Capital, and
an increase in share of profit of associates, partially offset by underwriting losses due to current period catastrophe
losses and an increased provision for income taxes primarily due to the impact of U.S. tax reform. The company’s
consolidated total debt to total capital ratio decreased to 25.8% at December 31, 2017 from 28.7% at December 31,
2016 primarily as a result of increased total capital, partially offset by increased total debt. The increase in total
capital primarily reflected increases in common shareholders’ equity (principally from the issuance of
5,075,894 subordinate voting shares pursuant to the acquisition of Allied World), non-controlling interests

124

(principally from consolidating Allied World, Grivalia Properties and Fairfax Africa) and total debt (principally from
consolidating the borrowings of Allied World, Grivalia Properties and Fairfax Africa, and increased borrowings by
Fairfax India). Common shareholders’ equity increased to $12,475.6 ($449.55 per basic share) at December 31, 2017
from $8,484.6 ($367.40 per basic share) at December 31, 2016 (an increase of 24.7%, adjusted for the $10.00 per
common share dividend paid in the first quarter of 2017).

Maintaining its emphasis on financial soundness, the company held $2,368.4 of cash and investments at the
holding company level ($2,356.9 net of $11.5 of holding company short sale and derivative obligations) at
December 31, 2017 compared to $1,371.6 ($1,329.4 net of $42.2 of holding company short sale and derivative
obligations) at December 31, 2016.

Business Developments

Acquisitions and Divestitures

The following narrative sets out the company’s key business developments in 2017 and 2016 by reporting segment.
Unless indicated otherwise, all completed acquisitions described in the following paragraphs resulted in a 100%
ownership interest in the acquiree. For further details about these acquisitions and transactions (including
definitions of terms set out in italics), refer to note 23 (Acquisitions and Divestitures) to the consolidated financial
statements for the year ended December 31, 2017 or the Components of Net Earnings section of this MD&A under
the relevant reporting segment heading.

Crum & Forster

On October 4, 2016 Crum & Forster acquired Trinity, which focuses on occupational accident insurance and
produces approximately $26 of gross premiums written annually.

Allied World

On July 6, 2017 the company acquired 94.6% of Allied World AG. Contemporaneously with the closing of the
acquisition of Allied World AG, OMERS, AIMCo and certain other third parties (‘‘the co-investors’’) invested funds
for an indirect equity interest in Allied World AG. The remaining 5.4% of Allied World AG was acquired on
August 17, 2017 in a merger transaction under Swiss law pursuant to which Allied World became the surviving entity.
This merger resulted in the co-investors holding an indirect ownership in Allied World of 32.6%. Allied World is a
global property, casualty and specialty insurer and reinsurer with gross written premiums of approximately
$3.1 billion in 2017 (inclusive of gross written premiums prior to the acquisition by Fairfax).

Fairfax Asia

On December 28, 2017 the company completed the sale of its 97.7% interest in First Capital to Mitsui Sumitomo.

On August 30, 2017 Pacific Insurance acquired Prudential Assurance Malaysia, a general insurer in Malaysia.

On July 6, 2017 the company sold a 12.2% equity interest in ICICI Lombard to private equity investors. On
September 19, 2017 the company sold an additional 12.1% equity interest through participation in ICICI Lombard’s
initial public offering. The company’s remaining 9.9% equity interest in ICICI Lombard was reclassified from the
equity method of accounting to common stock at FVTPL (fair value of $549.0 at December 31, 2017). On March 31,
2016 the company increased its ownership interest in ICICI Lombard to 34.6% by acquiring an additional 9.0% of
ICICI Lombard from ICICI Bank.

On October 10, 2016 the company acquired an 80.0% interest in AMAG, an established general insurer in Indonesia.
On December 31, 2016 Fairfax Indonesia was merged into AMAG.

On October 3, 2016 Union Assurance acquired Fairfirst Insurance, a general insurer in Sri Lanka. On February 28, 2017
Union Assurance was merged into Fairfirst Insurance.

Insurance and Reinsurance – Other

During 2017 the company completed the acquisition of the business and renewal rights of the insurance operations
of AIG in Hungary, Czech Republic and Slovakia (effective from April 30, 2017), Turkey (on May 2, 2017 and sold to
Gulf Insurance on the same day), Bulgaria (effective from May 31, 2017), Poland (effective from June 30, 2017) and

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FAIRFAX FINANCIAL HOLDINGS LIMITED

Romania (effective October 31, 2017). Further, the company completed the acquisition of the insurance operations
of AIG in Chile and Colombia (effective from July 31, 2017), Argentina (effective from September 30, 2017) and
Uruguay (effective January 31, 2018).

On December 7, 2016 the company acquired Bryte Insurance, a property and casualty insurer in South Africa and
Botswana.

Other

Subsequent to December 31, 2017

On March 9, 2018 the company received a performance fee of $114.4 for the period January 30, 2015 to
December 31, 2017 in the form of 7,663,685 newly issued Fairfax India subordinate voting shares, which increased
the company’s equity interest in Fairfax India to 33.6% from 30.2% at December 31, 2017.

On March 7, 2018 the company acquired the services business of Carillion, an infrastructure services company.

On February 22, 2018 the company sold its 51.0% ownership interest in The Keg to Cara for consideration of $74.6
(Cdn$94.7), comprised of cash consideration of $7.9 (Cdn$10.0) and 3,400,000 Cara subordinate voting shares. The
transaction increased the company’s equity interest in Cara to 43.2% from 40.2% at December 31, 2017.

On February 20, 2018 Fairfax India entered into an agreement to acquire a 51.0% equity interest in The Catholic
Syrian Bank Ltd. (‘‘CS Bank’’) for approximately $186 (12.1 billion Indian rupees). CS Bank, headquartered in
Thrissur, Kerala, offers banking services across India.

Years ended December 31, 2017 and 2016

On December 27, 2017 Quess acquired the facility management and catering business of Manipal primarily through
issuance of Quess common shares to Manipal shareholders and the reinvestment of Quess’ existing holdings of
Manipal preferred shares upon cancellation of those shares. In November of 2017 Thomas Cook India sold a 5.4%
interest in Quess. On August 18, 2017 Quess completed a private placement of common shares with institutional
investors. These transactions collectively reduced the company’s indirect ownership of Quess from 42.1% to 33.1%.

On December 1, 2017 Cara acquired Pickle Barrel, which operates restaurants and provides catering services in the
province of Ontario, Canada.

On July 4, 2017 the company acquired control of Grivalia Properties by increasing its equity interest to 52.6% through
the purchase of an additional 10.3% equity interest from Eurobank Ergasias S.A. Accordingly, the company
re-measured its equity accounted carrying value of Grivalia Properties to fair value and commenced consolidating
Grivalia Properties.

On March 14, 2017 Fairchem and Privi Organics completed their previously announced merger, with the merged
entity continuing under the Fairchem name. Subsequent to the merger, Fairfax India, which had acquired a 44.7%
interest in Fairchem on February 8, 2016 and a 50.8% interest in Privi Organics on August 26, 2016, became the
dominant shareholder in Fairchem with a 48.7% interest. Privi Organics is a supplier of aroma chemicals to the
fragrances industry and Fairchem is a specialty chemical manufacturer of oleochemicals used in the paints, inks and
adhesives industries, as well as intermediate nutraceutical and health products.

On February 17, 2017 the company acquired 98.8% of the voting rights and 64.2% of the equity interest in Fairfax
Africa, which was established, with the support of Fairfax, to invest in public and private equity and debt instruments
of African businesses or other businesses with customers, suppliers or business primarily conducted in, or dependent
on, Africa.

On February 14, 2017 Fairfax India acquired a 51.0% interest in Saurashtra Freight, which operates a container freight
station at the Mundra Port in the Indian state of Gujarat.

On January 26, 2017 the company invested in securities of Mosaic Capital through purchases of 6.00% senior
preferred securities, 5.00% senior secured debentures and warrants entitling the company to acquire up to
17,026,106 common shares of Mosaic Capital at any time until January 26, 2024. The company’s investment in
Mosaic Capital warrants represents a potential voting interest of approximately 62%.

On January 13, 2017 the company acquired an additional 12,340,500 subordinate voting shares of Fairfax India for
$145.0 in a private placement.

126

On November 28, 2016 Cara acquired an 89.2% interest in Original Joe’s, a Canadian multi-brand restaurant
company. On September 2, 2016 Cara acquired St-Hubert, a Canadian full-service restaurant operator and fully
integrated food manufacturer.

On October 31, 2016 the company acquired a 60.0% indirect interest in Golf Town, a Canadian specialty retailer of
golf equipment, consumables, golf apparel and accessories.

Operating Environment

Insurance Environment

The property and casualty insurance and reinsurance industry is expected to report a moderate underwriting loss in
2017 driven by an active Atlantic hurricane season and wildfire activity on the U.S. west coast. This marks the first
year of deteriorating underwriting results relative to the past several years, reflecting the above average catastrophe
losses and the expectation that the benefit from prior year reserve releases may diminish somewhat, combined with
the challenging market conditions that persist across many lines of business. The industry continues to feel the
effects of low interest rates that negatively affect operating income, although investments results have been bolstered
by strong equity markets throughout 2017. Despite interest rates having increased recently, the interest rates that
currently prevail for reinvestment are still lower than those on maturing fixed income securities, with the gap
narrowing as the 10-year anniversary of the financial crisis approaches. Strong performance in the equity markets,
partially offset by the impact of underwriting losses, is expected to contribute to low single digit growth in capital for
the industry. Insurance pricing on property and casualty lines of business shows signs of firming as catastrophe losses
have focused attention on pricing across all segments, some of which were being subsidized by property lines of
business that were benefiting from lower than average catastrophe losses in recent years.

The reinsurance sector remains well capitalized despite the significant catastrophe losses in 2017. Pricing on many
reinsurance lines remains attractive: property catastrophe-exposed business has experienced significant rate
increases for loss affected lines of business with non-loss affected lines of business experiencing low single digit price
increases and non-catastrophe property and casualty reinsurance business experiencing flat or nominal price
increases after several years of price decreases.

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FAIRFAX FINANCIAL HOLDINGS LIMITED

Sources of Revenue

Revenue for the most recent three years is shown in the table that follows.

Net premiums earned – Insurance and Reinsurance

Northbridge
OdysseyRe
Crum & Forster
Zenith National
Brit
Allied World(1)
Fairfax Asia
Other

Run-off

Interest and dividends
Share of profit of associates
Net gains (losses) on investments
Gain on sale of subsidiary
Other revenue(2)

2017

2016

2015

1,019.7
2,333.4
1,852.8
811.6
1,536.9
1,028.7
327.6
790.6
20.1

9,721.4
559.0
200.5
1,467.5
1,018.6
3,257.6

908.8
2,074.1
1,769.5
807.3
1,399.3
–
302.5
437.2
163.5

7,862.2
555.2
24.2
(1,203.6)
–
2,061.6

874.7
2,204.1
1,522.0
766.4
892.5
–
287.0
442.7
381.6

7,371.0
512.2
172.9
(259.2)
–
1,783.5

16,224.6

9,299.6

9,580.4

(1) Allied World is included in the company’s financial reporting with effect from July 6, 2017.

(2) Other revenue comprises the revenue earned by the Other reporting segment, which primarily comprises the revenue earned
by William Ashley, Sporting Life, Praktiker, The Keg, Thomas Cook India and its subsidiaries Quess and Sterling Resorts,
Pethealth, Cara and its subsidiaries St-Hubert (acquired on September 2, 2016), Original Joe’s (acquired on November 28,
2016) and Pickle Barrel (acquired on December 1, 2017), Boat Rocker, Golf Town (acquired on October 31, 2016), Mosaic
Capital (consolidated on January 26, 2017), Grivalia Properties (consolidated on July 4, 2017), Fairfax Africa (since its
initial public offering on February 17, 2017), and Fairfax India and its subsidiaries NCML, Fairchem (merged on
March 14, 2017 with Privi Organics (acquired on August 26, 2016)) and Saurashtra Freight (acquired on
February 14, 2017).

The increase in revenue to $16,224.6 in 2017 from $9,299.6 in 2016 principally reflected increased net gains on
investments, a gain of $1,018.6 on the sale of the company’s 97.7% interest in First Capital, higher net premiums
earned (including the consolidation of the net premiums earned of Allied World of $1,028.7), higher other revenue
and increased share of profit of associates. The increase in net gains on investments principally reflected the net gain
of $930.1 related to the reduction in the company’s shareholding in ICICI Lombard in 2017, higher net gains on
common stocks and lower net losses on short equity exposures and equity hedges, partially offset by higher net losses
on U.S. treasury bond forward contracts. Interest and dividends increased modestly to $559.0 in 2017 from $555.2 in
2016, primarily reflecting lower total return swap expense, the consolidation of the interest and dividends of Allied
World ($65.9) and increased interest income earned on cash equivalents and short term investments, partially offset
by lower interest income earned as a result of sales of U.S. treasury and municipal bonds late in 2016 and in the first
quarter of 2017. Share of profit of associates of $200.5 in 2017 increased from $24.2 in 2016, primarily due to an
increase at Eurolife in 2017 and a non-cash impairment charge of $100.4 recognized on Resolute in 2016.

The increase in net premiums earned by the company’s insurance and reinsurance operations in 2017 reflected the
consolidation of the net premiums earned by Allied World ($1,028.7), increases at Insurance and Reinsurance –
Other ($353.4, 80.8% inclusive of the consolidation of the $241.1, $68.5 and $23.7 of net premiums earned by Bryte
Insurance, Fairfax Latam and Colonnade Insurance related to the AIG branches in Central and Eastern Europe
respectively), OdysseyRe ($259.3, 12.5%), Brit ($137.6, 9.8%), Northbridge ($110.9, 12.2% including the favourable
effect of foreign currency translation), Crum & Forster ($83.3, 4.7%), Fairfax Asia ($25.1, 8.3% including the
consolidation of year-over-year increases of $34.4 and $8.6 of net premiums earned by AMAG and Fairfirst
Insurance) and Zenith National ($4.3, 0.5%). Net premiums earned at Run-off in 2016 principally reflected the

128

impacts of the second quarter 2016 construction defect reinsurance transaction and the habitational casualty
reinsurance transaction.

The decrease in revenue to $9,299.6 in 2016 from $9,580.4 in 2015 principally reflected increased net losses on
investments and lower share of profit of associates, partially offset by higher net premiums earned, increased other
revenue and higher interest and dividends. The increase in net losses on investments principally reflected net losses
on equity and equity-related holdings after equity hedges (primarily realized losses) and CPI-linked derivatives,
partially offset by net gains on bonds. Interest and dividends increased to $555.2 in 2016 from $512.2 in 2015
reflecting higher interest earned (primarily due to increased holdings of higher yielding government and corporate
bonds for most of 2016, partially offset by lower holdings of U.S. state and municipal bonds), lower total return swap
expense and lower interest on funds withheld expense. Share of profit of associates decreased to $24.2 in 2016 from
$172.9 in 2015 primarily reflecting a non-cash impairment charge of $100.4 recognized on Resolute and lower share
of profit from the KWF LPs (a Kennedy Wilson real estate partnership recognized a significant gain on disposition of
its investment properties in 2015), partially offset by a higher share of profit of ICICI Lombard.

The increase in net premiums earned by the company’s insurance and reinsurance operations in 2016 compared to
2015 reflected the consolidation of a full year of net premiums earned by Brit ($506.8 incremental increase
year-over-year), increases at Crum & Forster ($247.5, 16.3%), Zenith National ($40.9, 5.3%), Northbridge ($34.1,
3.9% including the unfavourable effect of foreign currency translation) and Fairfax Asia ($15.5, 5.4%), partially offset
by decreases at OdysseyRe ($130.0, 5.9%) and Insurance and Reinsurance – Other ($5.5, 1.2%). The decrease in net
premiums earned at Run-off in 2016 principally reflected the impact of two significant reinsurance transactions in
2016 compared to the completion of four significant reinsurance transactions in 2015.

In order to better compare 2017 to 2016, the table which follows presents net premiums written by the company’s
insurance and reinsurance operations excluding the impact of the acquisition of Allied World (acquired July 6, 2017)
and other smaller acquisitions as described in the footnotes.

Net premiums written
Northbridge
OdysseyRe
Crum & Forster
Zenith National
Brit
Fairfax Asia(1)
Other(2)

Insurance and reinsurance operations

2017

2016

1,064.9
2,495.9
1,863.4
837.4
1,530.9
272.2
480.7

942.6
2,100.2
1,801.1
819.4
1,480.2
290.1
458.4

8,545.4

7,892.0

% change
year-over-
year

13.0
18.8
3.5
2.2
3.4
(6.2)
4.9

8.3

(1) Excludes AMAG (acquired October 10, 2016) and Fairfirst Insurance (acquired October 3, 2016).

(2) Excludes Bryte Insurance (acquired December 7, 2016), Fairfax Latam (Chile and Colombia (effective from July 31, 2017)
and Argentina (effective from September 30, 2017)) and the AIG branches in Central and Eastern Europe (Hungary, Czech
Republic and Slovakia (effective from April 30, 2017), Bulgaria (effective from May 31, 2017), Poland (effective from
June 30, 2017) and Romania (effective from October 31, 2017).

Northbridge’s net premiums written increased by 13.0% in 2017 including the favourable effect of foreign currency
translation. In Canadian dollar terms, Northbridge’s net premiums written increased by 10.7% in 2017, primarily
reflecting increased renewal and new business writings, and price increases across the group.

OdysseyRe’s net premiums written increased by 18.8% in 2017, principally reflecting increases in the U.S. Insurance
division (automobile, crop and liability package lines of business), North America division (property and casualty
reinsurance lines of business), EuroAsia division (crop, commercial automobile and credit and bond reinsurance
lines of business) and the London Market division (affinity and liability insurance lines of business).

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FAIRFAX FINANCIAL HOLDINGS LIMITED

Crum & Forster’s net premiums written increased by 3.5% in 2017, principally reflecting growth in the accident and
health and commercial transportation lines of business, partially offset by decreases in excess and surplus and marine
lines of business.

Zenith National’s net premiums written increased by 2.2% in 2017, primarily reflecting increased exposure, partially
offset by price decreases.

Brit’s net premiums written increased by 3.4% in 2017, principally reflecting better than expected development on
2016 and prior underwriting years, inwards reinstatement premiums following the current period catastrophe losses,
increased contribution from initiatives launched in recent years and measured growth in core lines of business,
partially offset by modest price decreases and reductions in other lines of business through active portfolio
management, the unfavourable impact of foreign currency translation and the impact of additional reinsurance
purchased.

Net premiums written by Fairfax Asia decreased by 6.2% in 2017, principally reflecting lower writings in the
commercial automobile, property and marine lines of business and the impact of lower premium retention
(primarily at First Capital).

Net premiums written by the Insurance and Reinsurance – Other reporting segment increased by 4.9% in 2017,
principally reflecting increases at Fairfax CEE (primarily at Colonnade Insurance), Advent and Fairfax Brasil, partially
offset by decreases at Group Re.

Net gains (losses) on investments in 2017 and 2016 were comprised as shown in the following table:

Common stocks
Preferred stocks – convertible
Bonds – convertible
Gain on disposition of associates(1)
Other equity derivatives(2)

Long equity exposures

Short equity exposures and equity hedges

Net equity exposure and financial effects

Bonds
CPI-linked derivatives
U.S. treasury bond forwards
Other derivatives
Foreign currency
Gain on disposition of insurance and reinsurance associates(3)
Other

Net gains (losses) on investments

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

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

2017
707.8
(1.6)
233.1
69.8
57.9

2016
(78.0)
(6.6)
(39.4)
–
19.3

1,067.0
(417.9)

(104.7)
(1,192.9)

649.1
44.9
(71.0)
(153.2)
(0.3)
2.8
930.1
65.1

(1,297.6)
322.7
(196.2)
47.0
(7.4)
(129.5)
–
57.4

1,467.5

(1,203.6)

24.2
67.3
(46.6)

256.8
(29.5)
95.4

44.9

322.7

(1) During 2017 the company acquired control of Grivalia Properties by increasing its equity interest to 52.7% and
commenced consolidating Grivalia Properties in the Other reporting segment. As a result, the company re-measured its
equity accounted carrying value of Grivalia Properties to fair value and recorded a net realized gain of $51.3. Refer to
note 6 (Investments in Associates) to the consolidated financial statements for the year ended December 31, 2017.

(2) Other equity derivatives include long equity total return swaps, equity warrants and equity index call options.

(3) During 2017 the company sold a 24.3% equity interest in ICICI Lombard for net proceeds of $908.5 and recorded a net
realized gain of $595.6. The company’s remaining 9.9% equity interest in ICICI Lombard was reclassified to common
stock measured at FVTPL and re-measured to fair value for a net realized gain of $334.5. Refer to note 6 (Investments in
Associates) to the consolidated financial statements for the year ended December 31, 2017.

130

During 2017 the company closed out $1,202.9 notional amount of short equity total return swaps and recognized a
net loss on investment of $237.9 (realized loss of $553.1 of which $315.2 was recognized as unrealized losses in prior
years). In the first quarter of 2018 the company closed out an additional $481.3 notional amount of short equity and
equity index total return swaps and recognized a net loss on investment of $8.1 (realized loss of $199.0 of which
$190.9 was recognized as unrealized losses in prior years), which reduced the notional amount of remaining short
equity and equity index total return swaps to approximately $509. Refer to note 24 (Financial Risk Management)
under the heading Market Price Fluctuations in the company’s consolidated financial statements for the year ended
December 31, 2017 for a tabular analysis followed by a discussion of the net effect of the company’s equity and
equity-related holdings (long exposures net of short exposures) 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.

Net gains on bonds of $44.9 in 2017 were primarily comprised of net gains on U.S. treasury bonds ($52.8) and
U.S. state and municipal bonds ($67.3), partially offset by losses on Indian government bonds ($40.5) and corporate
and other bonds ($46.6).

The company’s CPI-linked derivative contracts produced net unrealized losses of $71.0 and $196.2 in 2017 and 2016
respectively. Net unrealized losses on CPI-linked derivative contracts typically reflect the market’s expectation of
increases in the values of the CPI indexes underlying those contracts at their respective maturities during the periods
presented (those contracts are structured to benefit the company during periods of decreasing CPI index values).

The increase in other revenue to $3,257.6 in 2017 from $2,061.6 in 2016 principally reflected increases at Cara
(reflecting the inclusion of the full year revenue of St-Hubert and Original Joe’s, and the consolidation of Pickle Barrel
on December 1, 2017), Thomas Cook India (reflecting increased business volumes at Quess), Fairfax India (reflecting
the consolidation of Fairchem on March 14, 2017, the inclusion of the full year revenue of Privi Organics and
increased business volumes at NCML), Golf Town (reflecting the inclusion of the full year revenue), and the
consolidation of Mosaic Capital (on January 26, 2017) and Grivalia Properties (on July 4, 2017).

Net Premiums Earned by Geographic Region

As presented in note 25 (Segmented Information) to the consolidated financial statements for the year ended
December 31, 2017, the United States, Canada, International and Asia accounted for 63.2%, 12.3%, 16.0% and 8.5%
respectively, of net premiums earned by geographic region in 2017, compared to 65.5%, 13.4%, 12.4% and 8.7%
respectively, in 2016.

United States

Net premiums earned in the United States geographic region increased by 19.3% from $5,152.8 in 2016 to $6,148.7
in 2017 primarily reflecting the consolidation of Allied World ($773.7 for the period July 6, 2017 to December 31,
2017) and increases at OdysseyRe (growth in the property and casualty reinsurance segments and the commercial
automobile, casualty and crop insurance segments), Brit (organic growth and new initiatives) and Crum & Forster
(growth in accident and health and commercial transportation lines of business), partially offset by lower net
premiums earned at Run-off reflecting non-recurring transactions in 2016 involving the reinsurance of third party
runoff portfolios.

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FAIRFAX FINANCIAL HOLDINGS LIMITED

Canada

Net premiums earned in the Canada geographic region increased by 13.6% from $1,053.1 in 2016 to $1,196.8 in
2017 primarily reflecting increased net premiums earned at Northbridge (increased new business writings, modest
price increases across the group and the favourable effect of the strengthening of the Canadian dollar relative to the
U.S. dollar as measured by average annual rates of exchange) and the consolidation of Allied World ($20.5 for the
period July 6, 2017 to December 31, 2017).

International

Net premiums earned in the International geographic region increased by 59.8% from $972.0 in 2016 to $1,553.2 in
2017 primarily reflecting the consolidation of Bryte Insurance ($241.1), Allied World ($146.3 for the period July 6,
2017 to December 31, 2017), and Fairfax Latam ($68.5), the impact of the expansion at Colonnade Insurance and
modest increases in net premiums earned at Brit and OdysseyRe.

Asia

Net premiums earned in the Asia geographic region increased by 20.2% from $684.3 in 2016 to $822.7 in 2017
primarily as a result of the consolidation of Allied World ($88.2 for the period July 6, 2017 to December 31, 2017),
year-over-year increases at AMAG and Fairfirst Insurance and modest increases in net premiums earned at Brit
and OdysseyRe.

132

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 run-off operations, as well as the earnings contributions from the
Other reporting segment for the years ended December 31, 2017, 2016 and 2015. In that table, interest and dividends
and share of profit (loss) of associates are presented separately as they relate to the insurance and reinsurance
reporting segments, and included in Run-off, Corporate overhead and other, and Other as they relate to those
segments. Pre-tax income before net gains (losses) on investments, net realized gains (losses) on investments, pre-tax
income (loss) including net realized gains (losses) on investments, and net change in unrealized gains (losses) on
investments are each shown separately to present more meaningfully the results of the company’s investment
management strategies.

Combined ratios – Insurance and Reinsurance

Northbridge
OdysseyRe
Crum & Forster
Zenith National
Brit
Allied World(1)
Fairfax Asia
Other

Consolidated

Sources of net earnings
Underwriting – Insurance and Reinsurance

Northbridge
OdysseyRe
Crum & Forster
Zenith National
Brit
Allied World(1)
Fairfax Asia
Other

Underwriting profit (loss) – Insurance and Reinsurance
Interest and dividends – Insurance and Reinsurance
Share of profit of associates – Insurance and Reinsurance

Operating income (loss) – Insurance and Reinsurance
Run-off (excluding net gains (losses) on investments)
Other reporting segment (excluding net gains (losses) on investments)
Interest expense
Corporate overhead and other
Gain on sale of subsidiary

Pre-tax income before net gains (losses) on investments
Net realized gains (losses) on investments

Pre-tax income (loss) including net realized gains (losses) on investments
Net change in unrealized gains (losses) on investments

Pre-tax income (loss)
Income taxes

Net earnings (loss)

Attributable to:

Shareholders of Fairfax
Non-controlling interests

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

(1) Allied World is included in the company’s financial reporting with effect from July 6, 2017.

133

2017

2016

2015

99.1%
97.4%
99.8%
85.6%
113.1%
157.0%
88.4%
110.2%

106.6%

94.9%
88.7%
98.2%
79.7%
97.9%
–%
86.4%
93.7%

92.5%

91.8%
84.7%
97.7%
82.5%
94.9%
–%
87.9%
89.6%

89.9%

9.0
60.0
3.2
117.2
(201.9)
(586.6)
38.2
(80.6)

(641.5)
402.3
23.5

(215.7)
(184.6)
212.1
(331.2)
56.5
1,018.6

555.7
723.4

1,279.1
744.1

2,023.2
(408.3)

46.3
235.2
32.4
164.1
29.1
–
41.1
27.7

575.9
410.0
53.3

1,039.2
(149.4)
133.5
(242.8)
(131.2)
–

649.3
(2,071.4)

(1,422.1)
867.8

(554.3)
159.6

1,614.9

(394.7)

1,740.6
(125.7)

(512.5)
117.8

1,614.9

(394.7)

$ 66.74
$ 64.98
$ 10.00

$ (24.18)
$ (24.18)
10.00
$

$
$
$

71.4
336.9
35.4
134.4
45.4
–
34.8
46.2

704.5
338.9
138.1

1,181.5
(74.1)
127.8
(219.0)
(132.5)
–

883.7
1,176.4

2,060.1
(1,435.6)

624.5
17.5

642.0

567.7
74.3

642.0

23.67
23.15
10.00

FAIRFAX FINANCIAL HOLDINGS LIMITED

The company’s insurance and reinsurance operations produced an underwriting loss of $641.5 (combined ratio of
106.6%) in 2017 compared to an underwriting profit of $575.9 (combined ratio of 92.5%) in 2016. The increase in
the combined ratio in 2017 principally reflected the impact of higher current period catastrophe losses, lower net
favourable prior year reserve development and an increase in non-catastrophe loss experience related to the current
accident year.

Net favourable prior year reserve development of $491.7 (5.1 combined ratio points) in 2017 decreased from $654.6
(8.5 combined ratio points) in 2016 and was comprised as follows:

Insurance and Reinsurance

Northbridge
OdysseyRe
Crum & Forster
Zenith National
Brit
Allied World(1)
Fairfax Asia
Other

Net favourable development

2017

2016

(93.5)
(288.1)
(10.2)
(76.4)
(9.5)
71.9
(52.3)
(33.6)

(112.8)
(266.5)
(8.3)
(101.0)
(53.5)
–
(52.1)
(60.4)

(491.7)

(654.6)

(1) Allied World is included in the company’s financial reporting with effect from July 6, 2017.

Current period catastrophe losses of $1,330.4 (13.7 combined ratio points) in 2017 increased from $352.7
(4.6 combined ratio points) in 2016 and were comprised as follows:

2017

2016

Catastrophe
losses(1)
372.0
281.7
252.4
185.4
24.1
–
–
214.8

Combined
ratio impact
3.8
2.9
2.6
1.9
0.2
–
–
2.3

Catastrophe
losses(1)
–
–
–
–
–
67.9
61.8
223.0

Combined
ratio impact
–
–
–
–
–
0.9
0.8
2.9

1,330.4

13.7 points

352.7

4.6 points

Hurricane Irma
Hurricane Maria
Hurricane Harvey
California wildfires
Mexico earthquakes
Hurricane Matthew
Fort McMurray wildfires
Other

(1) Net of reinstatement premiums.

The following table presents the components of the company’s combined ratios for the years ended December 31:

Underwriting profit (loss) – Insurance and Reinsurance

Loss & LAE – accident year
Commissions
Underwriting expense

Combined ratio – accident year

Net favourable development

Combined ratio – calendar year

134

2017
(641.5)

2016
575.9

77.4% 66.7%
16.9% 17.3%
17.4% 17.0%

111.7% 101.0%
(5.1)% (8.5)%

106.6% 92.5%

The commission expense ratio decreased to 16.9% in 2017 from 17.3% in 2016, primarily reflecting the
consolidation of Allied World (non-recurring acquisition accounting adjustments reduced net premiums earned and
commission expense in the period July 6, 2017 to December 31, 2017 and resulted in a commission expense ratio
that was generally lower than Fairfax’s other operating companies), partially offset by an increased commission
expense ratio at Brit (primarily the impacts of non-recurring acquisition accounting adjustments which reduced net
premiums earned and commission expense in 2016, partially offset by changes in the mix of business written,
reinsurance purchased and higher net premiums earned in 2017).

The underwriting expense ratio increased to 17.4% in 2017 from 17.0% in 2016, primarily reflecting the
consolidation of Allied World (Allied World’s underwriting expense ratio of 21.1% for the period July 6, 2017 to
December 31, 2017 was generally higher than Fairfax’s other operating companies), partially offset by increased net
premiums earned relative to underwriting expenses at OdysseyRe and Northbridge.

Underwriting expenses increased by 4.8% in 2017 (excluding the combined underwriting expenses of $310.2 of
Allied World, Bryte Insurance and Fairfax Latam in 2017), primarily reflecting increases at Crum & Forster (primarily
due to increased compensation costs related to new underwriting initiatives), Colonnade Insurance (primarily
reflecting its start-up costs), Zenith National (primarily reflecting higher underwriting expenses attributable to
ongoing investment in personnel) and Fairfax Asia (primarily reflecting the year-over-year impact of the
consolidation of the underwriting expenses of AMAG and Fairfirst Insurance and increased compensation costs),
partially offset by a decrease at Brit (primarily reflecting the favourable effect of foreign currency translation and
increased fee income earned from the management of third party underwriting capital)

Operating expenses in the consolidated statements of earnings include only the operating expenses of the company’s
insurance and reinsurance and run-off operations and corporate overhead. Operating expenses increased to $2,049.5
in 2017 from $1,597.7 in 2016 primarily as a result of increased underwriting expenses of the insurance and
reinsurance operations as described in the preceding paragraph and increased Fairfax and subsidiary holding
companies’ corporate overhead, partially offset by lower operating expenses at Run-off.

Other expenses increased to $3,024.6 in 2017 from $1,958.4 in 2016 primarily as a result of increases at Cara
(reflecting the inclusion of the full year expenses of St-Hubert and Original Joe’s, and the consolidation of Pickle
Barrel on December 1, 2017), Thomas Cook India (reflecting increased business volumes at Quess), Fairfax India
(reflecting the consolidation of Fairchem on March 14, 2017, the inclusion of the full year expenses of Privi Organics
and increased business volume at NCML) and Golf Town (reflecting the inclusion of the full year expenses), and the
consolidation of Mosaic Capital (on January 26, 2017) and Grivalia Properties (on July 4, 2017).

The company reported net earnings attributable to shareholders of Fairfax of $1,740.6 (net earnings of $66.74 per
basic share and$64.98 per diluted share) in 2017 compared to a net loss attributable to shareholders of Fairfax of
$512.5 (net loss of $24.18 per basic and diluted share) in 2016. The year-over-year increase in profitability primarily
reflected increased net gains on investments and the gain on the sale of the company’s 97.7% interest in First Capital,
partially offset by a decrease in underwriting profit and increased provision for income taxes.

Common shareholders’ equity increased from $8,484.6 at December 31, 2016 to $12,475.6 at December 31, 2017,
primarily reflecting the issuance of 5,075,894 shares with a fair value of $2,191.6 pursuant to the acquisition of Allied
World, net earnings attributable to shareholders of Fairfax of $1,740.6 and other comprehensive income of $283.8
(comprised of net unrealized foreign currency translation gains on foreign operations of $200.4 and the company’s
share of other comprehensive income of associates of $114.3, partially offset by net losses on defined benefit plans of
$30.9), partially offset by dividends paid of $282.0 on the company’s common and preferred shares. Common
shareholders’ equity per basic share at December 31, 2017 was $449.55 compared to $367.40 per basic share at
December 31, 2016, representing an increase of 22.4% (without adjustment for the $10.00 per common share
dividend paid in the first quarter of 2017, or an increase of 24.7% adjusted to include that dividend).

135

–

9,983.5

9,721.4

(848.9)

559.0

200.5

(89.4)

1,467.5

1,018.6

261.6

(331.2)

2,023.2

(408.3)

1,614.9

1,740.6

(125.7)

1,614.9

FAIRFAX FINANCIAL HOLDINGS LIMITED

Net Earnings by Reporting Segment

The company’s sources of net earnings (loss) shown by reporting segment are set out below for the years ended
December 31, 2017 and 2016. 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, 2017

Insurance and Reinsurance

Zenith
Northbridge OdysseyRe Forster National

Crum &

Brit World(1)

Allied Fairfax

Operating
Asia Other companies

Run-

Corporate

Eliminations
and

off Other and Other adjustments Consolidated

Gross premiums written

1,187.0

2,783.1

2,174.5

849.0 2,057.0

1,447.6

670.4 1,244.3

12,412.9

Net premiums written

1,064.9

2,495.9

1,863.4

837.4 1,530.9

991.9

327.5

863.3

9,975.2

8.4

8.3

Net premiums earned

1,019.7

2,333.4

1,852.8

811.6 1,536.9

1,028.7

327.6

790.6

9,701.3

20.1

(213.8)

12,207.5

–

60.0

124.9

3.2

33.8

117.2 (201.9)

(586.6)

23.4

32.6

65.9

38.2

29.1

(80.6)

38.5

(641.5)

(207.4)

402.3

28.9 (104.9)

(4.1)

236.8

7.2

(1.1)

(9.8)

9.2

(17.6)

29.4

3.0

23.5

(6.1)

55.4

127.7

–

192.1

35.9

130.8 (160.1)

(538.3)

96.7

(39.1)

(215.7)

(184.6)

(49.5)

123.6

236.8

253.1

27.9

26.6

79.0

(26.5) 1,083.9

69.5

–

– 1,018.6

–

1,558.3

1,018.6

73.3

–

7.2

–

– 261.6

(171.3)

–

(3.3)

(1.8)

(3.3)

(12.5)

(15.6)

(4.8)

(41.3)

(65.8)

(224.1)

–

(8.7)

(27.4)

(25.4)

(8.2)

(9.2)

(27.9)

(2.6)

(22.2)

(131.6)

–

64.5

(236.8)

(303.9)

Pre-tax income (loss)

102.4

414.5

36.6

145.9 (102.8)

(608.3) 2,196.6

3.4

2,188.3

(111.3) 153.5

(207.3)

–

Underwriting profit (loss)

Interest and dividends

Share of profit (loss) of

associates

Operating income (loss)

Net gains (losses) on

investments

Gain on sale of subsidiary

Other reporting segment

Interest expense

Corporate overhead and

other

9.0

54.1

3.2

66.3

44.8

–

Income taxes

Net earnings

Attributable to:

Shareholders of Fairfax

Non-controlling interests

Year ended December 31, 2016

Insurance and Reinsurance

Zenith
Northbridge OdysseyRe Forster National

Crum &

Brit World(1)

Allied Fairfax

Operating
Asia Other companies

Run-

Corporate Eliminations
and

and

off Other

Other adjustments Consolidated

Gross premiums written

1,055.1

2,380.7

2,055.0

831.7 1,912.2

Net premiums written

942.6

2,100.2

1,801.1

819.4 1,480.2

Net premiums earned

908.8

2,074.1

1,769.5

807.3 1,399.3

Underwriting profit (loss)

Interest and dividends

Share of profit (loss) of

associates

46.3

52.2

5.2

235.2

153.7

32.4

65.8

164.1

29.6

29.1

55.4

17.3

(22.6)

1.2

3.4

Operating income (loss)

103.7

406.2

75.6

194.9

87.9

Net gains (losses) on

investments

Other reporting segment

Interest expense

(161.3)

(318.7)

(184.7)

(168.2)

87.3

–

(2.8)

(1.6)

–

(3.3)

(8.4)

–

(14.2)

(9.2)

Corporate overhead and other

(6.6)

(30.2)

(20.4)

(64.2)

54.5

(131.1)

15.0

151.8

Pre-tax income (loss)

Income taxes

Net loss

Attributable to:

Shareholders of Fairfax

Non-controlling interests

–

648.7 643.3

9,526.7

183.9

303.1 458.4

7,905.0

183.4

302.5 437.2

7,698.7

163.5

–

41.1

26.7

27.7

26.6

575.9

410.0

(185.1)

51.2

16.7

(11.5)

48.1

0.7

53.3

(15.5)

13.6

(27.2)

115.9

55.0

1,039.2

(149.4)

30.3

(38.7)

(1.7)

(90.0)

(837.3)

(225.2)

30.1

(171.2)

–

(4.2)

(0.1)

–

(26.1)

(74.9)

– 103.2

–

(28.3)

–

(188.4)

(17.6)

114.1

(39.2)

100.9

(374.6) 135.3

(415.9)

(176.3)

9,534.3

–

88.8

–

88.8

–

(88.8)

–

8,088.4

7,862.2

390.8

555.2

24.2

970.2

(1,203.6)

103.2

(242.8)

(181.3)

(554.3)

159.6

(394.7)

(512.5)

117.8

(394.7)

(1) Allied World is included in the company’s financial reporting with effect from July 6, 2017.

136

Balance Sheets by Reporting Segment

The company’s segmented balance sheets as at December 31, 2017 and 2016 present the assets and liabilities of, and
the capital invested by the company in, each of the company’s reporting segments. The segmented balance sheets
have been prepared on the following basis:

(a) The balance sheet for each reporting segment is on a legal entity basis for the subsidiaries within that
segment, in accordance with Fairfax’s IFRS accounting policies and includes, where applicable, acquisition
accounting adjustments principally related to goodwill and intangible assets which arose on initial
acquisition of the subsidiaries or on a subsequent step acquisition.

(b) Certain of the company’s subsidiaries held ownership interests in other Fairfax subsidiaries (‘‘Fairfax
affiliates’’) at December 31, 2017. These investments in Fairfax affiliates are carried at cost and are disclosed
in the table below. 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 holding company and its subsidiary intermediate holding
companies as well as the consolidating and eliminating entries required under IFRS to prepare consolidated
financial statements. The most significant of those entries are derived from the elimination of
intercompany reinsurance (primarily consisting of reinsurance provided by Group Re and reinsurance
between OdysseyRe and the primary insurers), which affects recoverable from reinsurers, provision for
losses and loss adjustment expenses and unearned premiums. Corporate and Other borrowings of $3,445.1
as at December 31, 2017 primarily consisted of Fairfax holding company debt of $3,475.1, partially offset by
the elimination of intercompany debt. Corporate and Other borrowings of $3,479.6 as at December 31,
2016 primarily consisted of Fairfax holding company debt of $3,341.2 and purchase consideration payable
of $129.2 (repaid in 2017) related to the TRG acquisition.

Economic ownership percentage in Fairfax affiliates

Northbridge OdysseyRe

Crum &
Forster National Brit World

Zenith

Insurance &
Allied Fairfax Reinsurance –
Other

Asia

Run- Corporate &

off

Other Consolidated

Investments in

insurance and
reinsurance
affiliates(1)(2)

Zenith National

Advent

TRG (Run-off)

Investments in non-

insurance
affiliates(3)

Thomas Cook India

Fairfax India

The Keg

Cara

Boat Rocker Media

Fairfax Africa

Grivalia Properties

–

11.0%

8.5%

–

1.7%

3.9%

6.1%

2.0%

15.7% 12.7%

–

5.2%

–

– 13.8%

31.5% 44.9%

91.9%

57.8%

18.4%

100.0%

11.0%

6.9%

14.7%

10.5%

27.3%

20.1%

18.8%

1.5%

3.5%

7.3%

4.9%

0.4%

–

1.8% 0.6%

1.0% 4.1%

4.8% 1.0%

8.0%

–

– 3.8%

5.7%

–

20.1%

–

4.8%

5.1%

9.1% 9.9%

4.2% 0.6%

1.4% 1.7%

5.0%

–

1.7% 4.9%

2.0% 5.4%

6.6% 3.4%

–

6.3%

10.8%

–

7.6% 1.5%

5.0% 9.2%

45.7%

1.5%

–

0.5%

–

4.7%

2.6%

67.6%

30.2%

51.0%

40.2%

58.2%

64.2%

52.7%

(1)

(2)

(3)

This table excludes subsidiaries where the company’s equity interest is entirely held by the holding company including Northbridge, OdysseyRe, Crum & Forster, Brit, Allied World,
Fairfax Asia, Fairfax Brasil, Fairfax Latam, Bryte Insurance and Polish Re.

Investments in insurance and reinsurance affiliates are reported in Investment in Fairfax insurance and reinsurance affiliates on the segmented balance sheet.

Investments in non-insurance affiliates are reported within Portfolio investments on the segmented balance sheet.

137

FAIRFAX FINANCIAL HOLDINGS LIMITED

Segmented Balance Sheet as at December 31, 2017

Insurance and Reinsurance

Assets

Holding company cash

and investments

Insurance contract

receivables

Portfolio investments(2)
Deferred premium
acquisition costs

Recoverable from

reinsurers

Deferred income taxes

Goodwill and intangible

assets

Due from affiliates

Other assets

Investments in Fairfax

insurance and
reinsurance affiliates

Northbridge OdysseyRe Forster National

Brit World(1)

Asia Other companies Run-off

Other and Other Consolidated

Crum &

Zenith

Allied Fairfax

Operating

Corporate

107.0

557.8

5.3

9.4

–

549.0

–

1,228.5

–

1,139.9

2,368.4

327.4
3,008.1

995.9

315.4
7,979.8 4,024.2

260.7

774.0
1,716.0 4,245.1

1,336.7
8,162.9

97.8

621.6
632.9 2,145.7

4,729.5

–
31,914.7 3,710.0 3,176.8

73.8

116.4

223.4

126.0

12.2

207.1

146.6

16.8

94.4

942.9

–

441.5

81.6

172.8

205.4

67.0

976.1 1,033.7

53.1 1,437.6

2,879.6

275.9 1,110.2

8,207.7

195.7

151.6

29.9

–

66.3

525.1

737.9

25.3

171.3

318.2

433.1

725.6

1,702.6

196.4

–

8.6

66.6

32.0

3,786.6

36.8 2,242.7

250.6

437.6

–

72.4

90.7

356.0

153.3

149.4

1,214.4

79.7 3,264.5

1.6

82.6

3.0

243.0

–

(116.4)
(1,788.3)

4,686.9
37,013.2

(15.4)

927.5

(1,133.1)

(169.6)

6.4

(688.2)

269.7

7,812.5

380.8

6,072.5

–

4,828.3

–

131.9

70.2

–

35.1

237.2

106.1

–

(343.3)

–

Total assets

4,527.2

11,316.1 6,290.6

2,586.8 7,480.1 14,584.4

1,930.7 4,321.3

53,037.2 5,207.2 8,684.0

(2,838.3)

64,090.1

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

187.2

16.2

2.7

0.9

4.9

309.9

108.6

156.5

272.2

114.2

442.0

2,123.6

90.4 1,288.0

533.0

34.4

61.0

5.1

–

7.4

19.1

10.9

4.3

2.8

12.5

–

1.7

0.6

6.0

1.9

0.1

0.7

5.2

1.6

13.4

66.8

–

12.8

127.5

16.0

101.9

39.8

13.0

1.6

12.6

189.8

(1.3)

(231.2)

3,629.5

95.6

126.2

–

94.2

21.4

–

450.1

270.3

12.5

103.2

956.6

12.5

adjustment expenses

1,964.3

5,521.8 3,535.4

1,194.2 4,136.1

7,787.9

359.5 1,836.5

26,335.7 3,331.0

Provision for unearned

premiums

Deferred income taxes

Borrowings

628.4

909.1

713.0

305.7

891.2

1,653.0

177.1

726.3

6,003.8

–

89.8

–

41.4

–

42.8

38.2

233.5

67.5

878.0

8.5

–

3.2

92.1

122.0

1,373.0

8.0

–

146.6

(118.9)

850.2

(1,055.9)

28,610.8

(60.1)

(268.6)

5,951.7

–

– 1,596.0

3,445.1

6,414.1

Total liabilities

2,804.6

7,248.4 4,651.1

1,653.8 5,930.1 10,937.2

674.5 3,223.5

37,123.2 3,456.5 3,245.8

1,852.6

45,678.1

Equity

Shareholders’ equity
attributable to
shareholders of Fairfax

1,722.5

4,067.7 1,639.5

933.0 1,550.0

3,641.6

1,195.0 1,095.7

15,845.0 1,750.7 5,092.5

(8,877.1)

Non-controlling interests

0.1

–

5.6

61.2

2.1

69.0

–

345.7

4,186.2

13,811.1

4,600.9

Total equity

1,722.6

4,067.7 1,639.5

933.0 1,550.0

3,647.2

1,256.2 1,097.8

15,914.0 1,750.7 5,438.2

(4,690.9)

18,412.0

4,527.2

11,316.1 6,290.6

2,586.8 7,480.1 14,584.4

1,930.7 4,321.3

53,037.2 5,207.2 8,684.0

(2,838.3)

64,090.1

–

89.8

41.4

38.2

233.5

878.0

–

92.1

1,373.0

– 1,596.0

3,445.1

6,414.1

154.3

824.2

298.6

106.0

193.4

244.1

26.0

195.2

2,041.8

629.0

–

(2,670.8)

–

Total liabilities and total

equity

Capital

Borrowings

Investments in Fairfax

affiliates

Shareholders’ equity
attributable to
shareholders of Fairfax

Non-controlling interests

0.1

–

435.3

1,229.4

61.2

–

1,726.0

– 2,874.9

–

1,568.2

3,243.5 1,340.9

827.0

921.3

2,173.7

1,169.0

902.6

12,146.2 1,121.7 2,563.3

(2,020.1)

13,811.1

4,600.9

Total capital

1,722.6

4,157.5 1,680.9

971.2 1,783.5

4,525.2

1,256.2 1,189.9

17,287.0 1,750.7 7,034.2

(1,245.8)

24,826.1

% of consolidated total

capital

6.9%

16.7%

6.8%

3.9% 7.2% 18.2%

5.1% 4.8%

69.6%

7.1% 28.3%

(5.0)%

100.0%

(1)

(2)

Allied World is included in the company’s financial reporting with effect from July 6, 2017.

Includes investments in non-insurance affiliates.

138

Segmented Balance Sheet as at December 31, 2016

Insurance and Reinsurance

Northbridge OdysseyRe Forster National

Brit

Asia Other companies Run-off Other and Other Consolidated

Crum &

Zenith

Fairfax

Operating

Corporate

Assets

Holding company cash and investments

Insurance contract receivables
Portfolio investments(1)
Deferred premium acquisition costs

Recoverable from reinsurers

Deferred income taxes

Goodwill and intangible assets

Due from affiliates

Other assets

Investments in Fairfax insurance and

reinsurance affiliates

Total assets

Liabilities

125.9

272.7

508.6

830.8

7.2

10.3

–

652.0

–

279.1

238.2

639.2

169.6

385.7

2,815.3

196.8

–

2,748.8

7,243.8 3,907.7

1,708.7 3,986.7 1,568.8 1,680.6

22,845.1 3,847.2 1,476.5

96.4

463.3

65.9

152.8

120.9

103.2

182.5

122.0

774.8 1,104.1

300.5

174.9

4.0

182.9

257.3

331.6

31.4

183.5

10.9

68.0

55.0

192.7

923.7

–

30.6

72.0

707.1

634.3

346.3

4,314.5

–

697.6

–

835.8

11.6

–

439.0

730.9

173.1

–

0.3

60.6

106.0

23.3

85.0

2,036.2

37.1 1,766.0

215.0

772.2

575.3

–

99.6 1,497.7

18.9

33.9

35.1

51.0

719.6

(94.6)

(875.4)

(14.0)

(1,140.0)

23.4

8.2

(790.3)

148.9

1,371.6

2,917.5

27,293.4

693.1

4,010.3

732.6

3,847.5

–

2,518.4

–

132.0

70.2

–

32.7

234.9

106.1

–

(341.0)

–

4,149.9

10,334.8 6,294.1

2,590.7 6,579.5 2,684.7 2,656.2

35,289.9 5,709.5 4,740.2

(2,355.2)

43,384.4

Accounts payable and accrued liabilities

161.3

511.0

282.2

94.6

79.4

273.7

261.1

1,663.3

104.2

973.8

Income taxes payable

Short sale and derivative obligations

Due to affiliates

Funds withheld payable to reinsurers

Provision for losses and loss adjustment

6.3

40.9

0.9

3.3

–

79.5

9.2

61.6

–

37.2

0.6

18.2

1.5

3.1

3.0

11.8

–

302.3

–

13.0

–

5.5

51.8

0.2

5.0

2.2

66.0

21.0

177.5

21.4

503.2

–

41.9

1.0

13.3

expenses

1,875.0

4,896.9 3,562.3

1,212.5 3,406.7

800.0 1,019.1

16,772.5 3,790.1

Provision for unearned premiums

542.5

722.5

683.8

280.2

Deferred income taxes

Borrowings

–

89.8

–

41.4

–

38.2

836.8

102.8

175.9

308.9

403.1

3,777.8

19.9

4.8

–

3.2

90.2

110.8

435.5

–

153.0

852.5

2.2

–

48.3

–

147.3

12.2

14.9

(70.7)

(100.3)

(1,080.8)

(57.3)

(263.8)

3,479.6

2,888.6

35.4

234.3

–

416.2

19,481.8

3,740.4

–

4,767.6

Total liabilities

2,630.2

6,370.5 4,625.7

1,633.1 4,915.7 1,457.7 1,850.1

23,483.0 3,970.4 2,029.8

2,081.1

31,564.3

Equity

Shareholders’ equity attributable to

shareholders of Fairfax

Non-controlling interests

1,519.7

3,964.3 1,668.4

957.6 1,663.8 1,166.9

806.1

11,746.8 1,739.1 2,622.9

(6,288.7)

–

60.1

–

60.1

–

87.5

1,852.4

9,820.1

2,000.0

Total equity

1,519.7

3,964.3 1,668.4

957.6 1,663.8 1,227.0

806.1

11,806.9 1,739.1 2,710.4

(4,436.3)

11,820.1

Total liabilities and total equity

4,149.9

10,334.8 6,294.1

2,590.7 6,579.5 2,684.7 2,656.2

35,289.9 5,709.5 4,740.2

(2,355.2)

43,384.4

Capital

Borrowings

Investments in Fairfax affiliates

Shareholders’ equity attributable to

shareholders of Fairfax

Non-controlling interests

–

110.6

89.8

544.0

41.4

197.5

38.2

40.8

175.9

74.7

–

44.8

90.2

99.3

435.5

–

852.5

3,479.6

4,767.6

1,111.7

523.3

–

(1,635.0)

–

1,409.1

3,420.3 1,470.9

916.8 1,125.7 1,122.1

706.8

10,171.7 1,215.8 1,233.9

(2,801.3)

–

463.4

60.1

–

523.5

– 1,476.5

–

9,820.1

2,000.0

Total capital

1,519.7

4,054.1 1,709.8

995.8 1,839.7 1,227.0

896.3

12,242.4 1,739.1 3,562.9

(956.7)

16,587.7

% of consolidated total capital

9.2%

24.4% 10.3%

6.0% 11.1%

7.4% 5.4%

73.8% 10.5% 21.5%

(5.8)%

100.0%

(1)

Includes investments in non-insurance affiliates.

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, Run-off and Other by reporting segment for the years ended December 31, 2017 and 2016.

139

FAIRFAX FINANCIAL HOLDINGS LIMITED

Northbridge(1)

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
Share of profit of associates

Operating income

Cdn$

2017
11.6

74.5%
16.1%
17.7%

2016
61.3

71.6%
16.6%
19.1%

2017
9.0

74.5%
16.1%
17.7%

2016
46.3

71.6%
16.6%
19.1%

108.3%
(9.2)%

107.3%
(12.4)%

108.3%
(9.2)%

107.3%
(12.4)%

99.1%

94.9%

99.1%

94.9%

1,539.4

1,395.9

1,187.0

1,055.1

1,381.0

1,247.0

1,064.9

1,322.4

1,202.3

1,019.7

11.6
70.2
4.1

85.9

61.3
69.0
6.9

137.2

9.0
54.1
3.2

66.3

942.6

908.8

46.3
52.2
5.2

103.7

(1) These results differ from those published by Northbridge primarily due to purchase accounting adjustments related to the

privatization of Northbridge in 2009.

The Canadian dollar strengthened relative to the U.S. dollar (measured using average foreign exchange rates) by 2.0%
in 2017 compared to 2016. To avoid the distortion caused by foreign currency translation, the table above presents
Northbridge’s underwriting and operating results in both U.S. dollars and Canadian dollars (Northbridge’s
functional currency). The discussion which follows makes reference to those Canadian dollar figures unless indicated
otherwise.

Northbridge reported an underwriting profit of Cdn$11.6 ($9.0) and a combined ratio of 99.1% in 2017 compared to
an underwriting profit of Cdn$61.3 ($46.3) and a combined ratio of 94.9% in 2016. The decrease in underwriting
profit in 2017 principally reflected an increase in non-catastrophe loss experience related to the current accident year
(particularly in personal lines and commercial property lines of business) and lower net favourable prior year reserve
development, partially offset by the impact of higher net premiums earned and lower current period catastrophe
losses.

Net favourable prior year reserve development in 2017 of Cdn$121.3 ($93.5) representing 9.2 combined ratio points
principally reflected better than expected emergence on automobile and casualty lines of business related to accident
years 2009 to 2014. Net favourable prior year reserve development in 2016 of Cdn$149.2 ($112.8) representing
12.4 combined ratio points principally reflected better than expected emergence on automobile and casualty lines of
business related to accident years 2008 through 2014.

Current period catastrophe losses in 2017 of Cdn$11.6 ($8.9) (0.9 of a combined ratio point, principally the impact
of storms in central Canada) decreased from Cdn$38.0 ($28.7) in 2016 (3.2 combined ratio points, principally the
impact of the Fort McMurray wildfires). The decrease in Northbridge’s underwriting expense ratio to 17.7% in 2017
from 19.1% in 2016 principally reflected the impact of higher net premiums earned, partially offset by higher
underwriting expenses.

The increase in gross premiums written of 10.3% from Cdn$1,395.9 in 2016 to Cdn$1,539.4 in 2017, primarily
reflected increased renewal and new business writings, and price increases across the group. Net premiums written
increased by 10.7% in 2017, consistent with the growth in gross premiums written. Net premiums earned increased
by 10.0% in 2017, reflecting the growth in net premiums written during 2016 and 2017.

Interest and dividends of Cdn$70.2 ($54.1) in 2017, while comparable to Cdn$69.0 ($52.2) in 2016, principally
reflected lower total return swap expense in 2017, partially offset by lower interest income earned (reflecting sales of
U.S. treasury and municipal bonds late in 2016 and in the first quarter of 2017).

140

Cash provided by operating activities (excluding operating cash flow activity related to securities recorded at FVTPL)
increased to Cdn$113.6 ($87.6) in 2017 from Cdn$67.4 ($51.0) in 2016, primarily due to higher net premiums
collected and lower income taxes paid, partially offset by higher net claims paid.

Northbridge’s average annual return on average equity over the past 32 years since inception in 1985 was 12.9% at
December 31, 2017 (December 31, 2016 – 13.1%) (expressed in Canadian dollars).

OdysseyRe(1)

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
Share of profit of associates

Operating income

2017
60.0

78.3%
21.1%
10.3%

2016
235.2

69.3%
20.8%
11.4%

109.7%
(12.3)%

101.5%
(12.8)%

97.4%

88.7%

2,783.1

2,380.7

2,495.9

2,100.2

2,333.4

2,074.1

60.0
124.9
7.2

192.1

235.2
153.7
17.3

406.2

(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.

OdysseyRe reported an underwriting profit of $60.0 and a combined ratio of 97.4% in 2017 compared to an
underwriting profit of $235.2 and a combined ratio of 88.7% in 2016. The decrease in underwriting profit in 2017
principally reflected increased current period catastrophe losses (as set out in the table below), partially offset by
modestly higher net favourable prior year reserve development and lower current year extraordinary losses.

2017

2016

Catastrophe
losses(1)
103.0
70.4
51.6
46.6
8.2
–
–
–
–
111.9

Combined
ratio impact
4.4
3.0
2.2
2.0
0.4
–
–
–
–
4.8

Catastrophe
losses(1)
–
–
–
–
–
30.0
14.1
10.0
9.0
128.8

Combined
ratio impact
–
–
–
–
–
1.4
0.7
0.5
0.4
6.2

391.7

16.8 points

191.9

9.2 points

Hurricane Maria
Hurricane Irma
Hurricane Harvey
California wildfires
Mexico earthquakes
Hurricane Matthew
Fort McMurray wildfires
France floods
Belgium floods
Other

(1) Net of reinstatement premiums.

141

FAIRFAX FINANCIAL HOLDINGS LIMITED

Net favourable prior year reserve development increased to $288.1 (12.3 combined ratio points) in 2017 from $266.5
(12.8 combined ratio points) in 2016, principally related to net favourable emergence on casualty and catastrophe
loss reserves respectively in each of those periods. Current year extraordinary losses decreased to $28.4 (1.2 combined
ratio points) in 2017 from $61.9 (3.0 combined ratio points) in 2016. The decrease in OdysseyRe’s underwriting
expense ratio to 10.3% in 2017 from 11.4% in 2016 principally reflected the impact of increased net premiums
earned. The increase in OdysseyRe’s commission expense ratio to 21.1% in 2017 from 20.8% in 2016 principally
reflected changes in the mix of business and commission expense adjustments.

The increase in gross premiums written and net premiums written of 16.9% and 18.8% in 2017 principally reflected
increases in the U.S. Insurance division (automobile, crop and liability package lines of business), North America
division (property and casualty reinsurance lines of business), EuroAsia division (crop, commercial automobile and
credit and bond reinsurance lines of business) and the London Market division (affinity and liability insurance lines
of business). Net premiums earned in 2017 increased 12.5%, consistent with the growth in net premiums written.

The decrease in interest and dividends to $124.9 in 2017 from $153.7 in 2016 principally reflected lower interest
income earned (reflecting sales of U.S. treasury and municipal bonds late in 2016 and in the first quarter of 2017),
partially offset by lower total return swap expense.

Cash provided by operating activities (excluding operating cash flow activity related to securities recorded at FVTPL)
increased to $389.9 in 2017 from $268.9 in 2016, primarily due to lower income taxes paid and increased net
premiums collected, partially offset by increased net claims paid related to current period catastrophes losses and
lower investment income received.

Crum & Forster

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
Share of loss of associates

Operating income

2017
3.2

65.3%
15.8%
19.3%

100.4%
(0.6)%

2016
32.4

64.2%
16.0%
18.5%

98.7%
(0.5)%

99.8%

98.2%

2,174.5

2,055.0

1,863.4

1,801.1

1,852.8

1,769.5

3.2
33.8
(1.1)

35.9

32.4
65.8
(22.6)

75.6

On October 4, 2016 Crum & Forster acquired a 100% interest in Trinity Risk LLC (‘‘Trinity’’) for consideration of
$12.0. Trinity focuses on occupational accident insurance and produces approximately $26 of gross premiums
written annually.

142

Crum & Forster reported an underwriting profit of $3.2 and a combined ratio of 99.8% in 2017 compared to an
underwriting profit of $32.4 and a combined ratio of 98.2% in 2016. The decrease in underwriting profit in 2017
principally reflected the impact of higher current period catastrophe losses (as set out in the table below) and
increased underwriting expenses, partially offset by increased net favourable prior year reserve development.

2017

2016

Catastrophe
losses(1)
16.5
5.0
2.1
–
–
18.4

Combined
ratio impact
0.9
0.3
0.1
–
–
1.0

Catastrophe
losses(1)
–
–
–
10.5
5.0
10.5

Combined
ratio impact
–
–
–
0.6
0.3
0.6

42.0

2.3 points

26.0

1.5 points

Hurricane Irma
Hurricane Harvey
California wildfires
Texas hailstorms
Hurricane Matthew
Other

(1) Net of reinstatement premiums.

Net favourable prior year reserve development in 2017 of $10.2 (0.6 of a combined ratio point, principally related to
excess and surplus lines loss reserves, partially offset by net adverse development on commercial transportation loss
reserves) increased from $8.3 in 2016 (0.5 of a combined ratio point, principally related to net favourable emergence
on workers’ compensation and professional risk loss reserves, partially offset by an increase in construction defect
loss reserves).

The decrease in Crum & Forster’s commission expense ratio to 15.8% in 2017 from 16.0% in 2016, principally
reflected the impact of higher ceding commission income in 2017. The increase in Crum & Forster’s underwriting
expense ratio to 19.3% in 2017 from 18.5% in 2016 principally reflected increased compensation costs related to new
underwriting initiatives.

The increase in gross premiums written of 5.8% in 2017 principally reflected growth in the accident and health and
commercial transportation lines of business, partially offset by decreases in excess and surplus and marine lines of
business. Net premiums written increased by 3.5% in 2017, consistent with the growth in gross premiums written.
Net premiums earned increased by 4.7% in 2017, reflecting the growth in net premiums written during 2016
and 2017.

The decrease in interest and dividends to $33.8 in 2017 from $65.8 in 2016 principally reflected lower interest
income earned (reflecting sales of U.S. treasury and municipal bonds late in 2016 and in the first quarter of 2017) and
increased investment management and administration fees, partially offset by lower total return swap expense.
Share of loss of associates in 2016 included a non-cash impairment charge of $25.3 related to Resolute.

Cash provided by operating activities (excluding operating cash flow activity related to securities recorded at FVTPL)
of $111.6 in 2017 decreased from $238.5 in 2016 primarily due to higher net paid losses and lower interest and
dividend income received, partially offset by higher net premiums collected and lower income taxes paid.

Crum & Forster’s cumulative net earnings since acquisition on August 13, 1998 was $1,816.4 and its average annual
return on average equity since acquisition was 8.7% (December 31, 2016 – 9.4%).

143

FAIRFAX FINANCIAL HOLDINGS LIMITED

Zenith National(1)

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
Share of profit (loss) of associates

Operating income

2017
117.2

2016
164.1

58.9%
10.3%
25.8%

56.9%
10.1%
25.2%

95.0%
92.2%
(9.4)% (12.5)%

85.6%

79.7%

849.0

837.4

811.6

117.2
23.4
(9.8)

130.8

831.7

819.4

807.3

164.1
29.6
1.2

194.9

(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.

Zenith National reported an underwriting profit of $117.2 and a combined ratio of 85.6% in 2017 compared to an
underwriting profit of $164.1 and a combined ratio of 79.7% in 2016. The decrease in underwriting profit in 2017
principally reflected lower net favourable prior year reserve development, an increase in non-catastrophe property
loss experience related to the current accident year and higher current period catastrophe losses.

Net favourable prior year reserve development in 2017 of $76.4 (9.4 combined ratio points) decreased from $101.0 in
2016 (12.5 combined ratio points), principally reflecting net favourable emergence related to accident years 2013
through 2016 in 2017 and net favourable emergence related to accident years 2012 through 2015 in 2016.

In 2017 Zenith National’s agriculture property and casualty line of business incurred current period catastrophe
losses of $8.2 (1.0 combined ratio point) related to the California wildfires and other large losses of $6.7 (0.8 of a
combined ratio point). Excluding these incurred losses, the estimated accident year loss and LAE ratio in 2017 was
comparable to 2016 and reflected favourable loss development trends for accident year 2016, offset by modest earned
price decreases and estimated loss trends for accident year 2017. The increase in Zenith National’s underwriting
expense ratio to 25.8% in 2017 from 25.2% in 2016 principally reflected flat net premiums earned and higher
underwriting expenses, primarily attributable to ongoing investment in personnel.

The increase in gross premiums written and net premiums written of 2.1% and 2.2% in 2017 principally reflected
increased exposure, partially offset by price decreases. The increase in net premiums earned of 0.5% in 2017
principally reflected the growth in net premiums written during 2016 and 2017.

The decrease in interest and dividends to $23.4 in 2017 from $29.6 in 2016 principally reflected lower interest
income earned (reflecting sales of U.S. treasury and municipal bonds late in 2016 and in the first quarter of 2017),
partially offset by lower total return swap expense. Share of loss of associates in 2017 included a non-cash
impairment charge of $5.5 related to Thai Re.

Cash provided by operating activities (excluding operating cash flow activity related to securities recorded at FVTPL)
of $95.5 in 2017 decreased from $141.2 in 2016, primarily due to higher income taxes paid, higher net paid losses
and expenses and lower investment income received, partially offset by higher net premiums collected.

144

Brit(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
Share of profit of associates

Operating income (loss)

2017
(201.9)

72.7%
27.6%
13.4%

2016
29.1

65.0%
20.9%
15.8%

113.7%
(0.6)%

101.7%
(3.8)%

113.1%

97.9%

2,057.0

1,912.2

1,530.9

1,480.2

1,536.9

1,399.3

(201.9)
32.6
9.2

(160.1)

29.1
55.4
3.4

87.9

(1) These results differ from those published by Brit primarily due to differences in presentation of net gains on investments

and acquisition accounting adjustments recorded by Fairfax related to the acquisition of Brit on June 5, 2015.

On August 3, 2016 Brit purchased shares for cancellation from its minority shareholder Ontario Municipal
Employees Retirement System (‘‘OMERS’’) for cash consideration of $57.8, which increased the company’s
ownership interest in Brit from 70.1% to 72.5%. On March 3, 2017 Brit paid a dividend of $45.8 to OMERS.

Brit reported an underwriting loss of $201.9 and a combined ratio of 113.1% in 2017 compared to an underwriting
profit of $29.1 and a combined ratio of 97.9% in 2016. The decrease in underwriting profit in 2017 principally
reflected an increase in current period catastrophe losses (as set out in the table below), lower net favourable prior
year reserve development and an increase in commission expense (described below).

2017

2016

Catastrophe
losses(1)
110.5
54.3
45.6
34.2
6.8
–
–
7.5

Combined
ratio impact
7.2
3.5
3.0
2.2
0.4
–
–
0.5

Catastrophe
losses(1)
–
–
–
–
–
26.1
17.8
32.5

Combined
ratio impact
–
–
–
–
–
1.9
1.3
2.3

258.9

16.8 points

76.4

5.5 points

Hurricane Irma
Hurricane Harvey
Hurricane Maria
California wildfires
Mexico earthquakes
Hurricane Matthew
Fort McMurray wildfire
Other

(1) Net of reinstatement premiums.

Net favourable prior year reserve development in 2017 decreased to $9.5 (0.6 of a combined ratio point, principally
related to favourable emergence on casualty and property reinsurance and energy lines of business, partially offset by
net reserve strengthening of $13.1 resulting from a change in the Ogden discount rate that was effective from
March 2017) from $53.5 in 2016 (3.8 combined ratio points, principally related to favourable emergence on casualty
and property reinsurance lines of business). The Ogden discount rate is set and revised periodically by the
U.K. government and is used by the U.K. courts in the assessment of lump sum awards for personal injury claimants.

145

FAIRFAX FINANCIAL HOLDINGS LIMITED

The increase in Brit’s commission expense ratio to 27.6% in 2017 from 20.9% in 2016 principally reflected the
impacts of non-recurring acquisition accounting adjustments which reduced net premiums earned and commission
expense in 2016, partially offset by changes in the mix of business written, reinsurance purchased and higher net
premiums earned in 2017. The decrease in Brit’s underwriting expense ratio to 13.4% in 2017 from 15.8% in 2016
principally reflected the favourable effect of foreign currency translation and increased fee income earned from the
management of third party underwriting capital, partially offset by higher compensation costs.

The increase in gross premiums written and net premiums written of 7.6% and 3.4% in 2017 principally reflected
better than expected development on 2016 and prior underwriting years, inwards reinstatement premiums
following the current period catastrophe losses, increased contribution from initiatives launched in recent years and
measured growth in core lines of business, partially offset by modest price decreases and reductions in other lines of
business through active portfolio management and the unfavourable impact of foreign currency translation. The
increase in net premiums written was tempered by the impact of additional reinsurance purchased. The increase in
net premiums earned of 9.8% in 2017 principally reflected the same factors that affected net premiums written and
the impact of the acquisition accounting adjustments described in the preceding paragraph.

The decrease in interest and dividends to $32.6 in 2017 from $55.4 in 2016 principally reflected lower interest
income earned (reflecting sales of U.S. treasury and municipal bonds late in 2016 and in the first quarter of 2017).

Cash provided by operating activities (excluding operating cash flow activity related to securities recorded at FVTPL)
of $17.2 in 2017 decreased from $148.3 in 2016, primarily due to higher net paid losses and lower interest and
dividend income received, partially offset by higher net premiums collected.

Allied World(1)

Underwriting loss

Loss & LAE – accident year
Commissions
Underwriting expenses

Combined ratio – accident year

Net adverse development

Combined ratio – calendar year

Gross premiums written

Net premiums written

Net premiums earned

Underwriting loss
Interest and dividends
Share of loss of associates

Operating loss

For the period
July 6, 2017 to
December 31,
2017
(586.6)

125.7%
3.2%
21.1%

150.0%
7.0%

157.0%

1,447.6

991.9

1,028.7

(586.6)
65.9
(17.6)

(538.3)

(1) These results differ from those published by Allied World primarily due to differences between IFRS and U.S. GAAP and
acquisition accounting adjustments (principally goodwill and intangible assets) recorded by Fairfax related to the
acquisition of Allied World on July 6, 2017.

146

(‘‘AIMCo’’), an investment manager for pension, endowment and government funds in the province of Alberta, and
certain other third parties (together, ‘‘the co-investors’’) invested $1,580.0 for an indirect equity interest in Allied
World AG. The remaining 5.4% of the outstanding shares of Allied World AG were acquired on August 17, 2017 for
purchase consideration of $229.0, consisting of $109.7 in cash and $119.3 by the issuance of 276,397 subordinate
voting shares, in a merger transaction under Swiss law pursuant to which Allied World Assurance Company
Holdings, GmbH (‘‘Allied World’’) became the surviving entity. This merger resulted in the co-investors holding an
indirect ownership interest in Allied World of 32.6%. The co-investors will have a dividend in priority to the
company, and the company will have the ability to purchase the shares owned by the co-investors over the next
seven years. Allied World is a global property, casualty and specialty insurer and reinsurer.

Allied World reported an underwriting loss of $586.6 and a combined ratio of 157.0% in the period July 6, 2017 to
December 31, 2017, which included current period catastrophe losses (as set out in the table below) and net adverse
prior year reserve development of $71.9 (7.0 combined ratio points). Net adverse development principally related to
the insurance segment (due to higher than expected claims development within the professional liability line of
business for the 2012 and 2013 accident years and the primary casualty line of business), partially offset by net
favourable development in the reinsurance segment (due to net favourable prior year reserve development in the
specialty and casualty lines of business, partially offset by net adverse prior year reserve development in the property
line of business related to U.S. storms in 2015 and 2016). Allied World’s gross premiums written of $1,447.6 in the
period July 6, 2017 to December 31, 2017 included assumed reinstatement premiums of $19.8 related to current
period catastrophe losses.

Hurricane Irma
Hurricane Maria
Hurricane Harvey
California wildfires
Mexico earthquakes
Other

(1) Net of reinstatement premiums.

For the period July 6, 2017
to
December 31, 2017

Catastrophe
losses(1)
153.9
124.9
122.9
87.3
9.1
43.5

Combined
ratio impact
15.1
12.0
11.8
8.4
0.9
4.5

541.6

52.7 points

Share of loss of associates in the period July 6, 2017 to December 31, 2017 included a non-cash impairment charge of
$19.2 related to an associate.

147

FAIRFAX FINANCIAL HOLDINGS LIMITED

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
Share of profit of associates

Operating income

2017
38.2

2016
41.1

80.3% 83.4%
(2.1)%
22.7% 22.3%

1.4%

104.4% 103.6%
(16.0)% (17.2)%

88.4% 86.4%

670.4

648.7

327.5

303.1

327.6

302.5

38.2
29.1
29.4

96.7

41.1
26.7
48.1

115.9

Fairfax Asia comprises the company’s Asian holdings and operations: 97.7%-owned Singapore-based First Capital
Insurance Limited (‘‘First Capital’’, sold on December 28, 2017), Hong Kong-based Falcon Insurance (Hong Kong)
Company Ltd. (‘‘Falcon’’), 85.0%-owned Malaysia-based The Pacific Insurance Berhad (‘‘Pacific Insurance’’), 80.0%-
owned Indonesia-based PT Asuransi Multi Artha Guna Tbk. (‘‘AMAG’’), 78.0%-owned Sri Lanka-based Fairfirst
Insurance Limited (‘‘Fairfirst Insurance’’), 35.0%-owned Vietnam-based Bank for Investment and Development of
Vietnam Insurance Joint Stock Corporation (‘‘BIC Insurance’’), 41.2%-owned Bangkok-based Falcon Insurance PLC
(‘‘Falcon Thailand’’) and Mumbai-based ICICI Lombard General Insurance Company Limited (‘‘ICICI Lombard’’,
partially sold during 2017 and reclassified to a common stock investment).

On August 30, 2017 Pacific Insurance acquired the assets and liabilities of the general insurance business of
Prudential Assurance Malaysia Berhad (‘‘Prudential Assurance Malaysia’’) for $2.3. Prudential Assurance Malaysia is a
general insurer in Malaysia.

On July 6, 2017 the company sold a 12.2% equity interest in ICICI Lombard to private equity investors for net
proceeds of $376.3 and a net realized investment gain of $223.3. On September 19, 2017 the company sold an
additional 12.1% equity interest through participation in ICICI Lombard’s initial public offering for net proceeds of
$532.2 and a net realized investment gain of $372.3. The company’s remaining 9.9% equity interest in ICICI
Lombard (fair value of $549.0 at December 31, 2017) was reclassified from the equity method of accounting to
common stock at FVTPL (included in holding company cash and investments in the Fairfax Asia reporting segment),
resulting in a $334.5 re-measurement gain. In 2017, Fairfax Asia paid dividends to Fairfax of $2,429.7 primarily
comprised of the proceeds from the partial sale of ICICI Lombard and the sale of the company’s 97.7% interest in
First Capital. On March 31, 2016 the company increased its ownership interest in ICICI Lombard to 34.6% by
acquiring an additional 9.0% of the issued and outstanding shares of ICICI Lombard from ICICI Bank for $234.1
(15.5 billion Indian rupees).

On October 10, 2016 the company acquired an 80.0% interest in AMAG from PT Bank Pan Indonesia Tbk. (‘‘Panin
Bank’’) for $178.9 (2.322 trillion Indonesian rupiah). AMAG will distribute its insurance products through a
long-term bancassurance partnership with Panin Bank. AMAG is a general insurer in Indonesia. On December 31,
2016 Fairfax Indonesia was merged into AMAG.

148

On October 3, 2016 Union Assurance acquired a 100% equity interest in Asian Alliance General Insurance Limited
(subsequently renamed Fairfirst Insurance Limited) for $10.2 (1,488.9 million Sri Lankan rupees). Fairfirst Insurance
is a general insurer in Sri Lanka. On February 28, 2017 Union Assurance was merged into Fairfirst Insurance.

Fairfax Asia reported an underwriting profit of $38.2 and a combined ratio of 88.4% in 2017, compared to an
underwriting profit of $41.1 and a combined ratio of 86.4% in 2016. The entities comprising Fairfax Asia produced
combined ratios as set out in the following table:

First Capital
Falcon
Pacific Insurance
AMAG
Fairfirst Insurance

2016

2017
69.5% 64.9%
99.1% 97.6%
99.6% 95.6%(1)
95.9% 128.0%
99.0% 105.2%

(1) Excludes the impact of an intercompany loss portfolio transfer in 2016 of commercial automobile loss reserves ($15.8) and

the related premiums ceded to reinsurers ($15.8) (the ‘‘2016 LPT’’). Underwriting profit remained unchanged.

Net favourable prior year reserve development in 2017 of $52.3 (16.0 combined ratios points, principally related to
commercial automobile, health, marine and property loss reserves) increased nominally from $52.1 in 2016
(17.2 combined ratio points, principally related to commercial automobile, engineering and marine hull
loss reserves).

Fairfax Asia’s commission expense ratio of 1.4% in 2017 compared to its commission income ratio of 2.1% in 2016
primarily reflected decreased profit commission on reinsurance ceded by First Capital related to commercial property
and marine lines of business and the consolidation of the higher commission expense ratios of recent acquisitions
AMAG and Fairfirst Insurance.

The consolidation of AMAG, Fairfirst Insurance and the 2016 LPT affected gross premiums written, net premiums
written and net premiums earned as set out in the following table:

2017

2016

Fairfax Asia – as reported
Fairfirst Insurance
AMAG
Pacific Insurance – 2016 LPT

Net

Gross

Net
premiums premiums premiums premiums premiums premiums
earned
302.5
(3.8)
(10.7)
15.8

written
648.7
(4.1)
(11.8)
–

written
303.1
(3.9)
(9.1)
15.8

written
327.5
(11.4)
(43.9)
–

written
670.4
(11.9)
(62.9)
–

earned
327.6
(12.4)
(45.1)
–

Net

Fairfax Asia – as adjusted

595.6

272.2

270.1

632.8

305.9

303.8

Percentage change (year-over-year)

(5.9)%

(11.0)%

(11.1)%

The decrease in gross premiums written of 5.9% in 2017 principally reflected lower writings in the commercial
automobile, property and marine lines of business. The decrease in net premiums written of 11.0% in 2017
principally reflected the impact of lower premium retention (primarily at First Capital) and the same factors which
affected gross premiums written. Net premiums earned decreased by 11.1% in 2017 reflecting the decreases in net
premiums written during 2016 and 2017.

The decrease in share of profit of associates to $29.4 in 2017 from $48.1 in 2016 primarily reflected the impact of
reclassifying the remaining 9.9% equity interest in ICICI Lombard from the equity method of accounting to
common stock at FVTPL during the third quarter of 2017.

149

FAIRFAX FINANCIAL HOLDINGS LIMITED

Insurance and Reinsurance – Other

2017

Group Re

Insurance Advent America

Bryte

Fairfax

Fairfax
Central
and
Latin Eastern
Europe

Underwriting profit (loss)

7.1

(3.0)

(48.7)

(22.2)

(13.8)

Loss & LAE – accident year
Commissions
Underwriting expenses

Combined ratio – accident year

Net adverse (favourable) development

96.1%
29.0%
4.3%

129.4%
(35.2)%

68.6% 81.7%
17.9% 24.3%
17.2% 21.1%

54.8% 51.5%
1.1% 19.1%
57.5% 31.2%

103.7% 127.1% 113.4% 101.8%
9.7%

(2.5)% (0.8)%

5.1%

Combined ratio – calendar year

94.2%

101.2% 126.3% 118.5% 111.5%

Inter-
company

–

–
–
–

–
–

–

Total

(80.6)

71.3%
18.8%
24.3%

114.4%
(4.2)%

110.2%

348.9

271.2

314.1

168.6

(6.4) 1,244.3

Gross premiums written

Net premiums written

Net premiums earned

Underwriting profit (loss)
Interest and dividends
Share of profit (loss) of associates

147.9

129.2

124.4

7.1
1.9
3.4

240.8

184.4

160.6

148.3

241.1

185.1

120.1

119.9

(3.0)
16.8
–

(48.7)
5.9
(1.2)

(22.2)
12.7
–

(13.8)
1.2
0.8

Operating income (loss)

12.4

13.8

(44.0)

(9.5)

(11.8)

2016

Group Re

Insurance Advent America

Bryte

Fairfax

Fairfax
Central
and
Latin Eastern
Europe

–

–
–
–

–

863.3

790.6

(80.6)
38.5
3.0

(39.1)

Inter-

company Total

Underwriting profit (loss)

Loss & LAE – accident year
Commissions
Underwriting expenses

Combined ratio – accident year

Net adverse (favourable) development

Combined ratio – calendar year

Gross premiums written

Net premiums written

Net premiums earned

Underwriting profit (loss)
Interest and dividends
Share of profit (loss) of associates

Operating income (loss)

35.4

66.0%
30.9%
5.2%

102.1%
(28.5)%

73.6%

156.9

140.6

133.8

35.4
8.7
0.8

44.9

–

–
–
–

–
–

–

–
–
–

–

0.5

(8.7)

70.7%
22.3%
19.3%

61.4% 59.1%
12.6% 18.5%
32.6% 28.1%

112.3% 106.6% 105.7%
6.3%
(12.6)%

(7.7)%

–

–
–
–

27.7

66.4%
23.3%
17.8%

– 107.5%
(13.8)%
–

99.7%

98.9% 112.0%

–

93.7%

257.8

144.8

177.0

185.1

0.5
10.6
(0.1)

11.0

58.3

45.6

0.5
5.5
–

6.0

90.4

82.5

72.7

(8.7)
1.8
–

(6.9)

(6.6) 643.3

– 458.4

– 437.2

–
–
–

–

27.7
26.6
0.7

55.0

150

Fairfax Latin America is comprised of Fairfax Brasil (established by Fairfax in 2010) and Fairfax Latam, which consists
of the insurance operations acquired from AIG in Chile and Colombia (effective from July 31, 2017), Argentina
(effective from September 30, 2017) and Uruguay (effective from January 31, 2018). Fairfax Latam continues to work
through the legal, regulatory and operational requirements to complete the acquisition of the insurance operations
of AIG in Venezuela.

Fairfax Central and Eastern Europe (‘‘Fairfax CEE’’) is comprised of Colonnade Insurance and Polish Re (acquired in
2009). Colonnade Insurance includes the following: the business and renewal rights of the insurance operations
acquired from QBE in Hungary, Czech Republic and Slovakia (effective from February 1, 2016, April 1, 2016 and
May 2, 2016 respectively); the business and renewal rights of the insurance operations acquired from AIG in
Hungary, Czech Republic and Slovakia (effective from April 30, 2017), Bulgaria (effective from May 31, 2017), Poland
(effective from June 30, 2017) and Romania (effective from October 31, 2017); and Colonnade Ukraine (acquired in
2015). On July 31, 2017 (‘‘the effective date’’) a Part VII transfer pursuant to the U.K. Financial Services and Markets
Act 2000 was completed to legally transfer the run-off of the business written by QBE’s insurance operations in
Hungary, Czech Republic and Slovakia prior to the effective date (‘‘the transferring business’’) from QBE to
Colonnade Insurance. The net liabilities relating to the transferring business have been fully reinsured by Polish Re
since December 31, 2014 through various 100% quota share transactions with QBE. All reinsurance protection that
benefited the transferring business was transferred from QBE to Colonnade Insurance at the effective date.

The Insurance and Reinsurance – Other reporting segment produced an underwriting loss of $80.6 and a combined
ratio of 110.2% in 2017 compared to an underwriting profit of $27.7 and a combined ratio of 93.7% in 2016. The
decrease in underwriting profit in 2017 principally reflected increased current period catastrophe losses (as set out in
the table below), lower net favourable prior year reserve development and higher non-catastrophe loss experience
related to the current accident year.

Hurricane Irma
Hurricane Harvey
Hurricane Maria
California wildfires
Fort McMurray wildfire
Hurricane Matthew
Other

(1) Net of reinstatement premiums.

2017

2016

Catastrophe
losses(1)

Combined
ratio impact

Catastrophe
losses(1)

Combined
ratio impact

20.7
18.6
8.2
7.0
–
–
24.6

79.1

2.6
2.4
1.0
0.9
–
–
3.1

10.0 points

–
–
–
–
7.3
5.7
16.7

29.7

–
–
–
–
1.7
1.3
3.8

6.8 points

The underwriting results in 2017 included net favourable prior year reserve development of $33.6 (4.2 combined
ratio points), primarily reflecting net favourable development at Group Re (property and liability loss reserves),
partially offset by net adverse development at Fairfax CEE (liability loss reserves at Polish Re) and Fairfax Latin
America (general liability loss reserves in Argentina). The underwriting results in 2016 included net favourable prior
year reserve development of $60.4 (13.8 combined ratio points), primarily reflecting net favourable development at
Group Re (property and liability loss reserves including net favourable emergence on the run-off of the intercompany
quota share reinsurance contract with Northbridge), Advent (property and casualty reinsurance loss reserves) and
Fairfax Latin America (Fairfax Brasil).

The expense ratio increased to 24.3% in 2017 from 17.8% in 2016, principally reflecting higher operating expenses at
Fairfax Brasil, the impact of the start-up of Colonnade Insurance and a higher expense ratio at Fairfax Latam due to
lower net premium earned from changes to its reinsurance structure subsequent to its acquisition by Fairfax, partially
offset by lower operating expenses at Polish Re. The commission expense ratio decreased to 18.8% in 2017 from
23.3% in 2016, primarily reflecting the impact of the consolidation of Bryte Insurance and Fairfax Latam which have
commission expense ratios that are generally lower than the other companies within the Insurance and
Reinsurance – Other segment. Fairfax Latam’s commission income ratio reflected the impact of the lag from
changing from proportional reinsurance (with high ceding commissions) to a combination of proportional
reinsurance and non-proportional reinsurance (with lower ceding commissions).

151

FAIRFAX FINANCIAL HOLDINGS LIMITED

The consolidation of Bryte Insurance, Fairfax Latam and the business and renewal rights of the insurance operations
acquired from AIG in Central and Eastern Europe affected gross premiums written, net premiums written and net
premiums earned as set out in the following table:

2017

2016

Gross

Net
premiums premiums premiums premiums premiums premiums
earned

written

earned

Gross

Net

Insurance and Reinsurance – Other – as reported
Bryte Insurance
Insurance operations acquired from AIG in Latin America
Business and renewal rights of the insurance operations acquired from

1,244.3
(348.9)
(166.5)

863.3
(240.8)
(97.7)

790.6
(241.1)
(68.5)

643.3
–
–

458.4
–
–

437.2
–
–

AIG in CEE

(57.0)

(44.1)

(23.7)

–

Insurance and Reinsurance – Other – as adjusted

671.9

480.7

457.3

643.3

458.4

437.2

Percentage change (year-over-year)

4.4%

4.9%

4.6%

The increase in gross premiums written, net premiums written and net premiums earned by 4.4%, 4.9% and 4.6% in
2017 principally reflected increases at Fairfax CEE (primarily related to inward reinstatement premiums related to a
large loss in the commercial automobile line of business at Polish Re and organic growth at Colonnade Insurance)
and Advent (primarily reflecting organic growth in property binders and consumer products lines of business),
partially offset by decreases at Group Re (primarily reflecting the non-renewal in 2017 of certain reinsurance
contracts). Net premiums written in 2017 was also affected by increased premium retention at Polish Re and Fairfax
Brasil, partially offset by outwards reinstatement premiums on current period catastrophe losses at Advent and
purchases of additional reinsurance at Advent and Group Re. The increase in net premiums earned reflected the
growth in net premiums written during 2016 and 2017.

The increase in interest and dividends to $38.5 in 2017 from $26.6 in 2016 principally reflected the consolidation of
the interest and dividends of Bryte Insurance and Fairfax Latam, and lower total return swap expense, partially offset
by lower interest income earned (reflecting sales of U.S. treasury and municipal bonds late in 2016 and in the first
quarter of 2017).

Run-off

The Run-off business segment was formed with the acquisition of the company’s interest in The Resolution Group
(‘‘TRG’’) on August 11, 1999, and currently consists of two groups: the U.S. Run-off group, principally consisting of
TIG Insurance Company, and the European Run-off group, principally consisting of RiverStone (UK), Syndicate 3500
at Lloyd’s and RiverStone Insurance. The Run-off reporting segment also includes Resolution Group Reinsurance
(Barbados) Limited and TIG Insurance (Barbados) Limited, formed to facilitate certain reinsurance transactions. Both
groups are managed by the dedicated RiverStone Run-off management operation which has 406 employees in the
U.S. and the U.K.

On December 13, 2017 U.S. Run-off repaid $124.9 aggregate principal amount of purchase consideration payable
upon maturity.

On December 31, 2016 U.S. Run-off agreed to reinsure a portfolio of casualty exposures associated with habitational
risks (commercial residential properties such as apartment buildings and condominiums) relating to accident years
2011 through 2016 from a U.S.-based insurer (the ‘‘habitational casualty reinsurance transaction’’). The 2016
U.S. Run-off results reflected premiums of $110.7 as consideration for the assumption of $90.2 of net loss reserves
and net provision for unearned premiums of $19.9.

On April 1, 2016 U.S. Run-off agreed to reinsure a portfolio of business comprised of construction defect exposures in
various states in the western U.S. relating to accident years 2008 to 2013 (the ‘‘second quarter 2016 construction
defect reinsurance transaction’’). U.S. Run-off received a cash premium of $71.5 as consideration for the assumption
of $70.5 of net loss reserves and paid a commission of $1.0 to a third party for facilitating the transaction.

152

Set out below is a summary of the operating results of Run-off for the years ended December 31, 2017 and 2016.

Gross premiums written

Net premiums written

Net premiums earned

Losses on claims

Operating expenses

Interest and dividends

Share of loss of associates

Operating loss

2017
8.4

2016
183.9

8.3

183.4

20.1

163.5

(125.4)

(236.2)

(102.1)

(112.4)

28.9

51.2

(6.1)

(15.5)

(184.6)

(149.4)

Run-off reported an operating loss of $184.6 in 2017 compared to an operating loss of $149.4 in 2016. Net premiums
earned of $20.1 in 2017 principally reflected the run-off of the unearned premium related to the habitational
casualty reinsurance transaction (net premiums earned of $15.1 and losses on claims of $12.9). Losses on claims of
$125.4 in 2017 principally reflected net adverse prior year reserve development of $145.9 at U.S. Run-off, partially
offset by net favourable prior year reserve development of $33.4 at European Run-off. Net adverse prior year reserve
development at U.S. Run-off was principally comprised of $182.5 related to APH exposures assumed primarily from
Crum & Forster and in the legacy portfolio of Clearwater Insurance, partially offset by $39.0 of net favourable prior
year reserve development at TIG Insurance related to workers’ compensation loss reserves. Net favourable prior year
reserve development of $33.4 at European Run-off principally related to the World Trade Center aviation market
settlement.

Net premiums earned of $163.5 and losses on claims of $236.2 in 2016 principally reflected the impact of the
habitational casualty reinsurance transaction and the second quarter 2016 construction defect reinsurance
transaction. Losses on claims in 2016 also reflected net adverse prior year reserve development of $96.6 at
U.S. Run-off, partially offset by net favourable prior year reserve development of $17.1 at European Run-off. Net
adverse prior year reserve development of $96.6 at U.S. Run-off was principally comprised of $149.1 related to APH
exposures assumed from Crum & Forster and in the legacy portfolio of Clearwater Insurance (including $50.0 related
to a single assumed excess of loss contract with exposures to APH that was triggered and a loss of $18.8 incurred in
connection with the commutation of certain assumed long tail APH liabilities) and $30.2 of non-APH loss reserve
strengthening, partially offset by $89.5 of net favourable prior year reserve development at TIG Insurance principally
related to workers’ compensation loss reserves. Net favourable prior year reserve development at European Run-off
was across various lines of business.

Operating expenses decreased to $102.1 in 2017 from $112.4 in 2016 principally reflecting a decrease in the
provision for reinsurance recoverables.

Interest and dividends decreased to $28.9 in 2017 from $51.2 in 2016 primarily as a result of lower interest income
earned (reflecting sales of U.S. treasury and municipal bonds late in 2016 and in the first quarter of 2017), partially
offset by lower total return swap expense. Share of loss of associates in 2016 included a non-cash impairment charge
of $23.6 related to Resolute.

Run-off’s cash flows may be volatile as to timing and amount, with potential variability arising principally from the
requirement to pay gross claims initially while third party reinsurance is only subsequently collected in accordance
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.

153

FAIRFAX FINANCIAL HOLDINGS LIMITED

Other

Revenue
Expenses
Interest and dividends
Share of profit of associates

Operating income (loss)
Net gains (losses) on investments

Pre-tax income (loss) before interest expense

Revenue
Expenses
Interest and dividends
Share of profit of associates

Operating income
Net gains (losses) on investments

Pre-tax income before interest expense

2017

Restaurants
and retail(1)
1,441.7
(1,322.5)
7.7
–

Fairfax
India(2)
336.0
(315.9)
(116.8)
45.5

Thomas Cook
India(3)
1,009.6
(953.1)
–
0.3

Other(4)
470.3
(404.5)
4.2
9.6

Total
3,257.6
(2,996.0)
(104.9)
55.4

126.9
(0.4)

126.5

(51.2)
(4.6)

(55.8)

56.8
0.6

57.4

79.6
11.6

91.2

212.1
7.2

219.3

2016

Restaurants
and retail(1)

Fairfax
India(2)

Thomas Cook
India(3)

Other(4)

Total

978.3
(897.0)
7.2
–

154.6
(151.5)
9.5
13.6

88.5
8.8

97.3

26.2
20.4

46.6

786.4
(769.5)
–
–

16.9
1.5

18.4

142.3
(140.4)
–
–

2,061.6
(1,958.4)
16.7
13.6

1.9
(0.6)

1.3

133.5
30.1

163.6

(1) Comprised primarily of Cara and its subsidiaries Pickle Barrel (acquired on December 1, 2017), St. Hubert (acquired on
September 2, 2016) and Original Joe’s (acquired on November 28, 2016), The Keg, Praktiker, William Ashley, Sporting
Life and Golf Town (acquired on October 31, 2016).

(2) Comprised of Fairfax India and its subsidiaries NCML, Fairchem (merged on March 14, 2017 with Privi Organics) and
Saurashtra Freight (acquired on February 14, 2017). These results differ from those published by Fairfax India primarily
due to Fairfax India’s application of investment entity accounting under IFRS. Interest and dividends at Fairfax India in
2017 is net of a performance fee accrual of $114.4 (2016 – nil).

(3) Comprised of Thomas Cook India and its subsidiaries Quess and Sterling Resorts. These results differ from those published
by Thomas Cook India primarily due to differences between IFRS and Indian GAAP, and acquisition accounting
adjustments.

(4) Comprised primarily of Grivalia Properties (consolidated on July 4, 2017), Fairfax Africa (since its initial public offering

on February 17, 2017), Mosaic Capital (consolidated on January 26, 2017), Pethealth and Boat Rocker.

Restaurants and retail

Subsequent to December 31, 2017

Year ended December 31, 2017

On December 1, 2017 Cara acquired a 100% equity interest in Pickle Barrel Restaurants Inc. (‘‘Pickle Barrel’’) for
purchase consideration of $16.9 (Cdn$21.5). Pickle Barrel operates restaurants and provides catering services in the
province of Ontario.

154

Year ended December 31, 2016

The year-over-year increases in the revenues and expenses of Restaurants and retail in 2017 primarily reflected
increased revenue and expenses at Cara due to the inclusion of the full year results of St-Hubert and Original Joe’s,
and the consolidation of Pickle Barrel on December 1, 2017.

Fairfax India

Subsequent to December 31, 2017

Year ended December 31, 2017

On January 13, 2017 the company acquired 12,340,500 subordinate voting shares of Fairfax India for $145.0 ($11.75
per share) in a private placement. Through that private placement and a contemporaneous bought deal public
offering, Fairfax India raised proceeds of $493.5 net of commissions and expenses. Combined with various open
market purchases of Fairfax India subordinate voting shares, the company’s multiple voting shares and subordinate
voting shares represented 93.6% of the voting rights and 30.2% of the equity interest in Fairfax India at the close of
the aforementioned private placement and public offering.

Year ended December 31, 2016

On February 8, 2016 Fairfax India acquired a 44.7% interest in Adi Finechem Limited (subsequently renamed
Fairchem Specialty Limited (‘‘Fairchem’’)) for $19.4 (1.3 billion Indian rupees). Fairchem is a specialty chemical
manufacturer in India of oleochemicals used in the paints, inks and adhesives industries, as well as intermediate
nutraceutical and health products.

155

FAIRFAX FINANCIAL HOLDINGS LIMITED

The year-over-year increases in the revenues and expenses of Fairfax India in 2017 primarily reflected the
consolidation of Fairchem on March 14, 2017, the inclusion of the full year results of Privi Organics and increased
business volumes at NCML. Interest and dividends in 2017 included the accrual of a performance fee of $114.4
payable to Fairfax for the period January 30, 2015 to December 31, 2017 (subsequently settled on March 9, 2018) as
Fairfax India’s common shareholders’ equity at December 31, 2017 exceeded a specified hurdle rate for that period.
The performance fee is an intercompany transaction that is eliminated on consolidation. The increase in share of
profit of associates in 2017 primarily reflected the contribution from Bangalore Airport since March 24, 2017 and a
year-over-year increase related to IIFL Holdings. Net losses on investments in 2017 primarily reflected net losses on
Indian government bonds.

Thomas Cook India

Year ended December 31, 2017

On December 27, 2017 Quess acquired the facility management and catering business of Manipal Integrated Services
Private Limited (‘‘Manipal’’) for $152.5 (9.8 billion Indian rupees), primarily comprised of the issuance of $117.7
(7.5 billion Indian rupees) of Quess common shares to Manipal shareholders and the reinvestment of $34.3
(2.2 billion Indian rupees) of Quess’ existing holdings of Manipal preferred shares upon cancellation of those shares.
In November of 2017 Thomas Cook India sold a 5.4% equity interest in Quess for cash proceeds of $96.8 (6.3 billion
Indian rupees). On August 18, 2017 Quess raised $132.2 (8.5 billion Indian rupees) in net proceeds following the
completion of a private placement of common shares with institutional investors. These transactions at Thomas
Cook India and Quess collectively reduced the company’s indirect ownership of Quess from 42.1% to 33.1%. Quess is
a provider of staffing and facilities management services.

The year-over-year increases in the revenues and expenses of Thomas Cook India in 2017 primarily reflected
increased revenue and expenses at Quess driven by the growth in its business.

Other

Subsequent to December 31, 2017

Year ended December 31, 2017

On July 4, 2017 the company acquired control of Grivalia Properties REIC (‘‘Grivalia Properties’’) by increasing its
equity interest to 52.6% through the acquisition of an additional 10.3% equity interest from Eurobank Ergasias S.A.
for cash consideration of $100.0 (A88.0) and commenced consolidating Grivalia Properties in the Other reporting
segment. Grivalia Properties is a real estate investment company listed on the Athens Stock Exchange.

156

share at any time until January 26, 2024 (the ‘‘Mosaic warrants’’). The company’s Mosaic Capital warrants represent a
potential voting interest of approximately 62% (assuming all holders of Mosaic Capital convertible securities,
including the company, exercised their options to convert), giving the company the ability to control
Mosaic Capital.

Year ended December 31, 2016

The year-over-year increases in the revenues and expenses of Other in 2017 reflected the inclusion of the full year
results of Golf Town and the consolidation of Mosaic Capital (on January 26, 2017) and Grivalia Properties (on July 4,
2017). Share of profit of associates in 2017 primarily reflected the contribution from joint ventures held by Grivalia
Properties. Net gains on investments in 2017 primarily reflected net gains on Atlas Mara convertible bonds and
equity call options held by Fairfax Africa.

Interest and Dividends

An analysis of interest and dividends is presented in the Investments section of this MD&A.

Net Gains (Losses) on Investments

An analysis of consolidated net gains (losses) on investments is provided in the Investments section of this MD&A.

Interest Expense

Consolidated interest expense increased to $331.2 in 2017 from $242.8 in 2016, primarily reflecting the impact of
increased borrowings at Fairfax India and its subsidiaries, the issuance on December 16, 2016 of Cdn$450.0 principal
amount of 4.70% unsecured senior notes due 2026, consolidation of the interest expense of Allied World, increased
borrowings in 2017 on the holding company’s revolving credit facility, increased subsidiary borrowings (primarily at
Cara), consolidation of the interest expense of Grivalia Properties and Mosaic Capital and the issuance on
December 4, 2017 of Cdn$650.0 principal amount of 4.25% unsecured senior notes due 2027.

Consolidated interest expense in 2017 of $331.2 (2016 – $242.8) was primarily attributable to interest expense at the
holding company of $224.1 (2016 – $188.4). Interest expense by reporting segment is set out in the Sources of Net
Earnings section of this MD&A.

Corporate Overhead and Other

Corporate overhead and other consists of the expenses of all of the group holding companies, net of investment
management and administration fees earned by the holding company and the interest and dividend income earned
on holding company cash and investments.

Fairfax corporate overhead
Subsidiary holding companies’ corporate overhead
Subsidiary holding companies’ non-cash intangible asset amortization(1)
Holding company interest and dividends
Holding company share of (profit) loss of associates
Investment management and administration fees
Loss on repurchase of long term debt

2017
143.7
49.5
82.1
4.1
(127.7)
(236.8)
28.6

(56.5)

2016
106.4
15.5
59.4
11.5
27.2
(88.8)
–

131.2

(1) Non-cash amortization of intangible assets is principally comprised of customer and broker relationships.

Fairfax corporate overhead increased to $143.7 in 2017 from $106.4 in 2016, primarily reflecting increases in
charitable donations and consulting fees, and fees related to the renegotiation of the company’s revolving credit
facility, partially offset by non-recurring expenses incurred in connection with business acquisitions in 2016
(principally Fairfax Latam).

157

FAIRFAX FINANCIAL HOLDINGS LIMITED

Subsidiary holding companies’ corporate overhead increased to $49.5 in 2017 from $15.5 in 2016, primarily
reflecting restructuring costs incurred in 2017 at Bryte Insurance and Fairfax Latam, non-recurring expenses incurred
in connection with the acquisition of Allied World, the consolidation of the corporate overhead of Allied World and
increased charitable donations. Subsidiary holding companies’ non-cash intangible asset amortization increased to
$82.1 in 2017 from $59.4 in 2016, primarily due to amortization of intangible assets related to the acquisition of
Allied World.

Holding company interest and dividends included total return swap expense which decreased to $16.8 in 2017 from
$27.9 in 2016, primarily reflecting a reduction in short equity and equity index total return swaps in 2017. Excluding
the impact of total return swap expense, holding company interest and dividends decreased to $12.7 in 2017 from
$16.4 in 2016, primarily reflecting decreased interest income on bonds, partially offset by increased dividend
income.

Holding company share of profit of associates of $127.7 in 2017 primarily reflected increased share of profit of
Eurolife, partially offset by decreased share of profit of Gulf Insurance. Holding company share of loss of associates of
$27.2 in 2016 included a non-cash impairment charge related to Resolute of $34.8.

Investment management and administration fees increased to $236.8 in 2017 from $88.8 in 2016, primarily
reflecting the performance fee receivable from Fairfax India of $114.4 (2016 – nil) and increased investment and
advisory fees earned on the investment portfolios of Allied World, Fairfax India and Fairfax Africa.

Loss on repurchase of long term debt arose on the early redemption of Cdn$388.4 principal amount 7.5% unsecured
senior notes due 2019 and the purchase of principal amounts of $8.7, $5.8 and $3.3 of the holding company’s
unsecured senior notes due in 2019, 2020 and 2021. Refer to note 15 (Borrowings) to the consolidated financial
statements for the year ended December 31, 2017.

Net gains (losses) on investments attributable to the Corporate and Other reporting segment are set out in the
Investments section of this MD&A.

Income Taxes

The company’s effective income tax rate in 2017 of 20.2% ($408.3 provision for income taxes) was lower than the
company’s Canadian statutory income tax rate of 26.5% primarily due to the impact of net gains on the sales of ICICI
Lombard and First Capital which were not taxable in the jurisdictions in which they were held (income tax rate
benefits of $246.5 in Mauritius and $269.9 in Barbados respectively) and non-taxable investment income
(principally comprised of dividend income, non-taxable interest income and share of profit of associates in certain
jurisdictions), partially offset by the revaluation of U.S. deferred tax assets as a result of U.S. tax reform (income tax
rate charge of $222.4), losses at Allied World that are taxed at rates lower than the Canadian statutory income tax rate
and a reduction in U.S. tax credits and operating losses capitalized in prior years primarily driven by the effects of
U.S. tax reform (income tax rate charge of $89.7).

The company’s effective income tax recovery rate in 2016 of 28.8% ($159.6 recovery of income taxes) was higher
than the company’s Canadian statutory income tax rate of 26.5% primarily due to non-taxable investment income
(including dividend income and non-taxable interest income), losses incurred in the U.S. that are taxed at rates
higher than the Canadian statutory income tax rate and income in the U.K. that is taxed at rates lower than the
Canadian statutory rate, partially offset by deferred taxes not recorded in Canada.

For further details related to the impact of U.S. tax reform on the company’s financial reporting, please refer to
note 18 (Income Taxes) to the consolidated financial statements for the year ended December 31, 2017.

Non-controlling Interests

Non-controlling interests principally relate to Allied World, Fairfax India, Cara, Grivalia Properties, Brit, Thomas
Cook India and Fairfax Africa. For further details refer to note 16 (Total Equity) to the consolidated financial
statements for the year ended December 31, 2017.

158

Components of Consolidated Balance Sheets

Consolidated Balance Sheet Summary

The assets and liabilities reflected on the company’s consolidated balance sheet at December 31, 2017 were primarily
impacted by the acquisitions of Allied World and Fairfax Latam, the consolidation of Grivalia Properties and the
divestiture of the company’s 97.7% interest in First Capital. Refer to note 23 (Acquisitions and Divestitures) to the
consolidated financial statements for the year ended December 31, 2017 for additional details related to these
transactions.

Holding company cash and investments increased to $2,368.4 ($2,356.9 net of $11.5 of holding company
short sale and derivative obligations) at December 31, 2017 from $1,371.6 at December 31, 2016 ($1,329.4 net of
$42.2 of holding company short sale and derivative obligations). Significant cash movements at the holding
company level in 2017 are as set out in the Financial Condition section of this MD&A under the heading Liquidity.

Insurance contract receivables increased by $1,769.4 to $4,686.9 at December 31, 2017 from $2,917.5 at
December 31, 2016 primarily reflecting the impact of the consolidation of Allied World ($1,336.7) and Fairfax Latam
($162.9) and growth in business volumes at OdysseyRe and Brit, partially offset by the impact of the divestiture of
First Capital ($113.1).

Portfolio investments comprise investments carried at fair value and equity accounted investments, the
aggregate carrying value of which was $37,013.2 at December 31, 2017 ($36,898.5 net of subsidiary short sale and
derivative obligations) compared to an aggregate carrying value at December 31, 2016 of $27,293.4 ($27,101.3 net of
subsidiary short sale and derivative obligations). The increase of $9,797.2 primarily reflected the consolidation of the
investment portfolios of Allied World ($7,918.8) and Fairfax Latam ($248.6), the net proceeds received from Fairfax
Africa’s initial public offering and Fairfax India’s secondary offering and the favourable impact of foreign currency
translation (principally the strengthening of the euro, Canadian dollar and the British pound relative to the
U.S. dollar), partially offset by the divestiture of First Capital’s investment portfolio ($686.7) and the reduction in
ownership of ICICI Lombard (see the discussion of investments in associates below), in addition to the specific
factors which caused movements in portfolio investments as discussed in the subsequent paragraphs.

Subsidiary cash and short term investments (including cash and short term investments pledged for short sale and
derivative obligations) increased by $7,675.8, primarily reflecting the consolidation of the cash and short term
investments of Allied World ($4,509.0) and Fairfax Latam ($77.2), the proceeds received from net sales of long dated
U.S. state and municipal and corporate and other bonds (primarily corporate and other bonds that were part of the
acquisition of Allied World) where a portion of the proceeds was retained in cash or invested in short term
investments, and net proceeds received from Fairfax Africa’s initial public offering, partially offset by the divestiture
of the cash and short term investments of First Capital ($362.4).

Bonds (including bonds pledged for short sale derivative obligations) increased by $19.0 primarily reflecting the
consolidation of the bond portfolios of Allied World ($2,306.2) and Fairfax Latam ($148.9), partially offset by net
sales of U.S. state and municipal and corporate and other bonds (primarily corporate and other bonds that were part
of the acquisition of Allied World), and the divestiture of the bond portfolio of First Capital ($140.9).

Common stocks increased by $698.8 primarily reflecting the consolidation of the common stock portfolios of Allied
World ($833.8) and Fairfax Latam ($13.5), net unrealized appreciation and the favourable impact of foreign currency
translation (principally the strengthening of the euro, Canadian dollar and the British pound relative to the
U.S. dollar), partially offset by net sales of certain common stock investments and the divestiture of the common
stock portfolio of First Capital ($117.0).

Investments in associates increased by $1,022.8 primarily reflecting associates acquired in 2017 by Fairfax India
(Bangalore Airport) and Fairfax Africa (Atlas Mara) and the insurance and reinsurance companies (Farmers Edge,
Astarta and Sigma), increased investments in associates owned prior to 2017 (APR Energy, IIFL Holdings and Peak
Achievement) and the share of profit of associates ($200.5), partially offset by the reduction in ownership of ICICI
Lombard (proceeds from the sale of a 24.3% equity interest in ICICI Lombard were remitted to the holding company
and the remaining 9.9% equity interest in ICICI Lombard, previously reflected as an investment in associate within
portfolio investments, was reclassified to common stock at FVTPL within holding company cash and investments
(fair value of $549.0 at December 31, 2017).

159

FAIRFAX FINANCIAL HOLDINGS LIMITED

Derivatives and other invested assets net of short sale and derivative obligations increased by $153.6 primarily due to
investments in equity warrants, the closure of various short equity total return swaps and decreased payables to
counterparties to the company’s U.S. treasury bond forward contracts (excluding the impact of collateral
requirements), partially offset by net unrealized losses on CPI-linked derivatives.

Recoverable from reinsurers increased by $3,802.2 to $7,812.5 at December 31, 2017 from $4,010.3 at
December 31, 2016 primarily reflecting the consolidation of Allied World ($2,879.6) and Fairfax Latam ($572.6) and
the impact of current period catastrophe losses ceded to reinsurers (primarily by Brit, OdysseyRe and Advent),
partially offset by a decrease at Run-off and the divestiture of the recoverable from reinsurers of First Capital ($447.1).

Deferred income taxes decreased by $351.8 to $380.8 at December 31, 2017 from $732.6 at December 31, 2016
primarily due to the revaluation of the net U.S. deferred tax asset to the lower corporate income tax rate as a result of
U.S. tax reform, a reduction in tax credits and operating losses capitalized in prior years and deferred tax liabilities
related to intangible assets recognized in connection with the acquisition of Allied World. Refer to note 18 (Income
Taxes) to the consolidated financial statements for the year ended December 31, 2017 for additional details related to
the impact of U.S. tax reform on the company’s financial reporting.

Goodwill and intangible assets increased by $2,225.0 to $6,072.5 at December 31, 2017 from $3,847.5 at
December 31, 2016 primarily as a result of the acquisitions of Allied World ($1,726.9) and Fairfax Latam ($23.3), the
consolidation of Mosaic Capital ($49.0), various acquisitions by Quess ($204.5, including $154.2 related to Quess’
acquisition of Manipal) and the favourable impact of foreign currency translation (principally the strengthening of
the Canadian dollar and Indian rupee relative to the U.S. dollar), partially offset by non-cash intangible asset
amortization ($159.5).

The aforementioned acquisitions, and the allocation of goodwill of $2,904.7 and intangible assets of $3,167.8 at
December 31, 2017 (December 31, 2016 – $1,633.7 and $2,213.8) by operating segment, are described in note 23
(Acquisitions and Divestitures) to the consolidated financial statements for the year ended December 31, 2017.
Impairment tests for goodwill and intangible assets not subject to amortization were completed in 2017 and it was
concluded that no impairments had occurred.

Other assets increased by $2,309.9 to $4,828.3 at December 31, 2017 from $2,518.4 at December 31, 2016 primarily
as a result of the consolidation of Grivalia Properties ($1,170.4 comprised principally of its portfolio of investment
properties), Allied World ($356.0) and Fairfax Latam ($96.5). Acquisitions completed in 2017 and recorded in the
Other reporting segment also contributed to increased other assets, primarily related to premises and equipment,
inventories and sales receivables.

Provision for losses and loss adjustment expenses increased by $9,129.0 to $28,610.8 at December 31, 2017
from $19,481.8 at December 31, 2016 primarily reflecting the consolidation of Allied World ($7,787.9) and Fairfax
Latam ($581.1), the impact of significant current period catastrophe losses (primarily related to Hurricanes Harvey,
Irma and Maria and the California wildfires) and the impact on loss reserves of the strengthening of certain foreign
currencies relative to the U.S. dollar (principally at OdysseyRe, Brit and Northbridge), partially offset by Runoff’s
continued progress settling its claims liabilities, the divestiture of the provision for loss and loss adjustment expenses
of First Capital ($512.5) and prior year favourable reserve development (principally at OdysseyRe, Northbridge,
Zenith National, Fairfax Asia and Group Re).

Non-controlling interests increased by $2,600.9 to $4,600.9 at December 31, 2017 from $2,000.0 at
December 31, 2016 principally reflecting the consolidation of Allied World ($1,229.4) and Grivalia Properties
($517.6), Fairfax India’s secondary offering in January 2017, Fairfax Africa’s initial public offering in February 2017,
the reduction in the company’s indirect ownership of Quess from 42.1% to 33.1% and foreign currency translation
(principally the strengthening of the Canadian dollar relative to the U.S. dollar), partially offset by the net loss
attributable to non-controlling interests ($125.7) and dividends paid to non-controlling interests (principally the
dividend paid by Brit to its minority shareholder OMERS). For further details refer to note 16 (Total Equity) and
note 23 (Acquisitions and Divestitures) to the consolidated financial statements for the year ended
December 31, 2017.

Comparison of 2016 to 2015 – Total assets increased to $43,384.4 at December 31, 2016 from $41,529.0 at
December 31, 2015 primarily reflecting the acquisitions of Bryte Insurance, AMAG, St-Hubert and Original Joe’s
(at Cara) and Privi Organics (at Fairfax India) pursuant to the transactions described in note 23 (Acquisitions and
Divestitures) to the consolidated financial statements for the year ended December 31, 2017.

160

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 ‘‘loss 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 run-off
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.

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:

2017

Insurance and Reinsurance

Northbridge OdysseyRe Forster National

Brit World(1)

Asia Other Companies Run-off and Other Consolidated

Crum &

Zenith

Allied Fairfax

Operating

Corporate

Property

Casualty

Specialty

285.5

1,614.6

57.6

1,575.6

146.9

23.6

674.7

1,382.8

3,451.5

3,171.9

1,162.9 2,637.5

5,940.7

348.5

149.8

7.7

782.2

452.3

99.8

159.4

100.2

604.5

813.1

272.6

4,793.4

32.9

18,951.6

2,491.9

2,170.9

170.1

1,957.7

5,375.6

3,468.6

1,194.2 4,094.4

7,775.8

359.4 1,690.2

25,915.9

2,694.9

–

Intercompany

6.6

146.2

66.8

–

41.7

12.1

0.1

146.3

419.8

636.1

(1,055.9)

4,826.3

21,443.5

2,341.0

28,610.8

–

Provision for
losses and
LAE

2016

1,964.3

5,521.8

3,535.4

1,194.2 4,136.1

7,787.9

359.5 1,836.5

26,335.7

3,331.0

(1,055.9)

28,610.8

Insurance and Reinsurance

Northbridge OdysseyRe Forster National

Brit World(1)

Asia Other Companies Run-off and Other Consolidated

Crum &

Zenith

Allied Fairfax

Operating

Corporate

Property

Casualty

Specialty

251.3

1,570.6

47.4

1,199.2

147.9

10.1

378.4

3,312.5

3,140.5

1,193.7 2,280.0

328.3

210.8

8.7

703.5

Intercompany

5.7

56.9

63.1

–

44.8

1,869.3

4,840.0

3,499.2

1,212.5 3,361.9

Provision for
losses and
LAE

1,875.0

4,896.9

3,562.3

1,212.5 3,406.7

–

239.0

274.8

284.6

798.4

1.6

283.4

346.8

181.3

811.5

207.6

2,509.3

120.9

12,118.9

2,668.8

1,764.6

299.3

16,392.8

3,089.0

–

379.7

701.1

(1,080.8)

2,630.2

14,787.7

2,063.9

19,481.8

–

800.0 1,019.1

16,772.5

3,790.1

(1,080.8)

19,481.8

(1)

Allied World is included in the company’s financial reporting with effect from July 6, 2017.

In the ordinary course of carrying on business, the company’s insurance, reinsurance and run-off 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 pledged (either directly or to support letters of credit) 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 $5.7 billion of cash and investments pledged by the company’s
subsidiaries at December 31, 2017, as described in note 5 (Cash and Investments) to the consolidated financial
statements for the year ended December 31, 2017, represented the aggregate amount at that date that had been
pledged in the ordinary course of business to support each pledging subsidiary’s respective obligations (these pledges
do not involve the cross-collateralization by one group company of another group company’s obligations).

Claims provisions are established by the company’s 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
initial and subsequent claims reports received from ceding companies to establish estimates of provision for claims.

161

FAIRFAX FINANCIAL HOLDINGS LIMITED

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 business,
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 net favourable reserve development in the two tables that follow
excludes the loss reserve development of a subsidiary in the year it is acquired. In the second table below, a
subsidiary’s provision for claims balance at December 31 in the year of acquisition is included in the line ‘Provision
for claims of companies acquired during the year at December 31’, whereas the net favourable reserve development
as set out in the Sources of Net Earnings section of this MD&A and the consolidated statement of earnings includes
the loss reserve development of a subsidiary from its acquisition date.

Aggregate net favourable development for the years ended December 31, 2017 and 2016 were comprised as shown in
the following table:

Insurance and Reinsurance

Northbridge
OdysseyRe
Crum & Forster
Zenith National
Brit
Fairfax Asia
Other

Operating companies
Run-off

Favourable/(Unfavourable)

2017(1)

2016(2)

93.5
288.1
10.2
76.4
9.5
53.1
36.3

567.1
(112.5)

454.6

112.8
266.5
8.3
101.0
53.5
50.7
60.4

653.2
(79.5)

573.7

(1) Excludes net unfavourable development of companies acquired in 2017 – Allied World ($71.9), Fairfax Latam ($6.7) and
Prudential Assurance Malaysia ($0.8). Also excluded in 2017 is net favourable development on the CTR Life business
($4.0).

(2) Excludes net favourable development of companies acquired in 2016 – Fairfirst Insurance ($1.4).

162

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:

Reconciliation of Provision for Claims – Consolidated

Provision for claims at January 1 – 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

Provision for claims of companies acquired during the year

at December 31

Divestiture of subsidiary

2016

2017

2015
16,289.4 16,596.3 14,378.2
(559.3)

(103.7)

463.3

2014
14,981.6
(496.2)

2013
15,075.8
(128.0)

6,192.9
(454.6)

5,286.9
(573.7)

4,307.0
(467.5)

4,166.2
(374.4)

4,151.2
(476.0)

(1,691.3) (1,304.5) (1,055.3)
(3,876.8) (3,695.2) (2,688.4)

(1,076.7)
(2,822.7)

(1,050.8)
(3,068.7)

5,725.0
(235.5)

83.3
–

2,681.6
–

0.4
–

478.1
–

Provision for claims at December 31 before the undernoted 22,412.4 16,289.4 16,596.3
CTR Life(1)
14.2

12.8

8.7

14,378.2
15.2

14,981.6
17.9

Provision for claims at December 31 – net
Reinsurers’ share of provision for claims at December 31

22,421.1 16,302.2 16,610.5
3,205.9
3,179.6

6,189.7

14,393.4
3,355.7

14,999.5
4,213.3

Provision for claims at December 31 – gross

28,610.8 19,481.8 19,816.4

17,749.1

19,212.8

The foreign exchange effect of change in provision for claims principally related to the impact in 2017 of the
strengthening of the the Canadian dollar, British pound and the euro relative to the U.S. dollar (principally at
OdysseyRe, Northbridge, Brit and Run-off). In general, the company manages foreign currency risk on claims
liabilities by investing in financial instruments and other assets denominated in the same currency as the liabilities
to which they relate.

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.

Available on Fairfax’s website (www.fairfax.ca) in the Annual Financial Supplement for the year ended December 31,
2017 are tables that show the historical reserve reconciliation and the reserve development of Northbridge,
OdysseyRe, Crum & Forster, Zenith National, Fairfax Asia and Insurance and Reinsurance – Other (comprised of
Group Re, Bryte Insurance, Advent, Fairfax Latin America and Fairfax Central and Eastern Europe), and Run-off’s
reconciliation of provision for claims.

Asbestos, Pollution and Other Hazards

General Discussion

The company’s exposure to asbestos claims, environmental pollution and other types of mass tort or health hazard
claims (collectively ‘‘APH exposures’’) are described in more detail in the following paragraphs.

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. Substantially all of the
company’s exposure to asbestos losses are now under the management of Run-off. The vast majority of these claims
are presented under policies written many years ago. There is a great deal of uncertainty surrounding these types of
claims, which impacts the ability of insurers and reinsurers to estimate the ultimate amount of unpaid claims and

163

FAIRFAX FINANCIAL HOLDINGS LIMITED

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. Further, asbestos litigation itself continues to be an imperfect process for
resolving asbestos claims fairly and cost effectively. 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 asbestos exposures.

The company also faces exposure to other types of mass tort or health hazard claims including claims related to
environmental pollution and exposure to potentially harmful products or substances such as breast implants,
pharmaceutical products, chemical products, lead-based pigments, tobacco, hepatitis C, talc, head trauma and in
utero exposure to diethylstilbestrol (‘‘DES’’). Tobacco, although a significant potential risk to the company, has not
presented significant actual exposure to date. Methyl tertiary butyl ether (‘‘MTBE’’) contamination of underground
drinking water supplies was a significant potential health hazard, and while the company has resolved most of its
potential MBTE exposures, some exposure lingers. Although still a risk due to occasional unfavourable court
decisions, lead pigment has had some favourable underlying litigation developments resulting in this hazard
presenting less of a risk to the company. The company has been monitoring claims alleging breast cancer as a result of
in utero exposure to DES, a synthetic estrogen supplement prescribed to prevent miscarriages or premature births.
Since first emerging several years ago, the DES breast cancer claims have not progressed due to a lack of widely
accepted scientific support for such claims. The company is also monitoring an emerging body of claims by women
who claim exposure to talc as an ingredient of consumer products such as powders and cosmetics resulted in ovarian
cancer. Since 2016, a number of large talc verdicts have been awarded against a number of defendants. However,
there have been developments in defendants’ favour in 2017, including the reversal of two sizeable plaintiff verdicts
by appellate courts based on jurisdictional and scientific defenses as well as a defense verdict.

Asbestos Claims Discussion

Tort reform in the first decade of the millennium, both legislative and judicial, has had a significant impact on the
asbestos litigation landscape. The majority of claims now being filed and litigated continue to be mesothelioma and
lung cancer claims, with cases alleging less serious injury continuing to be brought in a small number of
jurisdictions. With unimpaired and non-malignant claims brought much less frequently, the litigation industry has
focused on the more seriously injured plaintiffs, and the number of mesothelioma cases has not tailed off as
expected. Though there are fewer cases overall, the average number of defendants named in each case continues to
rise, and each year more defendants not previously sued for asbestos liability are named in lawsuits for the first time.
Furthermore, there continues to be an increase in the settlement value of asbestos cases involving malignancies.
Defense costs have also increased because the malignancy cases often are more heavily litigated than the
non-malignancy cases and because the asbestos litigation process and practices in the U.S. continue to be inefficient.
Asbestos trial results have been mixed, with both plaintiff and defense verdicts having been rendered in courts
throughout the U.S. Some plaintiffs continue to focus their efforts on maximizing their recoveries in the U.S. tort
system from solvent defendants by heavily emphasizing their exposure to these defendants’ products and
operations, however limited that exposure may have been. Separately, these plaintiffs also seek to recover from the
trusts established by the bankruptcies of large asbestos manufacturing defendants associated with significant and
prolonged worksite contamination, which, in some cases, is not identified in the allegations in the tort system. The
unfortunate result in these instances is a disproportionate shift in financial responsibility for alleged asbestos injuries
from large bankrupt entities to solvent peripheral defendants. The company continues to implement strategies and
initiatives to address these issues and will prudently evaluate and adjust its asbestos reserves as necessary as the
litigation landscape continues to evolve. As set out in the table that follows, the company has strengthened asbestos
reserves by $153.0 or 11.4% in 2017.

In November 2016 A.M. Best Company issued its Asbestos Review, where it estimated net ultimate asbestos losses in
the U.S. property and casualty industry at $100 billion, an increase of more than $15 billion from its previous review,
citing ‘‘an unstable environment faced with evolving litigation, increasing secondary exposure cases, and an increase
in life expectancy.’’ The company has seen some of the underlying litigation factors that A.M. Best cites in the
asbestos claims in the Run-off portfolio. The policyholders with the most significant asbestos exposure continue to
be defendants who manufactured, distributed or installed asbestos products on a nationwide basis. The run-off
companies are exposed to these risks and have the bulk of the direct asbestos exposure within Fairfax. While these

164

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. Reinsurance contracts entered into before
1984 also continue to present exposure to asbestos.

Reserves for asbestos cannot be estimated using traditional loss reserving techniques that rely on historical accident
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 asbestos claim data sets 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 critiqued by
outside legal and actuarial consultants, and the results are reviewed annually by actuaries, all of whom have
consistently found the methodology comprehensive and the results reasonable.

In the course of the insured-by-insured evaluation of exposure the following factors are considered: available
insurance coverage, including any umbrella or excess insurance that has been issued to the insured; limits,
deductibles, and self-insured retentions; an analysis of each insured’s potential liability; the jurisdictions involved;
past and anticipated future asbestos claim filings against the insured; loss development on pending claims; past
settlement values of similar claims; allocated claim adjustment expenses; applicable coverage defenses and the
impact of the defense strategies and initiatives advanced on behalf of each insured.

Following is an analysis of the company’s gross and net loss and ALAE reserves from asbestos exposures as at
December 31, 2017 and 2016, and the movement in gross and net reserves for those years:

Asbestos
Provision for asbestos claims and ALAE at January 1
Asbestos losses and ALAE incurred during the year
Asbestos losses and ALAE paid during the year

2017

2016

Gross

Net

Gross

Net

1,347.7
153.0
(208.6)

1,065.5
141.8
(174.0)

1,381.0
219.9
(253.2)

1,043.8
218.7
(197.0)

Provision for asbestos claims and ALAE at December 31

1,292.1

1,033.3

1,347.7

1,065.5

Summary

Management believes that the asbestos reserves reported at December 31, 2017 are reasonable estimates of the
ultimate remaining liability for these claims based on facts currently known, the present state of the law and
coverage litigation, current assumptions, and the reserving methodologies employed. These asbestos reserves are
continually monitored by management and reviewed by actuaries. To the extent that future social, scientific,
economic, legal, or legislative developments alter the volume of claims, the liabilities of policyholders, the original
intent of the policies and the ability to recover reinsurance, adjustments to loss reserves may emerge in
future periods.

Recoverable from Reinsurers

The company’s subsidiaries purchase reinsurance to reduce their exposure on the insurance and reinsurance risks
they underwrite. Credit risk associated with reinsurance is managed through adherence to internal reinsurance
guidelines whereby the company‘s ongoing reinsurers generally 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 the company on acquisition of a subsidiary.

Recoverable from reinsurers of $7,812.5 on the consolidated balance sheet at December 31, 2017 consisted of future
recoverables from reinsurers on unpaid claims ($6,216.2), reinsurance receivable on paid losses ($593.7) and the
unearned portion of premiums ceded to reinsurers ($1,169.0), net of provision for uncollectible balances ($166.4).
Recoverables from reinsurers on unpaid claims increased by $3,006.2 to $6,216.2 at December 31, 2017 from
$3,210.0 at December 31, 2016 principally reflecting the consolidation of the recoverable from reinsurers of Allied

165

FAIRFAX FINANCIAL HOLDINGS LIMITED

World and Fairfax Latam (refer to note 23 (Acquisitions and Divestitures) to the consolidated financial statements for
the year ended December 31, 2017) and current period catastrophe losses ceded to reinsurers.

The following table presents the company’s top 25 reinsurance groups (ranked by gross recoverable from reinsurers)
at December 31, 2017, which represented 81.0% (December 31, 2016 – 72.2%) of total recoverable from reinsurers.

Reinsurance group
Munich
Swiss Re
Lloyd’s
AIG
Markel
Everest
AXIS
HDI
Berkshire Hathaway
Alleghany
SCOR
Arch Capital
XL
RenaissanceRe
Liberty Mutual
WR Berkley
EXOR
QBE
Chubb
Tokio Marine
Aspen
Singapore Re
Nationwide
Validus
ARAG Holding

Principal reinsurers
Munich Reinsurance Company
Swiss Reinsurance America Corporation
Lloyd’s
American Home Assurance Company
Markel CATCo Reinsurance Ltd
Everest Reinsurance (Bermuda), Ltd
AXIS Reinsurance Company
Hannover R ¨uck SE
General Reinsurance Corporation
Transatlantic Reinsurance Company
SCOR Global P&C SE
Arch Reinsurance Company
XL Insurance Company of New York, Inc.
Renaissance Reinsurance US Inc
Liberty Mutual Insurance Company
Berkley Insurance Company
Partner Reinsurance Company of the U.S.
QBE Reinsurance Corporation
Chubb Tempest Reinsurance Ltd
Tokio Millennium Re AG
Aspen Insurance UK Ltd
Singapore Reinsurance Corporation Ltd
Nationwide Mutual Insurance Company
AlphaCat Reinsurance Limited
ARAG Allgemeine Versicherungs-AG

Top 25 reinsurance groups
Other reinsurers

Total recoverable from reinsurers
Provision for uncollectible reinsurance

Recoverable from reinsurers

A.M. Best
rating (or S&P
equivalent)(1)

A+
A+
A
A
A
A+
A+
A+
A++
A+
A+
A+
A
A
A
A+
A
A
A++
A++
A
A-
A+
A
NR

Gross
recoverable
from
reinsurers(2)
1,181.5
737.0
520.5
520.2
462.6
372.4
329.8
317.5
259.5
194.2
152.6
149.6
145.7
145.7
130.7
113.2
110.1
104.0
98.8
84.9
78.8
66.2
65.9
61.4
60.1

6,462.9
1,516.0

7,978.9
(166.4)

7,812.5

Net unsecured
recoverable
from
reinsurers(3)
1,027.1
726.7
516.4
510.9
235.0
328.2
318.1
307.4
258.3
191.3
151.2
144.7
139.6
138.7
130.6
109.7
106.2
103.3
70.5
81.4
78.8
66.2
65.7
24.4
60.1

5,890.5
1,175.5

7,066.0
(166.4)

6,899.6

(1) Financial strength rating of principal reinsurer (or, if principal reinsurer is not rated, of the group).

(2) Excludes specific provisions for uncollectible reinsurance.

(3) Net of outstanding balances for which security was held, and excludes specific provisions for uncollectible reinsurance.

The following table presents the classification of the $7,812.5 recoverable from reinsurers according to the financial
strength rating of the responsible reinsurers at December 31, 2017, shown separately for the insurance and
reinsurance operations and for the run-off operations. At December 31, 2017 approximately 8.7% (December 31,

166

2016 – 19.3%) of the consolidated recoverable from reinsurers related to run-off operations. Pools and associations,
shown separately, generally consist of government or similar insurance funds carrying limited credit risk.

Insurance and Reinsurance

Run-off

Consolidated

A.M. Best

Gross

Balance

unsecured

Gross

Balance

unsecured

Gross

Balance

unsecured

rating recoverable

for which recoverable

recoverable

for which recoverable

recoverable

for which recoverable

(or S&P

from security is

from

from security is

from

from security is

from

Net

equivalent)

reinsurers

A++

A+

A-

B++

B+

B or lower

Not rated

Pools and associations

Provision for uncollectible
reinsurance

353.0

3,596.3

2,178.8

235.6

20.2

2.2

3.1

649.1

125.0

7,163.3

held

30.9

242.8

81.8

9.4

0.2

0.4

3.0

413.4

4.5

786.4

reinsurers

held

reinsurers

322.1

3,353.5

2,097.0

226.2

20.0

1.8

0.1

235.7

120.5

6,376.9

76.6

282.1

133.1

9.9

2.0

0.9

2.3

299.1

9.6

815.6

1.0

24.4

13.6

5.7

1.0

0.4

–

80.4

–

126.5

75.6

257.7

119.5

4.2

1.0

0.5

2.3

218.7

9.6

689.1

429.6

3,878.4

2,311.9

245.5

22.2

3.1

5.4

948.2

134.6

7,978.9

(31.9)

(134.5)

(166.4)

Recoverable from reinsurers

7,131.4

6,345.0

681.1

554.6

7,812.5

held

31.9

267.2

95.4

15.1

1.2

0.8

3.0

493.8

4.5

912.9

reinsurers

397.7

3,611.2

2,216.5

230.4

21.0

2.3

2.4

454.4

130.1

7,066.0

(166.4)

6,899.6

To support recoverable from reinsurers balances, the company had the benefit of letters of credit or trust funds
totaling $912.9 at December 31, 2017 as follows:

• for reinsurers rated A – or better, security of $409.6 against outstanding reinsurance recoverables of $6,865.4;

• for reinsurers rated B++ or lower, security of $5.0 against outstanding reinsurance recoverables of $30.7;

• for unrated reinsurers, security of $493.8 against outstanding reinsurance recoverables of $948.2; and

• for pools and associations, security of $4.5 against outstanding reinsurance recoverables of $134.6.

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 in those jurisdictions.

Substantially all of the provision for uncollectible reinsurance of $166.4 at December 31, 2017 related to the $480.1
of net unsecured reinsurance recoverables from reinsurers rated B++ or lower or which are unrated (which excludes
pools and associations).

Based on the preceding analysis of the company’s recoverable from reinsurers and on the credit risk analysis
performed by the company’s reinsurance security department as described below, the company believes that its
provision for uncollectible reinsurance has reasonably estimated all incurred losses arising from uncollectible
reinsurance at December 31, 2017.

The company’s reinsurance security department, with its dedicated specialized personnel and expertise in analyzing
and managing credit risk, is responsible for the following with respect to recoverable from reinsurers: evaluating the
creditworthiness of all reinsurers and recommending to the company’s reinsurance committee those reinsurers
which should be included on the list of approved reinsurers; on a quarterly basis, monitoring reinsurance
recoverables by reinsurer, by operating company, and 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 companies purchase reinsurance to achieve various objectives including protection
from catastrophic financial loss resulting from a single event, such as the total loss of a large manufacturing plant
from a fire, 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. Consolidated net earnings included the pre-tax benefit of ceded
reinsurance of $621.3 (2016 – pre-tax cost of $123.1). The consolidated pre-tax impact of ceded reinsurance was
comprised as follows: reinsurers’ share of premiums earned (see tables which follow this paragraph); commissions
earned on reinsurers’ share of premiums earned of $347.1 (2016 – $267.4); losses on claims ceded to reinsurers of
$2,367.1 (2016 – $952.1); and recovery of uncollectible reinsurance of $7.7 (2016 – $4.9).

167

FAIRFAX FINANCIAL HOLDINGS LIMITED

Year ended December 31, 2017

Insurance and Reinsurance

Northbridge OdysseyRe

Crum &
Zenith
Forster National

Allied Fairfax

Brit World(1)

Asia Other

Operating
companies Run-off Other

Corporate
and
Other

Inter-

company Consolidated

Reinsurers’ share of
premiums earned

Pre-tax benefit (cost) of ceded

reinsurance

121.2

283.1

292.6

11.9

465.8

390.7

330.8

414.1

2,310.2

0.1

(60.2)

156.4

90.1

(11.8) 155.8

318.7

(75.8)

19.0

592.2

68.7

–

(209.7)

2,100.6

(39.6)

621.3

Year ended December 31, 2016

Insurance and Reinsurance

Northbridge OdysseyRe

Crum &
Zenith
Forster National

Allied Fairfax

Brit World(1)

Asia Other

Operating
companies Run-off Other

Corporate
and
Other

Inter-

company Consolidated

Reinsurers’ share of
premiums earned
Pre-tax benefit (cost) of
ceded reinsurance

113.5

300.3

258.7

11.9

341.0

(36.5)

(16.6)

128.0

(12.5)

(113.8)

–

338.9

155.1

1,519.4

0.5

(11.2)

(85.6)

(148.2)

77.9

–

(172.4)

1,347.5

(52.8)

(123.1)

(1) Allied World is included in the company’s financial reporting with effect from July 6, 2017.

Reinsurers’ share of premiums earned increased from $1,347.5 in 2016 to $2,100.6 in 2017 primarily reflecting the
consolidation of Allied World and Fairfax Latam, the inclusion of the full year results of Bryte Insurance, increases at
Crum & Forster (consistent with increased business volumes) and Brit (primarily reflecting lower risk retention), and
higher reinstatement premiums paid as a result of current period catastrophe losses in 2017, partially offset by a
decrease at OdysseyRe (primarily reflecting the non-renewal in 2017 of a specific fronting arrangement).

Commissions earned on reinsurers’ share of premiums earned increased from $267.4 in 2016 to $347.1 in 2017
primarily reflecting the consolidation of Allied World and Fairfax Latam, the inclusion of the full year results of Bryte
Insurance and increases at Crum & Forster and Brit consistent with the increase in reinsurers’ share of premiums
earned.

Reinsurers’ share of losses on claims increased from $952.1 in 2016 to $2,367.1 in 2017 primarily reflecting the
consolidation of Allied World and Fairfax Latam, the inclusion of the full year results of Bryte Insurance and
significant current period catastrophe losses in 2017. The company recorded net recoveries of uncollectible
reinsurance of $7.7 in 2017 (2016 – $4.9).

The use of reinsurance in 2017 decreased cash provided by operating activities by approximately $469 (2016 – $152).
The increase in cash used in operating activities in 2017 primarily reflected the timing of premiums paid to reinsurers
($2,224.0 in 2017 compared to $1,445.9 in 2016) being sooner than the receipt of reinsurance recoverables, primarily
related to significant current period catastrophe losses in 2017 (total reinsurance recoveries received of $1,314.0 in
2017 compared to $1,017.4 in 2016).

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, its insurance, reinsurance and run-off companies, Fairfax India and
Fairfax Africa. Following a long-term value-oriented investment philosophy with primary emphasis on the
preservation of invested capital, Hamblin Watsa looks for investments with a margin of safety by conducting
thorough proprietary analysis of investment opportunities and markets to assess the financial strength of issuers,
identifying attractively priced securities selling at discounts to intrinsic value and hedging risks where appropriate.
Hamblin Watsa is opportunistic and disciplined in seeking undervalued securities in the market, often investing in
out-of-favour securities when sentiment is negative, and willing to maintain a large proportion of its investment
portfolio in cash and cash equivalents when it perceives markets 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. This investment committee is
responsible for making all investment decisions, subject to relevant regulatory guidelines and constraints, and
oversight by management of Hamblin Watsa. Fairfax’s Board of Directors, its insurance, reinsurance and run-off

168

companies, Fairfax India and Fairfax Africa 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) for the company’s first year and for
the past ten years are presented in the following table. Included in bonds are U.S. treasury bond forward contracts,
CPI-linked derivatives and credit default swaps and included in common stocks are investments in associates and
equity derivatives.

Year(1)
1985
(cid:2)

2008
2009
2010
2011
2012
2013
2014
2015
2016
2017(5)

Cash and
short term
investments
6.4

6,343.5
3,658.8
4,073.4
6,899.1
8,085.4
7,988.0
6,428.5
7,368.7
11,214.4
19,186.2

Bonds(2)
14.1

9,069.6
11,550.7
13,353.5
12,074.7
11,545.9
10,710.3
12,660.3
14,905.0
10,358.3
10,392.5

Preferred
stocks
1.0

Common
stocks
2.5

Real
estate(3)
–

50.3
357.6
627.3
608.3
651.4
764.8
520.6
116.9
70.6
299.6

4,480.0
5,697.9
5,095.3
4,448.8
5,397.6
4,951.0
5,968.1
6,124.4
6,281.1
9,014.1

6.4
8.0
150.5
291.6
413.9
447.5
615.2
501.1
506.3
363.0

Total(4)
24.0

19,949.8
21,273.0
23,300.0
24,322.5
26,094.2
24,861.6
26,192.7
29,016.1
28,430.7
39,255.4

Per share
($)
4.80

1,140.85
1,064.24
1,139.07
1,193.70
1,288.89
1,172.72
1,236.90
1,306.22
1,231.11
1,414.55

(1)

(2)

(3)

IFRS basis for 2010 to 2017; Canadian GAAP basis for 2009 and prior. Under Canadian GAAP, investments were
generally carried at cost or amortized cost in 2006 and prior.

Includes the company’s investment in other funds with a carrying value of $90.9 at December 31, 2017 (December 31,
2016 – $157.1, December 31, 2015 – $1.094.0) that are invested principally in fixed income securities.

Includes the company’s equity-accounted investments in KWF LPs, and Grivalia Properties prior to its consolidation
effective July 4, 2017.

(4) Net of short sale and derivative obligations of both the holding company and the operating companies commencing

in 2004.

(5)

Includes Allied World’s investment portfolio of $7,918.8, which the company commenced consolidating on July 6, 2017.

Investments per share increased by $183.44 to $1,414.55 at December 31, 2017 from $1,231.11 at December 31,
2016. Approximately $106 of the increase in investments per share reflected the factors that increased investments
described under the heading ‘‘Components of Consolidated Balance Sheets’’ in this MD&A (excluding the impact of
the acquisition of Allied World). Approximately $56 of the increase in investments per share reflected the
consolidation of Allied World’s investment portfolio of $7,918.8 relative to the 5,075,894 subordinate voting shares
issued to acquire Allied World. The remaining increase in investments per share of approximately $21 reflected the
impact of net repurchases of shares by the company for treasury for use in its share-based payment awards and for
cancellation pursuant to normal course issuer bids. Fairfax common shares effectively outstanding increased to
27,751,073 at December 31, 2017 from 23,093,566 at December 31, 2016. Since 1985, investments per share have
compounded at a rate of 19.4% per year, including the impact of acquisitions.

169

FAIRFAX FINANCIAL HOLDINGS LIMITED

Interest and Dividends

The majority of interest and dividends is earned by the insurance, reinsurance and run-off companies. Interest and
dividends on holding company cash and investments was $12.7 in 2017 (2016 – $16.4) prior to giving effect to total
return swap expense of $16.8 (2016 – $27.9). Interest and dividends earned in the company’s first year and for the
past ten years is presented in the following table.

Average

Investments at

carrying value(2) Amount
3.4
46.3

Pre-tax

Yield(3)
(%)
7.34

Interest and dividends

After tax

Per share
($)
0.70

Amount(4)
1.8

Yield(3)
(%)
3.89

Per share
($)
0.38

19,468.8
20,604.2
22,270.2
23,787.5
25,185.2
25,454.7
25,527.2
27,604.4
28,723.4
33,843.1

626.4
712.7
711.5
705.3
409.3
376.9
403.8
512.2
555.2
559.0

3.22
3.46
3.20
2.97
1.63
1.48
1.58
1.86
1.93
1.65

34.73
38.94
34.82
34.56
19.90
18.51
18.70
22.70
24.12
21.42

416.6
477.5
490.9
505.7
300.8
277.0
296.8
376.5
408.1
410.9

2.14
2.32
2.20
2.13
1.19
1.09
1.16
1.36
1.42
1.21

23.10
26.09
24.02
24.78
14.63
13.60
13.74
16.69
17.73
15.74

Year(1)
1986
(cid:2)

2008
2009
2010
2011
2012
2013
2014
2015
2016
2017

(1)

IFRS basis for 2010 to 2017; Canadian GAAP basis for 2009 and prior. Under Canadian GAAP, investments were
generally carried at cost or amortized cost in 2006 and prior.

(2) Comprised of cash and investments at both the holding company and operating companies, net of short sale and derivative

obligations commencing in 2004.

(3)

Interest and dividends, on a pre-tax and after-tax basis, expressed as a percentage of average investments at carrying value.

(4) Tax effected at the company’s Canadian statutory income tax rate.

Interest and dividends increased modestly to $559.0 in 2017 from $555.2 in 2016, primarily reflecting lower total
return swap expense, partially offset by lower interest earned. Lower interest earned principally reflected sales of
U.S. treasury and municipal bonds late in 2016 and in the first quarter of 2017, partially offset by the impact of
consolidating Allied World’s investment portfolio and the higher interest earned on increased holdings of cash and
short term investments. Total return swap expense decreased to $53.2 in 2017 from $146.4 in 2016, primarily
reflecting the closure of the Russell 2000 short equity index total return swaps in the fourth quarter of 2016.

The company’s pre-tax interest and dividends yield decreased from 1.93% in 2016 to 1.65% in 2017 and the
company’s after-tax interest and dividends yield decreased from 1.42% in 2016 to 1.21% in 2017. Prior to giving
effect to the interest which accrued to reinsurers on funds withheld of $2.8 (2016 – $0.9) and total return swap
expense of $53.2 (2016 – $146.4), interest and dividends in 2017 of $609.4 (2016 – $700.7) produced a pre-tax gross
portfolio yield of 1.80% (2016 – 2.44%). The decline in the pre-tax gross portfolio yield was primarily due to lower
interest earned on bonds as the result of sales of U.S. treasury and municipal bonds late in 2016 and in the first
quarter of 2017 as described in the preceding paragraph.

Share of Profit of Associates

Share of profit of associates increased to $200.5 in 2017 from $24.2 in 2016, primarily due to year-over-year increases
of $124.0 related to Eurolife and a non-cash impairment charge of $100.4 recognized on Resolute in 2016. Details of
the company’s associates and transactions related to associates are described in note 6 (Investments in Associates) to
the consolidated financial statements for the year ended December 31, 2017.

170

Net Gains (Losses) on Investments

Net gains on investments of $1,467.5 in 2017 (2016 – net losses on investments of $1,203.6) were comprised as
shown in the following table:

2017

2016

Common stocks
Preferred stocks – convertible
Bonds – convertible
Gain on disposition of associates(1)
Other equity derivatives(2)(3)

Long equity exposures

Short equity exposures and equity

hedges(3)

Net equity exposure and

financial effects
Bonds
CPI-linked derivatives
U.S. treasury bond forwards
Other derivatives
Foreign currency
Gain on disposition of insurance
and reinsurance associates(4)

Other

Net gains (losses) on investments

Net gains (losses) on bonds is

comprised as follows:
Government bonds
U.S. states and municipalities
Corporate and other

Net
realized gains
(losses)

Net change in
unrealized
gains (losses)

investments

Net
Net gains
(losses) on realized gains
(losses)
(151.2)(5)(6)
(68.0)(5)(7)
35.0
–
–

707.8
(1.6)
233.1
69.8
57.9

Net change in
unrealized
gains (losses)

Net gains
(losses) on
investments

73.2(5)(6)
61.4(5)(7)
(74.4)
–
19.3

(78.0)
(6.6)
(39.4)
–
19.3

582.7
(1.6)
207.2
–
77.8

866.1

1,067.0

(184.2)

79.5

(104.7)

125.1
–
25.9
69.8
(19.9)

200.9

(553.1)

135.2

(417.9)

(2,634.8)

1,441.9

(1,192.9)

(352.2)
419.8
–
(174.5)
(8.4)
(95.1)

930.1
3.7

723.4

(2.6)
437.5
(15.1)

419.8

1,001.3
(374.9)
(71.0)
21.3
8.1
97.9

–
61.4

649.1
44.9
(71.0)
(153.2)
(0.3)
2.8

930.1
65.1

(2,819.0)
648.7
–
96.7
(70.6)
80.6

–
(7.8)

1,521.4
(326.0)
(196.2)
(49.7)
63.2
(210.1)

–
65.2

(1,297.6)
322.7
(196.2)
47.0
(7.4)
(129.5)

–
57.4

744.1

1,467.5

(2,071.4)

867.8

(1,203.6)

26.8
(370.2)
(31.5)

(374.9)

24.2
67.3
(46.6)

44.9

334.3
321.4
(7.0)

648.7

(77.5)
(350.9)
102.4

(326.0)

256.8
(29.5)
95.4

322.7

(2) Other equity derivatives include long equity total return swaps, equity warrants and equity index call options.

(3) Gains and losses on equity and equity index total return swaps that are regularly renewed as part of the company’s long
term investment strategy are presented within net change in unrealized gains (losses). During 2017 the company closed
out $1,202.9 notional amount of short equity total return swaps and recogonized a net loss on investment of $237.9
(realized loss of $553.1, of which $315.2 was recognized as unrealized losses in prior years). In the fourth quarter of 2016
the company discontinued its economic hedging strategy and recorded a net loss on investment of $955.2 (realized loss of
$2,665.4, of which $1,710.2 had been recogonized as unrealized losses in prior years).

(4) During 2017 the company sold a 24.3% equity interest in ICICI Lombard for net proceeds of $908.5 and recorded a net
realized gain of $595.6. The company’s remaining 9.9% equity interest in ICICI Lombard was reclassified to common
stock measured at FVTPL and re-measured to fair value for a net realized gain of $334.5. Refer to note 6 (Investments in
Associates) to the consolidated financial statements for the year ended December 31, 2017.

(5) During 2016 the company recognized net realized losses of $220.3 and $103.7 on common and preferred stock
investments pursuant to the issuer’s plan of restructuring and subsequent emergence from bankruptcy protection. Prior
period unrealized losses on the common and preferred stock investments of $209.5 and $99.6 were reclassified to net
realized losses with a net impact of nil on the consolidated statement of earnings.

171

FAIRFAX FINANCIAL HOLDINGS LIMITED

(7) During 2016 the company was required to convert a preferred stock investment into common shares of the issuer, resulting
in a net realized gain on investment of $35.1 (the difference between the share price of the underlying common stock at the
date of conversion and the exercise price of the preferred stock). Prior period unrealized gains on the preferred stock
investment of $41.7 were reclassified to net realized gains with a net impact of nil on the consolidated statement
of earnings.

Net equity exposure and financial effects: During 2017 the company’s net equity exposure (long equity
exposures net of short equity exposures) produced net gains of $649.1 (2016 – net losses of $1,297.6).

The company discontinued its economic equity hedging strategy in the fourth quarter of 2016 after giving
consideration to the possible and actual outcome of the U.S. elections and the potential for fundamental changes
that could improve U.S. economic growth and equity markets. During 2016 the company closed out $6,350.6
notional amount of short positions effected through equity index total return swaps (comprised of Russell 2000,
S&P 500 and S&P/TSX 60 short equity index total return swaps) and recognized a net loss on investment of $955.2
(realized loss of $2,665.4 of which $1,710.2 had been recognized as unrealized losses in prior years). The company
continues to hold short equity and equity index total return swaps for investment purposes, but no longer regards
them as hedges of its equity and equity-related holdings. During 2017 the company closed out $1,202.9 notional
amount of short equity total return swaps and recognized a net loss on investment of $237.9 (realized loss of $553.1
of which $315.2 was recognized as unrealized losses in prior years). In the first quarter of 2018 the company closed
out an additional $481.3 notional amount of short equity and equity index total return swaps and recognized a net
loss on investment of $8.1 (realized loss of $199.0 of which $190.9 was recognized as unrealized losses in prior years),
which reduced the notional amount of remaining short equity and equity index total return swaps to
approximately $509.

Bonds: Net gains on bonds of $44.9 in 2017 were primarily comprised of net gains on U.S. treasury bonds ($52.8)
and U.S. state and municipal bonds ($67.3), partially offset by losses on Indian government bonds ($40.5) and
corporate and other bonds ($46.6).

CPI-linked derivatives: The company has purchased derivative contracts referenced to consumer price indexes
(‘‘CPI’’) in the geographic regions in which it operates to serve as an economic hedge against the potential adverse
financial impact on the company of decreasing price levels. During 2017 the company did not enter into any new
CPI-linked derivative contracts. The company’s CPI-linked derivative contracts produced net unrealized losses of
$71.0 in 2017 (2016 – $196.2).

Net unrealized losses on CPI-linked derivative contracts typically reflect increases in the values of the CPI indexes
underlying those contracts during the periods presented (those contracts are structured to benefit the company
during periods of decreasing CPI index values). Refer to the analysis in note 7 (Short Sales and Derivatives) under the
heading CPI-linked derivatives in the company’s consolidated financial statements for the year ended December 31,
2017 for a discussion and analysis of the company’s CPI-linked derivatives.

172

Net gains (losses) on investments by reporting segment: Net gains (losses) on investments by reporting
segment for 2017 and 2016 were comprised as shown in the following tables:

Year ended December 31, 2017

Insurance and Reinsurance

Crum &
Northbridge OdysseyRe Forster National Brit World(1)

Zenith

Allied Fairfax

Operating

Corporate
and

Asia Other companies Run-off Other

Other Consolidated

Long equity exposures

Short equity exposures

Bonds

U.S treasury bond forwards

CPI-linked derivatives

Foreign currency
Other(2)

114.4

(35.7)

(21.9)

(2.3)

(5.5)

(5.9)

1.7

0.6

–

362.0

119.1

24.6

80.9

130.5

80.8

(46.2)

(13.5)

(29.0)

(22.2)

0.1

1.9

(114.5)

102.6

(84.0)

(5.0)

9.6

0.1

–

5.1 (10.4)

(35.5)

11.9

(8.5)

(5.5)

(1.2)

(7.6)

–

10.3

15.5

10.1

10.7

0.6

1.8

(1.7)

930.8

(8.3)

6.9

(2.4)

(17.3)

2.8

7.0

912.9

(204.7)

45.2

(127.4)

(63.1)

53.2

942.2

129.9

23.6

0.6

(35.1)

–

(178.1)

8.0

(2.5)

(23.5)

(1.9)

–

(4.1)

(13.4)

–

(0.5)

(5.8)

(2.3)

(6.0)

(32.9)

53.2

1,067.0

(417.9)

44.9

(153.2)

(71.0)

2.8

994.9

Net gains (losses) on investments

44.8

253.1

27.9

26.6

79.0

(26.5) 1,083.9

69.5

1,558.3

73.3

7.2

(171.3)

1,467.5

Year ended December 31, 2016

Insurance and Reinsurance

Zenith
Northbridge OdysseyRe Forster National

Crum &

Allied Fairfax

Brit World(1)

Long equity exposures

Short equity exposures

Bonds

CPI-linked derivatives

Foreign currency

Other

42.6

(16.1)

31.1

(43.2)

(36.9)

(181.8)

(389.0)

(155.0)

(107.0)

(13.1)

67.6

(20.3)

(67.8)

(1.6)

90.9

(43.8)

27.8

11.5

(27.9)

(16.7)

(35.1)

18.9

19.8

110.6

(15.5)

(20.6)

(20.7)

(1.6)

41.5

5.8

Net gains (losses) on investments

(161.3)

(318.7)

(184.7)

(168.2)

87.3

–

Operating

Corporate
and

Asia Other companies Run-off Other

Other Consolidated

5.2

(9.6)

(26.9)

(32.4)

13.5

–

(62.1)

(908.0)

(159.0)

–

0.4

33.9

–

(44.1)

(7.0)

(0.3)

(5.7)

(2.4)

295.3

(161.0)

(67.0)

30.3

7.1

19.0

(11.2)

(48.6)

18.9

–

(5.9)

3.5

(58.9)

(125.9)

1.3

(24.0)

(8.0)

44.3

(104.7)

(1,192.9)

322.7

(196.2)

(129.5)

97.0

(1.7)

(90.0)

(837.3)

(225.2)

30.1

(171.2)

(1,203.6)

(1)
(2)

Allied World is included in the company’s financial reporting with effect from July 6, 2017.
Includes net realized gains of $930.1 on partial disposition of the company’s investment in ICICI Lombard at Fairfax Asia, refer to note 6 (Investments in Associates) to
the consolidated financial statements for the year ended December 31, 2017.

Total Return on the Investment Portfolio

The following table presents the performance of the investment portfolio since Fairfax’s inception in 1985. For the
years 1986 to 2006, the calculation of total return on average investments included interest and dividends, net
realized gains (losses) and changes in net unrealized gains (losses) as the majority of the company’s investment
portfolio was carried at cost or amortized cost under Canadian GAAP. For the years 2007 to 2009, Canadian GAAP
required the company to carry the majority 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 in associates. Effective January 1, 2010 the company
adopted IFRS and was required to carry the majority of its investments at FVTPL and as a result, the calculation of
total return on average investments for the years 2010 to 2017 includes interest and dividends, net investment gains
(losses) recorded in net earnings and changes in net unrealized gains (losses) on equity accounted investments in
associates. All noted amounts above are included on a pre-tax basis in the calculation of total return on average
investments.

173

FAIRFAX FINANCIAL HOLDINGS LIMITED

Average
investments
at carrying
value(2)

Interest
and
dividends

Net Change in
realized unrealized
gains
(losses)

gains
(losses)

Net gains (losses)
recorded in:

Net

Other
earnings comprehensive
income (loss)

(loss)(3)

46.3
81.2
102.6
112.4
201.2
292.3
301.8
473.1
871.5
1,163.4
1,861.5
3,258.6
5,911.2
10,020.3
11,291.5
10,264.3
10,377.9
11,527.5
12,955.8
14,142.4
15,827.0
17,898.0
19,468.8
20,604.2
22,270.2
23,787.5
25,185.2
25,454.7
25,527.2
27,604.4
28,723.4
33,843.1

3.4
6.2
7.5
10.0
17.7
22.7
19.8
18.1
42.6
65.3
111.0
183.8
303.7
532.7
534.0
436.9
436.1
331.9
375.7
466.1
746.5
761.0
626.4
712.7
711.5
705.3
409.3
376.9
403.8
512.2
555.2
559.0

0.7
7.1
6.5
13.4
2.0
(3.9)
2.8
21.6
14.6
52.5
96.3
149.3
314.3
63.8
259.1
121.0
465.0
826.1
300.5(4)
385.7
789.4(5)

–
–
–
–
–
–
–
–
–
–
–

(0.2)
(6.1)
9.5
(5.1)
(28.5)
24.0
(8.3)
22.2
(30.7)
32.7
82.1
(6.9)
(78.3)
(871.4)
584.1
194.0
263.2
142.4
165.6
73.0
(247.8)

–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
– 1,639.5
– 2,718.6
904.3(6)
–
28.7
–
737.7
–
–
639.4
– (1,579.8)
– 1,682.7
–
(341.3)
– (1,223.3)
– 1,542.4

–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
304.5
(426.7)
1,076.7
–
–
–
–
–
–
–
–

Change in
unrealized
gains
(losses) on
investments
in associates(8)

Total return
on average
investments(8)

(%)

3.9
7.2

–
8.4
–
8.9
–
23.5 22.9
–
18.3 16.3
–
(8.8) (4.4)
–
42.8 14.6
–
14.3
4.7
–
61.9 13.1
–
3.0
26.5
–
150.5 12.9
–
289.4 15.5
–
326.2 10.0
–
539.7
9.1
(274.9) (2.7)
–
– 1,377.2 12.2
–
7.3
751.9
– 1,164.3 11.2
– 1,300.4 11.3
6.5
841.8
–
6.5
–
924.8
– 1,288.1
8.1
(131.2) 2,573.8 14.4
278.3 3,196.6 16.4
(185.2) 2,508.5 12.2
3.8
98.2
838.4
6.4
78.5 1,521.5
79.6 1,128.3
4.5
(44.6) (1,247.5) (4.9)
8.4
70.3 2,156.8
191.8
20.9
0.7
(508.0) (1.8)
160.1
7.2
339.2 2,440.6

Year(1)
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
2013
2014
2015
2016
2017

Cumulative from inception

11,005.0

3,887.8

6,748.9

8.2(7)

(1)

IFRS basis for 2010 to 2017; Canadian GAAP for 2009 and prior. Under Canadian GAAP, investments were generally
carried at cost or amortized cost in 2006 and prior.

(2) Comprised of cash and investments at both the holding company and operating companies, net of short sale and derivative

obligations commencing in 2004.

(3) Excludes net gains (losses) recognized on the company’s underwriting activities related to foreign currency since 2008.

(4) Excludes the $40.1 gain on the company’s secondary offering of Northbridge and the $27.0 loss in connection with the

company’s repurchase of outstanding debt at a premium to par during 2004.

(5) Excludes the $69.7 gain on the company’s 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 of the OdysseyRe convertible senior
debenture during 2006.

(6) Net gains on investments in 2009 excluded $25.9 of gains recognized on transactions involving the common and preferred

shares of the company’s consolidated subsidiaries.

(7) Simple average of the total return on average investments for each of the 32 years.

(8) Total return on average investments is considered a non-IFRS measure as it includes changes in net unrealized gains

(losses) on equity accounted investments in associates and excludes share of profit (loss) of associates.

174

Investment gains have been an important component of Fairfax’s financial results since 1985, having contributed an
aggregate $11,695.4 (pre-tax) to total equity since inception. The contribution has fluctuated significantly from
period to period; the amount of investment gains (losses) for any period has no predictive value and variations in
amount from period to period have no practical analytical value. From inception in 1985 to 2017, total return on
average investments has averaged 8.2%.

The company has a long term, value-oriented investment philosophy. It continues to expect fluctuations in the
global financial markets for common stocks, bonds, derivatives and other securities.

Bonds

Credit Risk

At December 31, 2017, 72.2% (December 31, 2016 – 79.2%) of the fixed income portfolio carrying value was rated
investment grade or better, with 47.1% (December 31, 2016 – 61.9%) being rated AA or better (primarily consisting of
government obligations). Refer to note 24 (Financial Risk Management) under the heading Investments in Debt
Instruments in the consolidated financial statements for the year ended December 31, 2017 for a discussion of the
company’s exposure to the credit risk of individual issuers, sovereign and U.S. state and municipal governments.

Interest Rate Risk

Hypothetical parallel upward shifts in the term structure of interest rates by 100 basis points and 200 basis points
would potentially decrease net earnings by $155.6 and $306.2 respectively (2016 – $148.2 and $295.1). The
company’s exposure to interest rate risk did not change significantly during 2017 compared to 2016. Allied World’s
bond portfolio ($5,337.2, acquired on July 6, 2017) was re-balanced to reflect the company’s interest rate risk
tolerance. To reduce its exposure to interest rate risk (specifically exposure to U.S. state and municipal bonds and
long dated U.S. treasury bonds held in its fixed income portfolio), the company entered into forward contracts to sell
long dated U.S. treasury bonds with a notional amount of $1,693.8 as at December 31, 2017 (December 31, 2016 –
$3,013.4). These contracts have an average term to maturity of less than three months and may be renewed at
market rates.

The company’s exposure to interest rate risk is discussed further in note 24 (Financial Risk Management) to the
consolidated financial statements for the year ended December 31, 2017.

Common Stocks

The company holds significant investments in equity and equity-related instruments. 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. Throughout most of 2016 the
company had economically hedged its equity and equity-related holdings. The company discontinued its economic
equity hedging strategy in the fourth quarter of 2016 after giving consideration to the possible and actual outcome of
the U.S. elections and the potential for fundamental changes that could improve U.S. economic growth and equity
markets. During 2017 the company’s equity and equity-related exposure increased, primarily reflecting the
consolidation of the common stock portfolio of Allied World ($833.8), net acquisitions of non-insurance and
reinsurance associates, purchases of common stocks and the continued reduction of the notional amount of short
equity total return swaps.

As a result of the increase in its net equity exposures and the termination of its economic equity hedging strategy, a
hypothetical decrease in global equity markets of 5% and 10% at December 31, 2017 would potentially decrease the
company’s net earnings by $238.5 and $475.0 respectively (2016 – $106.7 and $204.5). The company’s net equity

175

FAIRFAX FINANCIAL HOLDINGS LIMITED

exposure and exposure to market price fluctuations are discussed further in note 24 (Financial Risk Management) to
the consolidated financial statements for the year ended December 31, 2017.

The company’s holdings of common stocks and long equity total return swaps at December 31, 2017 and 2016 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,
2016(1)
2,988.2
571.5
834.8

2017(1)
4,171.6
1,356.1
748.2

6,275.9

4,394.5

(1) Excludes other funds of $90.9 at December 31, 2017 (December 31, 2016 – $157.1) that are invested principally in fixed

income securities.

The company’s holdings of common stocks and long equity total return swaps at December 31, 2017 and 2016 are
summarized by the issuer’s country of domicile in the table below.

United States
Canada
India
Greece
Egypt
Netherlands
China
Singapore
Hong Kong
Thailand
United Kingdom
Nigeria
Kuwait
Germany
Ireland
All other

December 31, December 31,
2016(1)
1,266.9
755.6
247.8
297.0
331.5
231.9
167.2
182.3
66.8
105.5
35.8
74.4
70.3
30.3
102.8
428.4

2017(1)
2,078.2
1,060.7
621.2
434.1
367.1
355.8
214.3
122.9
115.2
111.0
94.3
78.4
47.7
29.5
0.8
544.7

6,275.9

4,394.5

(1) Excludes other funds of $90.9 at December 31, 2017 (December 31, 2016 – $157.1) that are invested principally in fixed

income securities.

Derivatives and Derivative Counterparties

The company endeavours to limit counterparty risk through diligent selection of counterparties to its derivative
contracts and through the terms of negotiated agreements. 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 based on the then daily fair value of the derivative contracts. 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 company to a counterparty to be offset to
the extent of the aggregate amount receivable by the company from that counterparty. The company’s exposure to
derivative counterparty risk at December 31, 2017 was estimated to be $66.2 (December 31, 2016 – $105.8).

Refer to note 24 (Financial Risk Management) under the heading Credit Risk – Counterparties to Derivative
Contracts in the company’s consolidated financial statements for the year ended December 31, 2017 for a discussion
and tabular analysis of the company’s exposure to derivative counterparty risk.

176

Float

Fairfax’s float (a non-IFRS measure) is the sum of its loss reserves, including loss adjustment expense reserves,
unearned premiums and other insurance contract liabilities, less insurance contract receivables, recoverable 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 23.5% in 2017 to $16,977.9, at a cost
of 3.8%.

Year
1986
(cid:2)

2013
2014
2015
2016
2017
Weighted average since inception

Underwriting
profit (loss)(1)
2.5

Average
float
21.6

Cost (benefit)
of float
(11.6)%

12,045.7
440.0
11,707.4
552.0
12,634.9
704.5
575.9
13,748.6
(641.5) 16,977.9

(3.7)%
(4.7)%
(5.6)%
(4.2)%
3.8%
0.7%

Average long
term Canada
treasury
bond yield
9.6%

2.8%
2.8%
2.2%
1.9%
2.3%
3.7%

Fairfax’s weighted average net benefit of float since inception: 3.0%

(1)

IFRS basis for 2010 to 2017; Canadian GAAP basis for 2009 and prior.

The following table presents a breakdown of total year-end float for the most recent five years.

Insurance and Reinsurance

Year

2013
2014
2015
2016
2017

Northbridge(1) OdysseyRe(2)

Crum &
Zenith
Forster(3) National(4)

Brit(5)

Allied Fairfax
Asia(7)

World(6)

Other(8)

Ongoing
operations

Run-off(9)

Total

2,112.0
1,910.8
1,626.1
1,670.7
1,760.2

4,673.5
4,492.3
4,172.2
4,024.6
4,439.6

2,338.7 1,202.3
2,562.7 1,195.2
2,593.6 1,217.1
2,706.5 1,179.1
2,860.8 1,177.2

– 519.3 1,003.2 11,849.0 3,701.5 15,550.5
–
880.4 11,565.8 3,499.2 15,065.0
– 524.4
–
792.5 13,704.0 3,367.6 17,071.6
– 570.7
2,731.8
855.4 13,793.2 2,879.7 16,672.9
– 561.1
2,795.8
3,078.3 5,457.2 233.5 1,155.8 20,162.6 2,566.9 22,729.5

During 2017 the company’s total float increased by $6,056.6 to $22,729.5.

(1) Northbridge’s float increased by 5.4% primarily due to the effect of the strengthening of the Canadian dollar relative to the
U.S. dollar. In Canadian dollar terms, Northbridge’s float decreased by 1.7% primarily due to a decrease in loss reserves
reflecting favourable prior year development and an increase in insurance balances receivables.

(2) OdysseyRe’s float increased by 10.3% primarily due to increases in loss reserves and unearned premiums, partially offset
by increases in insurance balances receivable and reinsurance recoverables. The increases in loss reserves and reinsurance
recoverables were principally due to increased catastrophe losses in 2017. The increase in unearned premiums primarily
reflected higher business volumes.

(3) Crum & Forster’s float increased by 5.7% primarily due to an increase in unearned premiums from higher business

volumes, partially offset by lower loss reserves and reinsurance recoverables.

(4) Zenith National’s float was consistent year-over-year (decreased by 0.2%) but reflected an increase in unearned premiums

due to slightly higher business volumes, largely offset by an increase in insurance balances receivable.

(5) Brit’s float increased by 10.1% due to increases in loss reserves and unearned premiums, partially offset by increases in
reinsurance recoverables and insurance balances receivable. The increases in loss reserves and reinsurance recoverables
were principally due to increased catastrophe losses in 2017.

(6) Allied World increased the company’s float with effect from its acquisition date of July 6, 2017.

177

FAIRFAX FINANCIAL HOLDINGS LIMITED

(7) Fairfax Asia’s float decreased by 58.4% primarily due to the sale of its 97.7% interest in First Capital in 2017. Excluding

the impact of the First Capital sale, Fairfax Asia’s float decreased by 2.6%.

(8)

Insurance and Reinsurance – Other’s float increased by 35.1% primarily due the consolidation of Fairfax Latam and the
strengthening of the Canadian dollar, South African rand and Polish zloty relative to the U.S. dollar, partially offset by the
strengthening of the U.S. dollar relative to the Brazilian real. The increase in float also reflected increases in loss reserves
and reinsurance recoverables principally due to increased catastrophe losses in 2017.

(9) Run-off’s float decreased by 10.9% primarily due to lower loss reserves, partially offset by lower insurance balances
receivable and reinsurance recoverables. Lower loss reserves and reinsurance recoverables were principally due to normal
course cession and collection activity, partially offset by net adverse prior year reserve development. The decrease in
insurance balances receivable reflected the settlement of a large receivable balance which was outstanding at the end
of 2016.

Financial Condition

Capital Resources and Management

The company manages its capital based on the following financial measurements and ratios:

Holding company cash and investments (net of short sale

and derivative obligations)

2,356.9

1,329.4

1,275.9 1,212.7 1,241.6

December 31,

2017

2016

2015

2014

2013

Borrowings – holding company
Borrowings – insurance and reinsurance companies
Borrowings – non-insurance companies

Total debt

Net debt(1)

Common shareholders’ equity
Preferred stock
Non-controlling interests

Total equity

3,475.1
1,373.0
1,566.0

3,472.5
435.5
859.6

2,599.0 2,656.5 2,491.0
458.8
385.9
44.7
136.6

468.5
284.0

6,414.1

4,767.6

3,351.5 3,179.0 2,994.5

4,057.2

3,438.2

2,075.6 1,966.3 1,752.9

12,475.6
1,335.5
4,600.9

8,484.6
1,335.5
2,000.0

8,952.5 8,361.0 7,186.7
1,334.9 1,164.7 1,166.4
107.4
218.1
1,731.5

18,412.0 11,820.1 12,018.9 9,743.8 8,460.5

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)

22.0%
18.1%
25.8%
7.1x
6.0x

29.1%
22.5%
28.7%
n/a
n/a

17.3% 20.2% 20.7%
14.7% 16.8% 17.2%
21.8% 24.6% 26.1%
12.3x
9.0x

3.9x
2.9x

n/a
n/a

(1) Net debt is calculated by the company as total debt less holding company cash and investments (net of short sale and

derivative obligations).

(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.

Holding company cash and investments increased to $2,356.9 at December 31, 2017 from $1,329.4 at December 31,
2016. Significant cash movements at the Fairfax holding company level during 2017 are as set out in the Financial
Condition section of this MD&A under the heading Liquidity.

178

Borrowings – holding company increased by $2.6 to $3,475.1 at December 31, 2017 from $3,472.5 at December 31,
2016 primarily reflecting the issuance of Cdn$650.0 principal amount of 4.25% unsecured senior notes due
December 6, 2027 and the impact of foreign currency translation on the company’s Canadian dollar denominated
long term debt, partially offset by the early redemption of the Cdn$388.4 principal amount of 7.50% unsecured
senior notes due 2019, the repayment of the amount drawn on the revolving credit facility, the repayment of
purchase consideration payable upon maturity and the repurchases of $17.8 principal amount of Fairfax senior notes
due 2019, 2020 and 2021.

Borrowings – insurance and reinsurance companies increased by $937.5 to $1,373.0 at December 31, 2017 from
$435.5 at December 31, 2016 primarily reflecting the consolidation of the borrowings of Allied World ($878.0) and
borrowings of $45.0 on Brit’s revolving credit facility which was repaid in January 2018.

Borrowings – non-insurance companies increased by $706.4 to $1,566.0 at December 31, 2017 from $859.6 at
December 31, 2016 primarily reflecting the consolidation of the borrowings of Grivalia Properties ($160.4), Mosaic
Capital ($54.0) and Fairfax Africa (term loan of $150.0) and increased borrowings at Fairfax India (term loan of
$400.0 at December 31, 2017 compared to $225.0 at December 31, 2016).

Common shareholders’ equity increased from $8,484.6 at December 31, 2016 to $12,475.6 at December 31, 2017
primarily reflecting the issuance of 5,075,894 subordinate voting shares pursuant to the acquisition of Allied World
($2,191.6), net earnings attributable to shareholders of Fairfax ($1,740.6) and other comprehensive income ($283.8,
comprised of net unrealized foreign currency translation gains on foreign operations of $200.4 and share of other
comprehensive income of associates of $114.3, partially offset by net losses on defined benefit plans of $30.9),
partially offset by the payment of dividends on the company’s common and preferred shares ($282.0).

Non-controlling interests increased from $2,000.0 at December 31, 2016 to $4,600.9 at December 31, 2017
principally reflecting the impact of the consolidation of Allied World ($1,229.4) and Grivalia Properties ($517.6),
Fairfax India’s secondary offering in January 2017 and Fairfax Africa’s initial public offering in February 2017, the
reduction in the company’s indirect ownership of Quess from 42.1% to 33.1% and foreign currency translation
(principally the strengthening of the Canadian dollar relative to the U.S. dollar), partially offset by the net loss
attributable to non-controlling interests ($125.7) and dividends paid to non-controlling interests (principally the
dividend paid by Brit to its minority shareholder OMERS).

The changes in holding company borrowings, subsidiary borrowings (comprised of the borrowings of the insurance
and reinsurance companies and the non-insurance companies) and common shareholders’ equity affected the
company’s leverage ratios as follows: the consolidated net debt/net total capital ratio decreased from 22.5% at
December 31, 2016 to 18.1% at December 31, 2017 primarily as a result of increased net total capital, partially offset
by increased net debt. The increase in net debt was primarily due to increased subsidiary borrowings, partially offset
by increased holding company cash and investments. The increase in net total capital was primarily due to increases
in common shareholders’ equity, non-controlling interests and net debt. The consolidated total debt/total capital
ratio decreased from 28.7% at December 31, 2016 to 25.8% at December 31, 2017 primarily as a result of increased
total capital (reflecting increases in common shareholders’ equity, non-controlling interests and total debt), partially
offset by increased total debt.

The company believes that holding company cash and investments, net of short sale and derivative obligations, at
December 31, 2017 of $2,356.9 (December 31, 2016 – $1,329.4) provide adequate liquidity to meet the holding
company’s known commitments in 2018. Refer to the Liquidity section of this MD&A for a discussion of the holding
company’s available sources of liquidity and known significant commitments for 2018.

The company’s insurance and reinsurance companies continue to maintain capital above minimum regulatory
levels, at levels adequate to support their issuer credit and financial strength ratings, and above internally calculated
risk management levels as discussed below. A common non-IFRS measure of capital adequacy in the property and

179

FAIRFAX FINANCIAL HOLDINGS LIMITED

casualty industry is the ratio of net premiums written to statutory surplus (or total equity). This ratio is shown for the
insurance and reinsurance companies for the most recent five years in the following table:

Insurance and Reinsurance

Northbridge (Canada)
OdysseyRe (U.S.)
Crum & Forster (U.S.)
Zenith National (U.S.)
Brit(1)
Allied World(2)
Fairfax Asia(3)
Other(4)

Canadian insurance industry
U.S. insurance industry

Net premiums written to statutory
surplus (total equity)

2017

2016

2015

2014

2013

1.0
0.6
1.4
1.5
1.4
0.9
0.4
0.8
1.1
0.8

0.9
0.5
1.5
1.5
1.3
–
0.4
0.7
1.0
0.7

0.9
0.5
1.3
1.3
1.4
–
0.5
0.7
1.0
0.7

0.8
0.6
1.1
1.3
n/a
–
0.5
0.5
1.0
0.7

0.9
0.6
1.1
1.4
n/a
–
0.5
0.6
1.0
0.7

(1) The 2015 ratio presented for Brit includes net premiums written by Brit prior its acquisition by the company on

June 5, 2015.

(2) The 2017 ratio presented for Allied World includes net premiums written by Allied World prior its acquisition by the

company on July 6, 2017 and its U.S. GAAP equity of $2,523.8 at December 31, 2017.

(3) Total equity excludes certain holding company investments.

(4) Other includes Group Re, Bryte Insurance, Advent, Fairfax Latin America (Fairfax Brasil and Fairfax Latam) and Fairfax

CEE (Colonnade Insurance and Polish Re).

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, 2017 OdysseyRe, Crum & Forster, Zenith National, Allied World and U.S. Run-off 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 of at least 3.3 times (December 31, 2016 – 3.4 times) the authorized control level,
except for TIG Insurance which had 2.3 times (December 31, 2016 – 2.2 times).

In Bermuda, insurance and reinsurance companies are regulated by the Bermuda Monetary Authority and are subject
to the statutory requirements of the Bermuda Insurance Act 1978. There is a requirement to hold available statutory
economic capital and surplus equal to or in excess of an enhanced capital and target capital level as determined
under the Bermuda Solvency Capital Requirement model. The target capital level is measured as 120% of the
enhanced capital requirements. At December 31, 2017 Allied World was in compliance with Bermuda’s regulatory
requirements.

The Lloyd’s market is subject to the solvency and capital adequacy requirements of the Prudential Regulatory
Authority in the U.K. The capital requirements of Brit are based on the output of an internal model which reflects the
risk profile of the business. At December 31, 2017 Brit’s available capital consisted of net tangible assets (total assets
less any intangible assets and all liabilities), subordinated debt and contingent funding in the form of letters of credit
and amounted to $1,468.5 (December 31, 2016 – $1,457.3). This represented a surplus of $395.1 (December 31,
2016 – $297.1) over the management capital requirements (capital required for business strategy and regulatory
requirements), compared to Brit’s minimum targeted surplus of $200.0 (December 31, 2016 – $200.0).

180

In countries other than the U.S., Canada, the U.K. and Bermuda where the company operates, the company met or
exceeded the applicable regulatory capital requirements at December 31, 2017.

The issuer credit ratings and financial strength ratings of Fairfax and its insurance and reinsurance operating
companies at December 31, 2017 were as follows:

Issuer Credit Ratings

Standard

A.M. Best

& Poor’s Moody’s

Fairfax Financial Holdings Limited

bbb

BBB-

Baa3

Financial Strength Ratings
Crum & Forster Holdings Corp.(1)
Zenith National Insurance Corp.(1)
Odyssey Re Holdings Corp.(1)
Brit Limited(2)
Northbridge General Insurance Corp.
Federated Insurance Company of Canada
Allied World Assurance Company Holdings, GmbH(1)
Wentworth Insurance Company Ltd.
Falcon Insurance Company (Hong Kong) Limited
Advent Capital (Holdings) Ltd.(2)
Polish Re
Colonnade Insurance S.A.

A
A
A
A
A
A
A
A
–
A
A-
A-

A-
A-
A-
A+
A-
A-
A-
–
A-
A+
–
–

Baa1
Baa1
A3
–
A3
–
A3
–
–
–
–
–

DBRS

BBB
(high)

–
–
–
–
A
A
–
–
–
–
–
–

(1) Financial strength ratings apply to the operating companies.

(2) Advent and Brit’s ratings are the A.M. Best and Standard & Poor’s ratings assigned to Lloyd’s.

During 2017 DBRS upgraded the Issuer Credit Rating of Fairfax to ‘‘BBB (high)’’ from ‘‘BBB’’ and the Financial
Strength Ratings of Northbridge General Insurance Corp. and Federated Insurance Company of Canada to ‘‘A’’ from
‘‘A (low)’’. Standard & Poor’s and Moody’s downgraded the Financial Strength Ratings of Allied World’s operating
companies to ‘‘A-’’ and ‘‘A3’’ from ‘‘A’’ and ‘‘A2’’ respectively subsequent to the acquisition by Fairfax. A.M. Best
assigned a Financial Strength Rating of ‘‘A-’’ to Colonnade Insurance.

Book Value Per Share

Common shareholders’ equity at December 31, 2017 of $12,475.6 or $449.55 per basic share (excluding the
unrecorded $1,233.0 pre-tax excess of fair value over the carrying value of investments in associates and certain
consolidated non-insurance subsidiaries) compared to $8,484.6 or $367.40 per basic share (excluding the unrecorded
$1,001.7 pre-tax excess of fair value over the carrying value of investments in associates and certain consolidated
non-insurance subsidiaries) at December 31, 2016, representing an increase per basic share in 2017 of 22.4%
(without adjustment for the $10.00 per common share dividend paid in the first quarter of 2017, or a increase of
24.7% adjusted to include that dividend). During 2017 the number of basic shares increased primarily as a result of
the issuance of 5,075,894 subordinate voting shares related to the acquisition of Allied World, partially offset by net
repurchases of 243,087 subordinate voting shares for treasury (for use in the company’s share-based payment awards)
and purchases of 184,367 subordinate voting shares for cancellation. At December 31, 2017 there were
27,751,073 common shares effectively outstanding.

181

FAIRFAX FINANCIAL HOLDINGS LIMITED

The company has issued and repurchased common shares in the most recent five years as follows:

Date
2013 – issuance of shares
2013 – repurchase of shares
2014 – repurchase of shares
2015 – issuance of shares
2016 – issuance of shares
2016 – repurchase of shares
2017 – issuance of shares
2017 – repurchase of shares

Number of
subordinate
voting shares
1,000,000
(36)
(8)
1,169,294
1,000,000
(30,732)
5,084,961
(184,367)

Average
issue/repurchase
price per share
399.49
402.78
430.98
502.01
523.50
458.81
431.94
521.79

Net proceeds/
(repurchase cost)
399.5
–
–
587.0
523.5
(14.1)
2,196.4
(96.2)

On September 28, 2017 the company commenced its normal course issuer bid by which it is authorized, until expiry
of the bid on September 27, 2018, to acquire up to 2,672,504 subordinate voting shares, 601,538 Series C preferred
shares, 344,111 Series D preferred shares, 396,713 Series E preferred shares, 357,204 Series F preferred shares,
743,295 Series G preferred shares, 256,704 Series H preferred shares, 1,046,555 Series I preferred shares,
153,444 Series J preferred shares, 950,000 Series K preferred shares and 920,000 Series M preferred shares,
representing at that date approximately 10% of the public float in respect of the subordinate voting shares and 10%
of the public float in respect of each series of preferred shares. Decisions regarding any future repurchases will be
based on market conditions, share price and other factors including opportunities to invest capital for growth. The
Notice of Intention to Make a Normal Course Issuer Bid is available by contacting the Corporate Secretary of
the company.

Virtually all of the common share issuances in 2013, 2015 and 2016 were pursuant to public offerings. During 2013
and 2014 the company repurchased 36 and 8 subordinate voting shares respectively for cancellation from former
employees. During 2016 and 2017 the company repurchased 30,732 and 184,367 subordinate voting shares
respectively for cancellation under the terms of its normal course issuer bids.

The company’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.

The table below presents the pre-tax excess (deficiency) of fair value over carrying value of investments in associates
and certain non-insurance subsidiaries the company considers to be portfolio investments but that are required to be
consolidated under IFRS. The aggregate pre-tax excess of fair value over carrying value of these investments is not
included in the calculation of book value per share.

December 31, 2017

December 31, 2016

Insurance and reinsurance associates
Non-insurance associates(2)
Cara(3)
Grivalia Properties
Thomas Cook India
Fairfax India
Fairfax Africa

value
783.1
2,041.2
486.3
568.6
996.6
666.4
460.2

711.0
1,776.0
519.5
573.2
449.7
448.4
291.6

Excess
(deficiency) of
Fair Carrying fair value over
value(1) carrying value

Excess
(deficiency) of
Fair Carrying fair value over
value(1) carrying value
574.3
(11.9)
(21.0)
–
395.0
65.3
–

940.5
1,452.5
454.9
–
296.2
290.4
–

value
72.1 1,514.8
265.2 1,440.6
433.9
(33.2)
–
(4.6)
691.2
546.9
355.7
218.0
–
168.6

6,002.4

4,769.4

1,233.0 4,436.2

3,434.5

1,001.7

(1) The carrying values of Cara, Grivalia Properties, Thomas Cook India, Fairfax India and Fairfax Africa represent their

approximate carrying values under the equity method of accounting.

(2) Excludes investments in associates held by Fairfax India and Fairfax Africa.

(3)

Impairment tests for goodwill and intangible assets not subject to amortization were completed in 2017 and 2016. It was
concluded that no impairment had occurred in each year.

182

Liquidity

Holding company cash and investments at December 31, 2017 totaled $2,368.4 ($2,356.9 net of $11.5 of holding
company short sale and derivative obligations) compared to $1,371.6 at December 31, 2016 ($1,329.4 net of $42.2 of
holding company short sale and derivative obligations).

Significant cash and investment movements at the holding company level during 2017 included the following
significant inflows: dividends from Fairfax Asia ($2,429.7 comprised of net proceeds from the partial sale of ICICI
Lombard and the sale of First Capital), net proceeds of $509.5 from the issuance of Cdn$650.0 principal amount of
4.25% unsecured senior notes due 2027 and dividends from other subsidiaries (primarily Zenith National ($102.0),
OdysseyRe ($100.0) and Northbridge ($213.2)). The company’s remaining 9.9% equity interest in ICICI Lombard,
previously reflected as an investment in associate within portfolio investments, was reclassified to common stock at
FVTPL within holding company cash and investments (fair value of $549.0 at December 31, 2017).

Significant holding company outflows during 2017 included the following: cash consideration of $435.3 paid to
partially fund the acquisition of Allied World, the redemption of Cdn$388.4 principal amount of 7.5% unsecured
senior notes due 2019 ($340.6), payment of common and preferred share dividends ($282.0), repayment of the
amount drawn on the revolving credit facility ($200.0), net cash paid of $179.0 with respect to the reset provisions of
long and short equity and equity index total return swaps (excluding the impact of collateral requirements), cash
consideration of $167.9 paid to acquire Fairfax Latam, repayment of purchase consideration payable upon maturity
($124.9) and purchases of subordinate voting shares for cancellation under the terms of normal course issuer
bids ($96.2).

The carrying value of holding company cash and investments was also affected by the following: receipt of
investment management and administration fees, disbursements associated with corporate overhead expenses and
interest paid on long term debt. The carrying value of holding company cash and investments will vary with changes
in the fair values of those investments (including derivative contracts that may have collateral and cash settlement
requirements).

During 2017 subsidiary cash and short term investments (including cash and short term investments pledged for
short sale and derivative obligations) increased by $7,675.8 primarily reflecting the consolidation of the cash and
short term investments of Allied World ($4,509.0) and Fairfax Latam ($77.2), the proceeds received from net sales of
long dated U.S. state and municipal and corporate and other bonds (primarily corporate and other bonds that were
part of the acquisition of Allied World) where a portion of the proceeds was retained in cash or invested in short term
investments, and net proceeds received from Fairfax Africa’s initial public offering, partially offset by the impact of
the divestiture of the cash and short term investments of First Capital ($362.4).

The insurance and reinsurance subsidiaries may experience cash inflows or outflows on occasion related to their
derivative contracts, including collateral requirements. During 2017 the insurance and reinsurance subsidiaries paid
net cash of $285.0 (2016 – $814.4) in connection with long and short equity and equity index total return swaps
(excluding the impact of collateral requirements). The closure in the fourth quarter of 2016 of all of the company’s
short positions effected through total return swaps in the Russell 2000, S&P 500 and S&P/TSX 60 equity indexes
significantly reduced cash flow volatility related to derivatives in 2017.

183

FAIRFAX FINANCIAL HOLDINGS LIMITED

The non-insurance companies have principal repayments coming due in 2018 of $855.9 primarily related to Fairfax
India and Fairfax Africa term loans. Borrowings of the non-insurance companies are non-recourse to the holding
company and are generally expected to be settled through a combination of refinancing and operating cash flows.

The following table presents major components of cash flows for the years ended December 31, 2017 and 2016:

Operating activities

Cash provided by operating activities before the undernoted
Net sales of investments classified as FVTPL

Investing activities

Purchases of investments in associates
Sales of investments in associates
Purchases of subsidiaries, net of cash acquired
Sale of subsidiary, net of cash divested
Net purchases of premises and equipment and intangible assets
Decrease in restricted cash for purchase of subsidiary

Financing activities

Net proceeds from borrowings – holding company and insurance and reinsurance

companies

Repayment of borrowings – holding company and insurance and reinsurance companies
Net borrowings from (repayments to) holding company revolving credit facility
Net proceeds from borrowings – non-insurance companies
Repayment of borrowings – non-insurance companies
Net borrowings from revolving credit facilities – non-insurance companies
Increase in restricted cash related to financing activities
Issuances of subordinate voting shares
Purchases of subordinate voting shares for treasury
Purchases of subordinate voting shares for cancellation
Issuances of subsidiary common shares to non-controlling interests
Purchases of subsidiary common shares from non-controlling interests
Sales of subsidiary common shares to non-controlling interests
Common and preferred share dividends paid
Dividends paid to non-controlling interests

2017

2016

22.2
2,678.4

138.9
1,119.3

(1,026.5)
1,014.9
(1,107.7)
640.4
(415.2)
–

577.0
(483.7)
(200.0)
500.6
(268.7)
193.7
(150.8)
–
(140.5)
(96.2)
2,223.2
(140.3)
96.8
(282.0)
(67.5)

(735.3)
45.8
(779.1)
–
(208.3)
6.5

637.7
(5.4)
200.0
360.5
(38.9)
193.6
(18.9)
523.5
(64.2)
(14.1)
157.1
(87.2)
12.7
(271.8)
(41.2)

Increase in cash and cash equivalents during the year

3,568.1

1,131.2

Cash provided by operating activities (excluding net purchases of investments classified as FVTPL) decreased from
$138.9 in 2016 to $22.2 in 2017, principally reflecting higher net paid losses and expenses and lower interest and
dividends received, partially offset by higher net premium collections and lower income taxes paid. Refer to note 27
(Supplementary Cash Flow Information) to the consolidated financial statements for the year ended December 31,
2017 for details of net purchases of securities classified as FVTPL.

Purchases of investments in associates of $1,026.5 in 2017 primarily reflected investments in Astarta (28.1%),
Farmers Edge (46.1%), Sigma (81.2%), Bangalore Airport (48.0% by Fairfax India), Atlas Mara (43.3% by Fairfax
Africa) and the purchase of an additional indirect interest in APR Energy (ownership increased by 22.9%). Purchases
of investments in associates of $735.3 in 2016 primarily reflected the purchase of an additional ownership interest in
ICICI Lombard (ownership increased by 9.0%), an additional indirect interest in APR Energy, an investment in
Fairchem (44.7% by Fairfax India), and the acquisition of indirect interests in Eurolife (40.0%) and Peak Achievement
(38.2%). Sales of associates of $1,014.9 in 2017 primarily reflected net proceeds received on the sale of a 24.3% equity
interest in ICICI Lombard ($908.5) and distributions received from the company’s insurance and non-insurance
associates.

Purchases of subsidiaries, net of cash acquired of $1,107.7 in 2017 primarily related to the acquisitions of Allied
World and Fairfax Latam (100%), an additional investment in Grivalia Properties (ownership increased by 10.3%),
and the acquisition of Saurashtra Freight (51.0% by Fairfax India). Purchases of subsidiaries, net of cash acquired of
$779.1 in 2016 primarily related to the acquisitions of St-Hubert (100% by Cara), Original Joe’s (89.2% by Cara),

184

AMAG (80.0%), Privi Organics (50.8% by Fairfax India), Bryte Insurance (100%) and Golf Town (60.0%). Sale of
subsidiary, net of cash divested in 2017 related to the divestiture of a 97.7% equity interest in First Capital.

Net proceeds from borrowings – holding company and insurance and reinsurance companies of $577.0 in 2017
primarily reflected net proceeds from the issuance of Cdn$650.0 principal amount of 4.25% unsecured senior notes
due December 6, 2027. Net proceeds from borrowings – holding company and insurance and reinsurance companies
of $637.7 in 2016 primarily reflected net proceeds from the issuance of Cdn$400.0 principal amount of 4.50%
unsecured senior notes due March 22, 2023 and Cdn$450.0 principal amount of 4.70% unsecured senior notes due
December 16, 2026. Repayment of borrowings – holding company and insurance and reinsurance companies of
$483.7 in 2017 primarily reflected the early redemption of Cdn$388.4 principal amount of 7.5% unsecured senior
notes due 2019 and repayment of $124.9 principal amount of purchase consideration payable upon maturity.

Net proceeds from borrowings by non-insurance companies of $500.6 in 2017 primarily reflected net proceeds from
Fairfax India’s term loan ($400.0). Repayment of borrowings by non-insurance companies of $268.7 in 2017
primarily reflected Fairfax India’s repayment of a previous term loan ($225.0). Net borrowings from revolving credit
facilities and short term loans by non-insurance companies of $193.7 in 2017 primarily reflected proceeds from
Fairfax Africa’s term loan ($150.0) that required cash collateral of $150.0 (included in restricted cash related to
financing activities). Net proceeds from borrowings – non-insurance companies of $360.5 in 2016 reflected net
proceeds from Cara’s floating rate term loan of $115.2 (Cdn $150.0) to finance its acquisition of St-Hubert and Fairfax
India’s term loan ($225.0). Net borrowings from revolving credit facilities – non-insurance companies of $193.6 in
2016 principally reflected Cara’s borrowing on its floating rate revolving credit facility to finance its acquisitions of
St-Hubert and Original Joe’s.

Purchases of subordinate voting shares for treasury in 2017 of $140.5 (2016 – $64.2) were for the company’s share-
based payment awards. Issuance of subsidiary common shares to non-controlling interests of $2,223.2 in 2017
primarily reflected certain co-investors acquiring an indirect equity interest in Allied World, the public offerings by
Fairfax Africa and Fairfax India and the issuance of common shares by Quess. Purchases of subsidiary common shares
from non-controlling interests of $140.3 in 2017 primarily reflected Mosaic Capital’s redemption of certain of its
preferred shares and other equity instruments. Sales of subsidiary common shares to non-controlling interests of
$96.8 in 2017 reflected Thomas Cook India’s sale of a 5.4% equity interest in Quess.

Issuance of subordinate voting shares of $523.5 in 2016 reflected net proceeds received from the underwritten public
offering of 1.0 million subordinate voting shares. Issuance of subsidiary common shares to non-controlling interests
of $157.1 in 2016 primarily reflected Cara’s issuance of subordinate voting shares to finance its acquisition of
St-Hubert and the issuance of common shares by Quess through its initial public offering. Purchases of subsidiary
common shares from non-controlling interests of $87.2 in 2016 primarily reflected the repurchase by Brit of its
common shares from OMERS and the repurchase of subordinate voting shares for cancellation by Fairfax India.

Contractual Obligations

The following table sets out the expected payment schedule of the company’s significant contractual obligations as
at December 31, 2017:

Provision for losses and loss adjustment expenses
Borrowings – principal
Borrowings – interest
Operating leases

Less than
1 year
7,453.3
1,005.1
315.7
188.5

1-3 years
8,272.0
877.5
542.9
326.6

3-5 years
4,557.3
1,556.8
381.5
252.5

More than
5 years
8,328.2
2,957.5
745.6
458.2

Total
28,610.8
6,396.9
1,985.7
1,225.8

8,962.6

10,019.0

6,748.1

12,489.5

38,219.2

For further detail on the maturity profile of the company’s financial liabilities, please see the heading Liquidity Risk
in note 24 (Financial Risk Management) to the consolidated financial statements for the year ended
December 31, 2017.

185

FAIRFAX FINANCIAL HOLDINGS LIMITED

Contingencies and Commitments

For a full description of these matters, please see note 20 (Contingencies and Commitments) to the consolidated
financial statements for the year ended December 31, 2017.

Accounting and Disclosure Matters

Management’s Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of the company’s 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, 2017, as required by Canadian securities legislation. Disclosure controls and procedures are designed
to ensure that the information required to be disclosed by the company in the reports it files or submits under
securities legislation is recorded, processed, summarized and reported on a timely basis and that such information is
accumulated and reported to management, including the company’s CEO and CFO, as appropriate, to allow required
disclosures to be made in a timely fashion. Based on their evaluation, the CEO and CFO have concluded that as of
December 31, 2017, 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 financial
reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934 and under National
Instrument 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 (‘‘IFRS’’) as issued by the
International Accounting Standards Board (‘‘IASB’’). 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 IFRS as issued
by the IASB, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could
have a material effect on the financial statements.

The company’s management assessed the effectiveness of the company’s internal control over financial reporting as
of December 31, 2017. 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 (2013). Based on this assessment, except as described below under ‘‘Limitation on scope of design and
evaluation’’, the company’s management, including the CEO and CFO, concluded that, as of December 31, 2017, the
company’s internal control over financial reporting was effective based on the criteria in Internal Control – Integrated
Framework (2013) issued by COSO.

Pursuant to the requirements of the U.S. Securities Exchange Act, the effectiveness of the company’s internal control
over financial reporting as of December 31, 2017 has been audited by PricewaterhouseCoopers LLP, an independent
registered public accounting firm, as stated in its report which appears within this Annual Report.

Limitation on scope of design and evaluation

On July 6, 2017 the company completed the acquisition of Allied World Assurance Company Holdings, AG, which
was subsequently renamed Allied World Assurance Company Holdings, GmbH (‘‘Allied World’’). Management has
determined to limit the scope of the design and evaluation of the company’s internal control over financial reporting
to exclude the controls, policies and procedures of Allied World, the results of which are included in the consolidated
financial statements of the company for the year ended December 31, 2017 since the acquisition date. The scope
limitation is in accordance with Canadian and U.S. securities laws, which allow an issuer to limit its design and
evaluation of internal control over financial reporting to exclude the controls, policies and procedures of a company

186

acquired not more than 365 days before the end of the financial period to which the applicable certifications relate.
The operations of Allied World represented 6.5% of the company’s consolidated revenue for the year ended
December 31, 2017 and represented 22.8% and 23.9% of the company’s consolidated assets and liabilities
respectively as at December 31, 2017. In addition, the table that follows presents a summary of financial information
for Allied World.

Revenue

Net loss

Assets

Insurance contract receivables
Portfolio investments
Deferred premium acquisition costs
Recoverable from reinsurers
Goodwill and intangible assets
Other assets

Liabilities

Accounts payable and accrued liabilities
Income taxes payable
Short sale and derivative obligations
Due to affiliates
Funds withheld payable to reinsurers
Insurance contract liabilities
Deferred income taxes
Borrowings

Equity

For the period
July 6, 2017 to
December 31, 2017
1,050.5

(555.4)

As at
December 31, 2017

1,336.7
8,162.9
146.6
2,879.6
1,702.6
356.0

14,584.4

272.2
1.7
0.6
6.0
270.3
9,440.9
67.5
878.0

10,937.2

3,647.2

14,584.4

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, 2017.

Significant Accounting Policy Changes

There were no significant accounting policy changes during 2017. Please refer to note 3 (Summary of Significant
Accounting Policies) to the consolidated financial statements for the year ended December 31, 2017 for a detailed
description of the company’s accounting policies.

Future Accounting Changes

Certain new IFRS standards may have a significant impact on the company’s consolidated financial reporting in the
future. Each of those standards will require a moderate to high degree of implementation effort within the next three
years as described below. The company does not expect to adopt any of these new standards in advance of their
respective effective dates. New standards and amendments that have been issued but are not yet effective are also
described in note 3 (Summary of Significant Accounting Policies) to the consolidated financial statements for the
year ended December 31, 2017.

187

FAIRFAX FINANCIAL HOLDINGS LIMITED

IFRS 9 Financial Instruments (‘‘IFRS 9’’)

In July 2014 the IASB issued the complete version of IFRS 9 which will supersede the 2010 version of IFRS 9 currently
applied by the company (‘‘IFRS 9 (2010)’’). IFRS 9 is effective for annual periods beginning on or after January 1,
2018, with retrospective application, and includes requirements for the classification and measurement of financial
assets and liabilities, an expected credit loss model that replaces the existing incurred loss impairment model, and
new hedge accounting guidance.

The company evaluated the impact of IFRS 9 by assessing its business models and the cash flow characteristics of its
financial assets to determine their appropriate classifications under the new standard, and is nearing completion of
that analysis. The company expects equities and derivative instruments held within the company’s investment
portfolio to continue to be classified as FVTPL, and the classification of financial liabilities and its hedge of net
investment to also remain substantially unchanged from IFRS 9 (2010). The company continues to monitor and
consider evolving guidance and interpretations related to IFRS 9 as it works through the classification analysis for its
investments in debt instruments.

IFRS 15 Revenue from Contracts with Customers (‘‘IFRS 15’’)

In May 2014 the IASB issued IFRS 15 which introduces a single model for recognizing revenue from contracts with
customers. IFRS 15 excludes insurance contracts and financial instruments from its scope and is applicable primarily
to the company’s non-insurance companies. In April 2016 the IASB issued amendments to clarify certain aspects of
IFRS 15 and to provide additional practical expedients upon transition. The standard is effective for annual periods
beginning on or after January 1, 2018, with retrospective application.

During 2016 the company developed a detailed project plan for the implementation of IFRS 15 and conducted an
impact assessment, involving all of its significant operating companies, that focused on identifying, by industry and
key revenue streams, potential measurement differences under IFRS 15 compared to current accounting policies.
Further study of a limited number of potential issues for certain of the non-insurance companies, particularly in the
restaurant and staffing industries, was undertaken in 2017. Based on the cumulative work performed, the company
has substantially completed its analysis of the accounting requirements under IFRS 15 and does not anticipate
recording any significant transition adjustments upon adoption on January 1, 2018.

IFRS 16 Leases (‘‘IFRS 16’’)

In January 2016 the IASB issued IFRS 16 which largely eliminates the distinction between finance and operating
leases for lessees. With limited exceptions, a lessee will be required to recognize a right-of-use asset and a liability for
its obligation to make lease payments. The standard is effective for annual periods beginning on or after January 1,
2019, with a choice of modified retrospective or full retrospective application.

During 2017 the company developed an implementation plan for IFRS 16 and had its operating companies
undertake a detailed inventory of leases to determine the characteristics of their leases and the completeness of
historic lease data required for IFRS 16 transition calculations. Further work will be undertaken in 2018 to develop
IFRS 16 lease liability calculations and to identify and implement enhancements to current processes and
information systems that may be required to embed such calculations within the company’s financial reporting.

IFRS 17 Insurance Contracts (‘‘IFRS 17’’)

In May 2017 the IASB issued IFRS 17, a comprehensive standard that establishes principles for the recognition,
measurement, presentation and disclosure of insurance contracts. The measurement approach is based on the
following: (i) a current, unbiased probability-weighted estimate of future cash flows expected to arise as the insurer
fulfills the contract; (ii) the effect of the time value of money; (iii) a risk adjustment that measures the effects of
uncertainty about the amount and timing of future cash flows; and (iv) a contractual service margin which
represents the unearned profit in a contract (that is recognized in net earnings as the insurer fulfills its performance
obligations under the contract). Estimates are required to be re-measured each reporting period. In addition, a
simplified measurement approach is permitted for short-duration contracts in which the coverage period is
approximately one year or less. The standard is effective for annual periods beginning on or after January 1, 2021,
with retrospective application and some practical expedients available on adoption.

188

The company is currently evaluating the impact of the new standard on its financial reporting, and potentially, its
business activities. The new measurement approach and its need for current estimates is expected to significantly
increase 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 standard presents certain
implementation challenges and the presentation requirements significantly alter the disclosure of profit and loss
from insurance contracts in the consolidated financial statements. The company is devoting significant effort to the
analysis of IFRS 17, including education workshops and impact assessments at its largest insurance and reinsurance
companies. Findings from those impact assessments will support implementation planning and analysis for all
insurance and reinsurance operations in 2018.

Risk Management

Overview

The primary goals of the company’s financial risk management program 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. Please refer to note 24 (Financial Risk
Management) to the consolidated financial statements for the year ended December 31, 2017 for a detailed
discussion of the company’s risk management policies.

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 at www.sedar.com.

Claims Reserves

Reserves are maintained to cover the estimated ultimate unpaid liability for losses and loss adjustment expenses with
respect to reported and unreported claims incurred as of the end of each accounting period. The company’s success is
dependent upon its ability to accurately assess the risks associated with the businesses being insured or reinsured.
Failure to accurately assess the risks assumed may lead to the setting of inappropriate premium rates and establishing
reserves that are inadequate to cover losses. This could adversely affect the company’s net 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 to establish appropriate claims reserves. The company’s
management of pricing risk is discussed in note 24 (Financial Risk Management), and management of claims reserves
is discussed in note 4 (Critical Accounting Estimates and Judgments) and note 8 (Insurance Contract Liabilities), to
the consolidated financial statements for the year ended December 31, 2017.

Catastrophe Exposure

The company’s insurance and reinsurance operations are exposed to claims arising out of catastrophes. Catastrophes
can be caused by various events, including natural events such as hurricanes, windstorms, earthquakes, tornadoes,
hailstorms, severe winter weather and fires, and unnatural events such as terrorist attacks and riots. The incidence
and severity of catastrophes are inherently unpredictable.

The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected
by the event and the severity of the event. Most catastrophes are restricted to small geographic areas; however,
hurricanes, windstorms and earthquakes may produce significant damage in large, heavily populated areas.
Catastrophes can cause losses in a variety of property and casualty lines, including losses relating to business
interruptions occurring in the same geographic area as the catastrophic event or in the other geographic areas. It is
possible that a catastrophic event or multiple catastrophic events could have a material adverse effect upon the

189

FAIRFAX FINANCIAL HOLDINGS LIMITED

company’s financial condition, profitability or cash flows. The company believes that increases in the value and
geographic concentration of insured property, higher construction costs due to labour and raw material shortages
following a significant catastrophe event, and climate change could increase the severity of claims from catastrophic
events in the future. 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, 2017.

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 or 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 reduce the premiums the company writes and 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 in response to changes in rates of return being realized. 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 insurers, including 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 existing reinsurers or
alternative forms of reinsurance capacity entering the market from recent or future market entrants. If any of these
events transpire, the profitability of the company’s reinsurance business could be adversely affected.

The company actively manages its operations to withstand the cyclical nature of the property and casualty business
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, 2017.

Investment Portfolio

Investment returns are an important part of the company’s overall profitability as the company’s operating results
depend in part on the performance of its investment portfolio. The company’s investment portfolio 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 the company’s financial condition,
profitability or cash flows. Investment income is derived from interest and dividends, together with net gains or
losses on investments. The portion derived from net gains or losses 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 equities owned. In
addition, defaults by third parties who fail to pay or perform on their obligations could reduce the company’s
investment income and net gains on investment or result in investment losses. The company’s 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, 2017.

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Derivative Instruments

The company may be a counterparty to various derivative instruments, primarily for general protection against
declines in the fair value of its 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 volatile and may vary dramatically up or down in short
periods, and their ultimate value will therefore only be known upon their disposition or settlement.

The 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, basis risk and
counterparty risk, although these risks are diminished because the company’s principal use of derivative instruments
is to hedge exposures to various risks. The company endeavors to limit counterparty risk through diligent selection of
counterparties to its derivative instruments and 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 have a material adverse effect upon its financial position, profitability or cash flows. The company’s use of
derivatives is discussed in note 7 (Short Sales and Derivatives) 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, 2017.

Economic Hedging Strategies

The company may use derivative instruments from time to time 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.
The company may choose 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, although the company
does not expect to undertake hedges of such risks in the foreseeable future. The company’s use of derivatives is
discussed in note 7 (Short Sales and Derivatives) to the consolidated financial statements for the year ended
December 31, 2017.

The company’s derivative instruments may expose it to basis risk. Basis risk is the risk that the fair value or cash flows
of derivative instruments applied as economic hedges will not experience changes in exactly the opposite directions
from those of the underlying hedged exposure. This imperfect correlation 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, profitability or cash flows.

The company regularly monitors the prospective and retrospective effectiveness of any hedging instruments and will
adjust the amount and/or type of hedging instruments as required to achieve its risk management goals. The
management of credit risk and various market risks is discussed in note 24 (Financial Risk Management) to the
consolidated financial statements for the year ended December 31, 2017.

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 the company’s financial condition, profitability
or cash flows in future periods.

The company’s exposure to asbestos, environmental and other latent claims is discussed in the Asbestos, Pollution
and Other Hazards section of this MD&A. 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, 2017.

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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 insurer, called the cedant,
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, as a cedant, 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 operations, financial positions and cash
flows will be adversely affected. The credit risk associated with the company’s reinsurance recoverable balances is
described in note 24 (Financial Risk Management) to the consolidated financial statements for the year ended
December 31, 2017 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 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 financial condition, profitability or cash flows.
The company may periodically explore opportunities to make strategic investments in all or part of certain
businesses or companies. Acquisitions may involve a number of special risks, including failure to retain key
personnel, unanticipated events or circumstances and legal liabilities, some or all of which could have a material
adverse effect on the company’s business, results of operations and financial position. The company cannot be sure
that any acquired businesses will achieve the anticipated revenues, income and synergies. Failure on the company’s
part to manage its acquisition strategy successfully could have a material adverse effect on its business, results of
operations and financial position. The company cannot be sure that it will be able to identify appropriate targets,
profitably manage additional businesses or successfully integrate any acquired business into its operations.

The strategies and performance of operating companies, and the alignment of those strategies throughout the
organization, are regularly assessed 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
establishing competitive position for insurance and reinsurance companies. Third-party rating agencies assess and
rate the claims-paying ability of reinsurers and insurers based upon the criteria of such rating agencies. Periodically
the rating agencies evaluate the company’s insurance and reinsurance subsidiaries to confirm that they continue to
meet the criteria of the ratings previously assigned to them. The claims-paying ability ratings assigned by rating
agencies to reinsurance or insurance companies represent independent opinions of financial strength and ability to
meet policyholder obligations. A downgrade in these ratings could lead to a significant 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. A downgrade of the company’s long term debt ratings by the major rating agencies could require the
company and/or its subsidiaries to accelerate their cash settlement obligations for certain derivative transactions to
which they are a party, and could result in the termination of certain other derivative transactions. In addition, a
downgrade of the company’s credit rating may affect the cost and availability of unsecured financing. Ratings are
subject to periodic review at the discretion of each respective rating agency and may be revised downward or revoked
at their sole discretion. Rating agencies may also increase their scrutiny of rated companies, revise their rating

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standards or take other action. The company 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 factors,
including premiums charged and other terms and conditions offered, products and services provided, commission
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
management resources than the company. In addition, some financial institutions, such as banks, are now able to
offer services similar to those offered by the company’s reinsurance subsidiaries while in recent years, capital market
participants have also created alternative products that are intended to compete with reinsurance 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 its prices,
the company’s operating margins would 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 and 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, 2017.

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 lines of business, 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 until many years after a policy or contract is issued. The company’s
exposure to this uncertainty is greatest in its ‘‘long-tail’’ casualty lines of business where claims can typically be made
for many years, rendering them more susceptible to these trends than in the property insurance lines of business,
which is more typically ‘‘short-tail’’. In addition, the company could be adversely affected by the growing trend of
plaintiffs targeting participants in the property-liability insurance industry in purported class action litigation
relating to claims handling and other practices.

The company seeks to limit its loss exposure by employing a variety of policy limits and other terms and conditions
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, 2017 and in the Asbestos, Pollution and Other Hazards section of this MD&A.

Cost of Reinsurance and Adequate Protection

The company uses reinsurance arrangements, including reinsurance of its own reinsurance business purchased from
other reinsurers, referred to as retrocessionaires, to help manage its exposure to property and casualty risks. 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. Reinsurance
companies can also add or exclude certain coverages from, or alter terms in, the policies they offer. Reinsurers may
also impose 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. As a result, the company’s insurance
subsidiaries, like other primary insurance companies, increasingly are writing insurance policies which to some

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extent do not have the benefit of reinsurance protection. These gaps in reinsurance protection expose the company
to greater risk and greater potential losses.

The rates charged by reinsurers and the availability of reinsurance to the company’s subsidiaries will generally reflect
the recent loss experience of the company and of the industry in general. For example, the significant hurricane
losses in 2004 and 2005 caused the prices for catastrophe reinsurance protection in Florida to increase significantly in
2006. In 2011 the insurance industry experienced the second highest number of insured losses in history, primarily
due to numerous catastrophes. The significant catastrophe losses incurred by reinsurers worldwide resulted in higher
costs for reinsurance protection in 2012. More recently, there has been excess capital within the reinsurance market
due to favourable operating results of reinsurers and alternative forms of reinsurance capacity entering the market.
As a result, the market has become very competitive with prices decreasing for most lines of business. However,
significant hurricane loss activity in 2017 may again result in higher costs for reinsurance protection going forward.
Each of the company’s subsidiaries continue 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 holding company that conducts substantially all of its business through its subsidiaries and receives
substantially all of its earnings from them. The holding company controls the operating insurance and reinsurance
companies, each of which must comply with applicable insurance regulations of the jurisdictions in which it
operates. Each operating company must maintain reserves for losses and loss adjustment expenses to cover the risks
it has underwritten.

Although substantially all of the holding company’s operations are conducted through its subsidiaries, none of its
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 the countries where the company operates (principally the U.S., Canada, the United Kingdom and
Bermuda) (in each case, including the provinces, states or other jurisdictions therein) 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, 2017 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
on reasonable terms or at all, its business, financial condition and profitability 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 revolving credit facility discussed
in note 15 (Borrowings) to the consolidated financial statements for the year ended December 31, 2017. The
revolving credit facility contains various covenants that may restrict, 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 consolidate with another entity. In addition, the revolving credit facility
contains certain financial covenants that require the company to maintain a ratio of consolidated debt to
consolidated capitalization of not more than 0.35:1 and consolidated shareholders’ equity of not less than
$9.5 billion. A failure to comply with the obligations and covenants under the revolving credit facility could result in
an event of default under such agreement which, if not cured or waived, could permit acceleration of indebtedness,
including other indebtedness of Fairfax or its subsidiaries. If such indebtedness were to be accelerated, there can be
no assurance that the company’s assets would be sufficient to repay that indebtedness in full. This risk is mitigated by
maintaining high levels of liquid assets at the holding company. The company’s management of liquidity risk is

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discussed further in note 24 (Financial Risk Management) to the consolidated financial statements for the year ended
December 31, 2017 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, Chief
Executive Officer and significant shareholder, Mr. Prem Watsa, and the senior management of the company and 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 maintain key employee insurance with respect to any of its employees.

Regulatory, Political and other Influences

The insurance and reinsurance industries are highly regulated and are subject to changing political, economic and
regulatory influences. These factors affect the practices and operation of insurance and reinsurance organizations.
Federal, state and provincial governments in the United States and Canada, as well as governments in foreign
jurisdictions in which the company operates, have periodically considered programs to reform or amend the
insurance systems at both the federal and local levels. For example, in recent years the company has had to
implement the following: new regulatory capital guidelines for the company’s European operations due to Solvency
II; the Dodd-Frank Act created a new framework for regulation 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; the activities
of the International Association of Insurance Supervisors has resulted in additional regulatory oversight of the
company; and the Canadian and U.S. insurance regulators’ Own Risk and Solvency Assessment (‘‘ORSA’’) initiatives
have required the company’s North American operations to perform self-assessments of the capital available to
support their business risks. Such initiatives 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 by insurers or reinsurers. Insurance industry participants may respond
to changes by reducing their investments or postponing investment decisions, including investments in the
company’s products and services. The company’s management of the risks associated with its capital within the
various regulatory regimes in which it operates is discussed in note 24 (Financial Risk Management) under the
heading of Capital Management in the consolidated financial statements for the year ended December 31, 2017 and
in the Capital Resources and Management section of this MD&A.

Information Requests or Proceedings by Government Authorities

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
company sometimes receives inquiries and informational requests from insurance regulators in the jurisdictions in
which its insurance and reinsurance subsidiaries operate. From time to time, consumer advocacy groups or the media
also focus attention on certain insurance industry practices. The company cannot predict at this time the effect that
investigations, litigation and regulatory activity or negative publicity from consumers or the media will have on the
insurance or reinsurance industry or its business, or whether activities or practices currently thought to be lawful will
be characterized in the future as unlawful or will become subject to negative scrutiny from consumer advocacy
groups or the media. The company’s involvement in any investigations and related lawsuits would cause it to incur
legal costs and, if the company were found to have violated any laws, could be required to pay fines and damages,
perhaps in material amounts. In addition, the company could be materially adversely affected by the negative
publicity for the insurance industry related to any such proceedings, and by any new industry-wide regulations or
practices that may result from such proceedings or publicity. It is possible that future investigations or related
regulatory developments will mandate changes in industry practices in a fashion that increases the company’s costs
of doing business or requires the company to alter aspects of the manner in which it conducts its business. The
company’s internal and external legal counsels coordinate with operating companies in responding to information
requests and government proceedings.

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Regional or Geographical Limitations and Risks

The company’s international operations are regulated in various jurisdictions with respect to licensing requirements,
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 decentralized
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 any one particular region.

Lawsuits

The company may, from time to time, become party to a variety of legal claims and regulatory proceedings including,
but not limited to: disputes over coverage or claims adjudication; disputes regarding sales practices, disclosures,
premium refunds, licensing, regulatory compliance and compensation arrangements; disputes with its agents,
brokers or network providers over compensation and termination of contracts and related claims; regulatory actions
relating to consumer pressure in relation to benefits realized by insurers; disputes with taxing authorities regarding
its tax liabilities and tax assets; regulatory proceedings and litigation related to acquisitions or divestitures made or
proposed by the company or its subsidiaries or in connection with subsidiaries in which the company holds an
investment; and disputes relating to certain businesses acquired or disposed of by the company. The existence of
such claims against the company or its affiliates, directors or officers could have various adverse effects, including the
incurrence of significant legal expenses defending claims, even those without merit.

Operating companies manage day-to-day regulatory and legal risk primarily by implementing appropriate policies,
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. The company’s legal and regulatory matters are
discussed in note 20 (Contingencies and Commitments) to the consolidated financial statements for the year ended
December 31, 2017.

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 42.5% of the voting power of the company’s outstanding shares.
Mr. Watsa has the ability to substantially influence certain actions requiring shareholder approval, including
approving a business combination or consolidation, liquidation or sale of assets, electing members of the Board of
Directors and adopting amendments to articles of incorporation and by-laws.

Amendments were made to the terms of the company’s multiple voting shares, which are controlled by Mr. Watsa, in
August of 2015 having the effect of preserving the voting power represented by the multiple voting shares at 41.8%
even if additional subordinate voting shares are issued in the future. The amendments are described in note 16 (Total
Equity) to the consolidated financial statements for the year ended December 31, 2015 and in the company’s annual
information form filed with the securities regulatory authorities in Canada, which are available on SEDAR at
www.sedar.com.

Foreign Exchange

The company’s reporting 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 financial condition, profitability or cash flows. 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, 2017.

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Reliance on Distribution Channels

The company uses brokers to distribute its business and in some instances will distribute through agents or directly to
customers. 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 company’s reinsurance operations), with the remainder split among the other distribution channels. This is
substantially consistent across the company’s insurance and reinsurance subsidiaries.

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 preferences of such brokers and
their policyholders.

Because the majority of the company’s brokers are independent, there is limited ability to exercise control over them.
In the event that an independent broker exceeds its authority by binding the company on a risk which does not
comply with the company’s underwriting guidelines, the company may be at risk for that policy until the application
is received and a cancellation effected. Although to date the company has not experienced a material loss from
improper use of binding authority by its brokers, any improper use of such authority may result in losses that could
have a material adverse effect on the business, financial condition, profitability or cash flows 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 company’s consolidated balance sheet originated from various
acquisitions made by the company or its operating subsidiaries. Continued profitability of acquired businesses is a
key driver for there to be no impairment in the carrying value of goodwill and intangible assets. 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 jurisdictions
where the relevant tax losses and temporary differences exist. Failure to achieve projected levels of profitability could
lead to a reduction in the company’s deferred income tax asset if it is no longer probable that the amount of the asset
will be realized.

The company is subject to income taxes in Canada, the U.S. and many foreign jurisdictions where it operates, and
the company’s determination of its tax liability is subject to review by applicable domestic and foreign tax
authorities. While the company believes its tax positions to be reasonable, where the company’s interpretations
differ from those of tax authorities or the timing of realization is not as expected, the provision for income taxes may
increase or decrease in future periods to reflect actual experience.

The company has specialist tax personnel responsible for assessing the income tax consequences of planned
transactions and events and undertaking the appropriate tax planning. The company also consults with external tax
professionals as needed. Tax legislation of 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.

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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 a 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 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 subsidiaries 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.

Technological Changes

Technological changes could have unpredictable effects on the insurance and reinsurance industries. It is expected
that new services and technologies will continue to emerge that will affect the demand for insurance and reinsurance
products and services, the premiums payable, the profitability of such products and services and the risks associated
with underwriting certain lines of business, including new lines of business. Failure to understand evolving
technologies, or to position the company in the appropriate direction, or to deploy new products and services in a
timely way that considers customer demand and competitor activities could have an adverse impact on the
company’s business, financial condition, profitability or cash flows. The company maintains an innovation working
group comprised of members with diverse backgrounds from across its global operating companies to regularly assess
new services and technologies that that may be applicable or disruptive to the insurance and reinsurance industries.

Technology Infrastructure

The company’s business is highly dependent upon the successful and uninterrupted functioning of its computer and
data processing systems which are relied upon to perform actuarial and other modeling functions necessary for
writing business, to process and make claim payments and to process and summarize investment transactions. 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. The failure of these systems
could interrupt the company’s operations or impact its ability to rapidly evaluate and commit to new business
opportunities. If sustained or repeated, a system failure could result in the loss of existing or potential business
relationships, or compromise the company’s ability to pay claims in a timely manner.

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. Significant capital and other resources may be
required to protect against security breaches or to alleviate problems caused by such breaches. Any well publicized
compromise of security could deter people from conducting transactions that involve transmitting confidential
information to the company’s systems. Therefore, it is critical that these facilities and infrastructure remain secure
and are perceived by the marketplace to be secure. This infrastructure may be vulnerable to physical break-ins,
computer viruses, programming errors, attacks by third parties or similar disruptive problems. In addition, the
company could be subject to liability if hackers were able to penetrate its network security or otherwise
misappropriate confidential information.

The company has highly trained staff that is committed to the continual development and maintenance of its
technology infrastructure. Security measures, including data security programs specific to confidential personal
information, have been implemented and are regularly upgraded. The company and its third party service providers
also maintain contingency plans specific to its technology infrastructure.

Systemic Cyber-Attacks

The company relies on information technology in virtually all aspects of its business. A significant disruption or
failure of the company’s information technology systems could result in service interruptions, safety failures,

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security violations, regulatory compliance failures, and inability to protect information and assets against intruders,
and other operational difficulties. Attacks perpetrated against those information systems could result in loss of assets
and critical information, expose the company to remediation costs and reputational damage, and adversely affect
the company’s results of operations, financial condition and liquidity.

Cyber-attacks could further adversely affect the company’s ability to operate facilities, information technology and
business systems, or compromise confidential customer and employee information. Cyber-attacks resulting in
political, economic, social or financial market instability or damage to or interference with the company’s assets, or
its customers or suppliers may result in business interruptions, lost revenue, higher commodity prices, disruption in
fuel supplies, lower energy consumption, unstable markets, increased security and repair or other costs, any of which
may affect the company’s consolidated financial results. Furthermore, instability in the financial markets as a result
of terrorism, sustained or significant cyber-attacks, or war could also adversely affect the company’s ability to
raise capital.

The company has taken steps intended to mitigate these risks, including implementation of cyber security measures,
business continuity planning, disaster recovery planning and business impact analysis, and regularly updates these
plans and security measures.

Other

Quarterly Data (unaudited)

Years ended December 31

2017

Revenue
Net earnings
Net earnings attributable to shareholders of Fairfax
Net earnings per share
Net earnings per diluted share

2016

Revenue
Net earnings (loss)
Net earnings (loss) attributable to shareholders of Fairfax
Net earnings (loss) per share
Net earnings (loss) per diluted share

First

Fourth
Quarter Quarter Quarter Quarter

Second

Third

Full
Year

3,258.2
312.6
311.6

2,737.6
75.3
82.6
3.11 $ 13.04 $ 16.85 $ 30.87 $
3.03 $ 12.67 $ 16.42 $ 30.06 $

5,321.5
856.8
869.5

4,907.3
370.2
476.9

16,224.6
1,614.9
1,740.6
66.74
64.98

$
$

2,186.5
(16.7)
(51.0)
$ (2.76) $
$ (2.76) $

2,907.0
293.5
238.7

2,431.4
32.7
1.3

9,299.6
(394.7)
(512.5)
9.81 $ (0.42) $ (30.77) $ (24.18)
9.58 $ (0.42) $ (30.77) $ (24.18)

1,774.7
(704.2)
(701.5)

Revenue of $4,907.3 and $5,321.5 in the third and fourth quarter of 2017 increased from $2,431.4 and $1,774.7 in
the third and fourth quarter of 2016, principally as a result of net gains from the partial sale of ICICI Lombard in the
third quarter of 2017, the sale of the company’s 97.7% interest in First Capital in the fourth quarter of 2017, and the
consolidation of the net premiums earned by Allied World from July 6, 2017.

Net earnings attributable to shareholders of Fairfax of $476.9 (net earnings of $16.85 per basic share and $16.42 per
diluted share) in the third quarter of 2017 compared to net earnings attributable to shareholders of Fairfax of $1.3
(net loss of $0.42 per basic and diluted share) in the third quarter of 2016, reflected higher net gains on investments
(which primarily resulted from the partial sale of ICICI Lombard and increased net gains on net equity exposure),
partially offset by underwriting losses (which primarily resulted from current period catastrophe losses related to
Hurricanes Harvey, Irma and Maria).

Net earnings attributable to shareholders of Fairfax of $869.5 (net earnings of $30.87 per basic share and $30.06 per
diluted share) in the fourth quarter of 2017 compared to a net loss attributable to shareholders of Fairfax of $701.5
(net loss of $30.77 per basic and diluted share) in the fourth quarter of 2016, reflected higher net gains on
investments (which primarily resulted from decreased net losses on bonds and increased net gains on net equity
exposure) and the net gain on the sale of the company’s 97.7% interest in First Capital, partially offset by decreased
underwriting profit (which primarily resulted from current period catastrophe losses related to the California
wildfires) and increased provision for income taxes.

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FAIRFAX FINANCIAL HOLDINGS LIMITED

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, by favourable or adverse reserve development and by settlements or
commutations, the occurrence of which are not predictable, and have been (and are expected to continue to be)
significantly impacted by net gains or losses on investments, the timing of which are not predictable.

Stock Prices and Share Information

At March 9, 2018, Fairfax had 26,934,931 subordinate voting shares and 1,548,000 multiple voting shares
outstanding (an aggregate of 27,683,701 shares effectively outstanding after an intercompany holding). Each
subordinate voting share carries one vote per share at all meetings of shareholders except for separate meetings of
holders of another class of shares. The multiple voting shares cumulatively carry 41.8% voting power at all meetings
of shareholders 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
subordinate voting shares of Fairfax for each quarter of 2017 and 2016.

2017
High
Low
Close

2016
High
Low
Close

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

(Cdn$)

663.63
598.00
605.20

780.13
646.03
727.07

628.42
547.95
562.01

736.54
637.17
695.83

652.89
552.01
649.33

774.90
673.00
768.72

708.99
639.00
669.34

777.45
586.00
648.50

Compliance with Corporate Governance Rules

Fairfax is a Canadian reporting issuer with securities listed on the Toronto Stock Exchange and trading in Canadian
dollars under the symbol FFH and in U.S. dollars under the symbol FFH.U. It has in place corporate governance
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
Compensation 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, performance or
achievements expressed or implied by such forward-looking statements.

Such factors include, but are not limited to: a reduction in net earnings if our loss reserves are insufficient;
underwriting losses on the risks we insure that are higher or lower than expected; the occurrence of catastrophic
events with a frequency or severity exceeding our estimates; changes in market variables, including interest rates,
foreign exchange rates, equity prices and credit spreads, which could negatively affect our investment portfolio; the
cycles of the insurance market and general economic conditions, which can substantially influence our and our
competitors’ premium rates and capacity to write new business; insufficient reserves for asbestos, environmental and

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other latent claims; exposure to credit risk in the event our reinsurers fail to make payments to us under our
reinsurance arrangements; exposure to credit risk in the event our insureds, insurance producers or reinsurance
intermediaries fail to remit premiums that are owed to us or failure by our insureds to reimburse us for deductibles
that are paid by us on their behalf; our inability to maintain our long term debt ratings, the inability of our
subsidiaries to maintain financial or claims paying ability ratings and the impact of a downgrade of such ratings on
derivative transactions that we or our subsidiaries have entered into; 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; risks associated with any use we may make of derivative instruments; the failure of any hedging
methods we may employ 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 impact of emerging claim
and coverage issues or the failure of any of the loss limitation methods we employ; our inability to access cash of our
subsidiaries; our inability to obtain required levels of capital on favourable terms, if at all; the 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 or significant litigation; failures or security breaches of
our computer and data processing systems; the influence exercisable by our significant shareholder; adverse
fluctuations in foreign currency exchange rates; our dependence on independent brokers over whom we exercise
little control; an impairment in the carrying value of our goodwill and indefinite-lived intangible assets; our failure
to realize deferred income tax assets; technological or other change which adversely impacts demand, or the
premiums payable, for the insurance coverages we offer; disruptions of our information technology systems; and
assessments and shared market mechanisms which may adversely affect our insurance subsidiaries. Additional risks
and uncertainties are described in this 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.

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FAIRFAX FINANCIAL HOLDINGS LIMITED

APPENDIX
GUIDING PRINCIPLES FOR FAIRFAX FINANCIAL HOLDINGS LIMITED

OBJECTIVES:

1) We expect to compound our mark-to-market 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, shareholders and the
communities where we operate – at the expense of short term profits if necessary.

2) 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.

3) We always want to be soundly financed.

4) 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, financing and investments, which are done by or with Fairfax. Investing will always be
conducted based on a long term value-oriented philosophy. Cooperation among companies is encouraged to the
benefit of Fairfax in total.

2) Complete and open communication between Fairfax and subsidiaries is an essential requirement at Fairfax.

Share ownership and large incentives are encouraged across the Group.

Fairfax will always be a very small holding company and not an operating company.

VALUES:

1) Honesty and integrity are essential in all our relationships and will never be compromised.

2) We are results oriented – not political.

3) We are team players – no ‘‘egos’’. A confrontational style is not appropriate. We value loyalty – to Fairfax and

our colleagues.

4) We are hard working but not at the expense of our families.

5) We always look at opportunities but emphasize downside protection and look for ways to minimize loss

of capital.

6) We are entrepreneurial. We encourage calculated risk taking. It is all right to fail but we should learn from

our mistakes.

7) We will never bet the company on any project or acquisition.

8) We believe in having fun – at work!

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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
Karen L. Jurjevich
Principal, Branksome Hall
Christine N. McLean (as of April 2018)
Director of Research
Sprucegrove Investment Management Ltd.
John R.V. Palmer
Chairman, Toronto Leadership Centre
Timothy R. Price
Chairman, Brookfield Funds, a division of
Brookfield Asset Management Inc.

Brandon W. Sweitzer
Dean, School of Risk Management, St. John’s University

Lauren C. Templeton
President, Templeton and Phillips Capital Management, LLC

Benjamin P. Watsa
President and Founder, Marval Capital Ltd.

V. Prem Watsa
Chairman and Chief Executive Officer of the Company

Officers of the Company
Jennifer Allen
Vice President

David Bonham
Vice President and Chief Financial Officer

Peter Clarke
Vice President and Chief Risk Officer

Jean Cloutier
Vice President, International Operations

Vinodh Loganadhan
Vice President, Administrative Services

Bradley Martin
Vice President, Strategic Investments

Paul Rivett
President

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

Auditor
PricewaterhouseCoopers LLP

General Counsel
Torys LLP

Operating Management

Fairfax Insurance Group

Andrew A. Barnard, President

Northbridge

Silvy Wright, President
Northbridge Financial Corporation

OdysseyRe

Brian D. Young, President
Odyssey Re Holdings Corp.

Crum & Forster
Marc Adee, President
Crum & Forster Holdings Corp.

Zenith National

Kari Van Gundy, President
Zenith National Insurance Corp.

Brit

Mark Cloutier, Executive Chairman
Matthew Wilson, President
Brit Limited

Allied World

Scott A. Carmilani, President
Allied World Assurance Company Holdings, GmbH

Fairfax Asia

Ramaswamy Athappan, Chief Executive Officer

Sammy Y. Chan, President
Gobinath Athappan, Chief Operating Officer
and President, Pacific Insurance

Insurance and Reinsurance – Other

Bruno Camargo, President
Fairfax Brasil
Nigel Fitzgerald, President
Advent Capital (Holdings)
Jacek Kugacz, President
Polish Re
Peter Csakvari, President
Colonnade Insurance
Edwyn O’Neill, President
Bryte Insurance
Fabricio Campos, President
Fairfax Latin America

Run-off

Nicholas C. Bentley, President
RiverStone Group

Other

Bijan Khosrowshahi, President
Fairfax International
Sean Smith, President

Pethealth
Roger Lace, President

Hamblin Watsa Investment Counsel

Head Office

95 Wellington Street West, Suite 800, Toronto, Canada M5J 2N7
Telephone: (416) 367-4941
Website: www.fairfax.ca

203