Fairfax Financial Holdings Limited (FAXRF) 40-F/A 2005 FY Annual report (Canada) (amended)

FAIRFAX FINANCIAL HOLDINGS LIMITED

Auditors’ Report

To the Shareholders of Fairfax Financial Holdings Limited

We have audited the accompanying consolidated balance sheets of Fairfax Financial Holdings Limited (the “Company”) as at December 31, 2005 and 2004 and the related consolidated statements of earnings, shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2005. We have also audited the effectiveness of the Company’s internal control over financial reporting as at December, 31, 2005 based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and management’s assessment thereof included in Management’s Report on Internal Control over Financial Reporting. The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on Fairfax Financial Holdings Limited’s 2005, 2004, and 2003 consolidated financial statements, an opinion on management’s assessment as at December 31, 2005 and an opinion on the effectiveness of the Company’s internal control over financial reporting as at December 31, 2005 based on our audits.

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 (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) 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 (3) 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.

We conducted our audits of the Company’s financial statements in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. A financial statement audit also includes assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We conducted our audit of the effectiveness of the Company’s internal control over financial reporting and management’s assessment thereof in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control and performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim

4

financial statements will not be prevented or detected. As of December 31, 2005, the following material weaknesses have been identified and included in management’s assessment:

1.	The Company did not maintain an appropriate accounting and financial reporting organizational structure and a sufficient complement of accounting personnel to support the activities of the Company. Specifically, lines of communication between our operations and accounting and finance personnel and subsidiaries were not adequate to raise issues to the appropriate level of accounting personnel. Further, the Company did not maintain personnel with an appropriate level of accounting knowledge, experience and training to support the size and complexity of the organization and its financial reporting requirements. This control deficiency resulted in the restatement of the Company’s consolidated financial statements for the years ended December 31, 2001 through 2005 and related disclosures. This control deficiency contributed to each of the material weaknesses discussed in 2 through 4 below.
2.	The Company did not maintain effective controls over the completeness and accuracy of period-end financial reporting and period-end close processes at the Fairfax head office consolidation level. Specifically, the Company did not maintain effective review and monitoring processes and documentation relating to the (i) recording of recurring and non-recurring journal entries, (ii) recording of intercompany and related Company eliminations and reconciliations and (iii) translation of foreign currency transactions and subsidiary Company results. This control deficiency resulted in the restatement of the Company’s consolidated financial statements for the years ended December 31, 2001 through 2005 and related disclosures to correct significant accounts and disclosures.
3.	The Company did not maintain effective controls over the accounting for certain derivative instruments in accordance with FAS 133. Specifically, the Company did not maintain appropriate controls over the processes to account for convertible bond securities and to identify embedded derivatives in other fixed income securities in accordance with US GAAP. This control deficiency resulted in the restatement of the Company’s US GAAP net earnings (loss) with an offsetting amount in other comprehensive income for each of the three years ended December 31, 2005.
4.	The Company did not maintain effective controls over the completeness and accuracy of the calculation and review of income taxes, including the determination of income taxes payable, future income tax assets and liabilities and the related income tax provision including the impact on US GAAP information. Specifically, the Company did not maintain appropriate controls over tax effecting certain permanent differences, temporary differences and US GAAP differences. This control deficiency resulted in the restatement of the Company’s consolidated financial statements for the years ended December 31, 2001 through 2005 and related disclosures.

Each of these control deficiencies described in 1 to 4 above could result in misstatements of the Company’s financial statement accounts and disclosures that would result in a material misstatement to the annual consolidated financial statements that would not be prevented or detected. Therefore, management has determined that each of these control deficiencies constitutes a material weakness. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2005 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements.

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FAIRFAX FINANCIAL HOLDINGS LIMITED

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as at December 31, 2005 and 2004 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2005 in accordance with Canadian generally accepted accounting principles. Also, in our opinion, management’s assessment as shown on page 118 that the Company did not maintain effective internal control over financial reporting as at December 31, 2005 is fairly stated, in all material respects, based on criteria established in Internal Control – Integrated Framework issued by the COSO. Furthermore, in our opinion, because of the effects of the material weaknesses described above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as at December 31, 2005 based on criteria established in Internal Control – Integrated Framework issued by the COSO.

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.

Our previous report dated March 31, 2006, except as to Note 2, which was as of August 31, 2006, has been withdrawn and the consolidated financial statements have been restated as discussed in note 21. In addition, our original opinion on the effectiveness of internal control over financial reporting at December 31, 2005 was restated as of August 31, 2006.

Chartered Accountants

Toronto, Ontario

March 31, 2006, except as to Note 2 which is as of August 31, 2006 and as to Note 21 which is as of November 2, 2006.

Comments by Auditors for United States Readers on Canada – United States Accounting Differences

Accounting principles generally accepted in Canada vary in certain significant respects from accounting principles generally accepted in the United States of America. Information related to the nature and effect of such differences is presented in note 21, as restated, to the consolidated financial statements.

Chartered Accountants

Toronto, Ontario

March 31, 2006, except as to Note 2 which is as of August 31, 2006 and as to Note 21 which is as of November 2, 2006.

6

Consolidated Financial Statements

Consolidated Balance Sheets

as at December 31, 2005 and 2004

	2005		2004
	Restated		Restated
	(US$ millions)
Assets
Cash, short term investments and marketable securities		559.0		566.8
Accounts receivable and other		2,380.4		2,345.9
Recoverable from reinsurers (including recoverables on paid losses – $535.3; 2004 – $630.2)		7,655.7		8,142.5
		10,595.1		11,055.2
Portfolio investments
Subsidiary cash and short term investments (market value – $4,526.3; 2004 – $4,047.7)		4,526.3		4,047.7
Bonds (market value – $8,038.4; 2004 – $7,292.7)		8,127.4		7,260.9
Preferred stocks (market value – $16.6; 2004 – $136.4)		15.8		135.8
Common stocks (market value – $2,530.7; 2004 – $1,957.9)		2,097.4		1,678.6
Investments in Hub, Zenith National and Advent (market value – $439.1; 2004 – $450.5)		226.6		282.3
Real estate (market value – $18.0; 2004 – $33.5)		17.2		28.0
Total (market value – $15,569.1; 2004 – $13,918.7)		15,010.7		13,433.3
Deferred premium acquisition costs		385.1		369.3
Future income taxes		1,118.8		949.7
Premises and equipment		95.7		100.8
Goodwill		228.4		245.7
Other assets		108.2		117.2
		27,542.0		26,271.2

See accompanying notes.

Signed on behalf of the Board

Director
Director

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FAIRFAX FINANCIAL HOLDINGS LIMITED

	2005			2004
	Restated			Restated
	(US$ millions)
Liabilities
Cunningham Lindsey indebtedness		63.9			89.2
Accounts payable and accrued liabilities		1,167.3			1,244.2
Securities sold but not yet purchased		700.3			539.5
Funds withheld payable to reinsurers		1,054.4			1,033.2
		2,985.9			2,906.1
Provision for claims		16,235.1			15,166.0
Unearned premiums		2,446.3			2,374.4
Long term debt – holding company borrowings		1,365.3			1,422.9
Long term debt – subsidiary company borrowings		869.3			773.0
Purchase consideration payable		192.1			195.2
Trust preferred securities of subsidiaries		52.4			52.4
		21,160.5			19,983.9
Non-controlling interests		751.4			579.5
Shareholders’ Equity
Common stock		2,079.6			1,786.9
Other paid in capital		59.4			59.4
Treasury stock, at cost		(17.3	)		(17.4	)
Preferred stock		136.6			136.6
Retained earnings		405.6			862.3
Currency translation account		(19.7	)		(26.1	)
		2,644.2			2,801.7
		27,542.0			26,271.2

See accompanying notes.

8

Consolidated Statements of Earnings

for the years ended December 31, 2005, 2004 and 2003

		2005			2004			2003
		Restated			Restated			Restated
		(US$ millions except
		per share amounts)
Revenue
	Gross premiums written		5,559.1			5,603.1			5,487.8
	Net premiums written		4,694.6			4,785.7			4,425.6
	Net premiums earned		4,692.5			4,804.3			4,238.6
	Interest and dividends		466.1			375.7			331.9
	Realized gains on investments		385.7			273.5			826.1
	Realized gain on Northbridge secondary offering and IPO		–			40.1			5.7
	Claims fees		356.2			336.1			328.9
			5,900.5			5,829.7			5,731.2
Expenses
	Losses on claims		4,370.9			3,507.5			3,266.4
	Operating expenses		1,059.7			1,017.2			997.5
	Commissions, net		736.0			827.3			776.1
	Interest expense		200.4			176.7			154.1
	Cunningham Lindsey TPA disposition costs		–			13.4			–
			6,367.0			5,542.1			5,194.1
Earnings (loss) from operations before income taxes			(466.5	)		287.6			537.1
Provision for (recovery of) income taxes			(66.3	)		154.9			184.0
Net earnings (loss) before non-controlling interests			(400.2	)		132.7			353.1
Non-controlling interests			(46.4	)		(79.6	)		(64.5	)
Net earnings (loss)			(446.6	)		53.1			288.6
Net earnings (loss) per share		$	(27.75	)	$	3.11		$	19.98
Net earnings (loss) per diluted share		$	(27.75	)	$	3.11		$	19.51
Cash dividends paid per share		$	1.40		$	1.40		$	0.98

See accompanying notes.

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FAIRFAX FINANCIAL HOLDINGS LIMITED

Consolidated Statements of Shareholders’ Equity

for the years ended December 31, 2005, 2004 and 2003

	2005			2004			2003
	Restated			Restated			Restated
	(US$ millions)
Common stock –
Subordinate voting shares – beginning of year		1,783.1			1,511.3			1,537.0
Issuances during the year		299.8			299.7			–
Purchases during the year		(7.1	)		(27.9	)		(25.7	)
Subordinate voting shares – end of year		2,075.8			1,783.1			1,511.3
Multiple voting shares – beginning and end of year		3.8			3.8			3.8
Common stock		2,079.6			1,786.9			1,515.1
Other paid in capital – beginning of year		59.4			62.7			–
Issuance of convertible senior debenture		–			–			62.7
Purchases of convertible senior debenture		–			(3.3	)		–
Other paid in capital – end of year		59.4			59.4			62.7
Treasury shares (at cost) – beginning of year		(17.4	)		(18.7	)		(26.6	)
Purchases during the year		(1.2	)		(7.8	)		(1.7	)
Reissuances during the year		1.3			9.1			9.6
Treasury shares (at cost) – end of year		(17.3	)		(17.4	)		(18.7	)
Preferred stock –
Series A – beginning of year		51.2			136.6			136.6
Conversion to Series B preferred shares		–			(85.4	)		–
Series A – end of year		51.2			51.2			136.6
Series B – beginning of year		85.4			–			–
Conversion from Series A preferred shares		–			85.4			–
Series B – end of year		85.4			85.4			–
Preferred stock		136.6			136.6			136.6
Retained earnings – beginning of year, as previously reported		1,061.9			1,114.9			873.5
Restatement adjustments –note 2		(199.6	)		(249.9	)		(268.5	)
Retained earnings –beginning of year, as restated		862.3			865.0			605.0
Net earnings (loss) for the year		(446.6	)		53.1			288.6
Excess over stated value of shares purchased for cancellation		(0.3	)		(3.6	)		(4.9	)
Common share dividends		–			(42.1	)		(13.9	)
Preferred share dividends		(9.8	)		(10.1	)		(9.8	)
Retained earnings – end of year		405.6			862.3			865.0
Currency translation account – beginning of year		(26.1	)		(96.8	)		(357.5	)
Foreign exchange impact from foreign denominated net assets		6.4			70.7			(30.7	)
Foreign exchange impact from hedges (U.S. denominated debt and forward contracts, net of tax of $25.7 in 2003)		–			–			291.4
Currency translation account – end of year		(19.7	)		(26.1	)		(96.8	)
Total shareholders’ equity		2,644.2			2,801.7			2,463.9

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	2005			2004			2003
	Restated			Restated			Restated
	(US$ millions)
Number of shares outstanding
Common stock –
Subordinate voting shares – beginning of year		15,260,625			13,085,210			13,306,870
Issuances during the year		1,843,318			2,406,741			–
Purchases during the year		(49,800	)		(215,200	)		(240,700	)
Net treasury shares reissued (acquired)		2,713			(16,126	)		19,040
Subordinate voting shares – end of year		17,056,856			15,260,625			13,085,210
Multiple voting shares – beginning and end of year		1,548,000			1,548,000			1,548,000
Interest in shares held through ownership interest in shareholder		(799,230	)		(799,230	)		(799,230	)
Common stock effectively outstanding – end of year		17,805,626			16,009,395			13,833,980
Preferred stock –
Series A – beginning of year		3,000,000			8,000,000			8,000,000
Conversion to Series B preferred shares		–			(5,000,000	)		–
Series A – end of year		3,000,000			3,000,000			8,000,000
Series B – beginning of year		5,000,000			–			–
Conversion from Series A preferred shares		–			5,000,000			–
Series B – end of year		5,000,000			5,000,000			–

See accompanying notes.

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FAIRFAX FINANCIAL HOLDINGS LIMITED

Consolidated Statements of Cash Flows

for the years ended December 31, 2005, 2004 and 2003

		2005			2004			2003
		Restated			Restated			Restated
		(US$ millions)
Operating activities
	Earnings (loss) before non-controlling interests		(400.2	)		132.7			353.1
	Amortization		26.2			40.7			56.0
	Future income taxes		(151.8	)		77.5			119.1
	Realized gains on investments		(385.7	)		(313.6	)		(831.8	)
			(911.5	)		(62.7	)		(303.6	)
Changes in:
	Provision for claims		974.9			311.6			949.3
	Unearned premiums		28.9			(127.0	)		231.1
	Accounts receivable and other		4.7			(36.9	)		221.6
	Recoverable from reinsurers		540.2			301.7			(779.6	)
	Funds withheld payable to reinsurers		18.6			(76.5	)		141.6
	Accounts payable and accrued liabilities		(58.8	)		(287.5	)		(148.6	)
	Other		31.7			95.7			81.6
Cash provided by operating activities			628.7			118.4			393.4
Investing activities
	Investments – purchases		(6,198.2	)		(6,883.2	)		(11,280.6	)
	– sales		5,503.7			4,610.9			14,483.6
	Sale (purchase) of marketable securities		(263.4	)		1.4			6.6
	Sale of Zenith National shares		218.5			127.6			–
	Purchase of Advent shares		(34.1	)		–			–
	Purchase of capital assets		(20.5	)		(37.0	)		(29.9	)
	Purchase of subsidiaries, net of cash		(52.0	)		(33.7	)		18.7
	Net proceeds on Northbridge secondary offering and IPO		–			104.8			148.9
	Disposition of Cunningham Lindsey TPA business		–			(22.2	)		–
Cash provided by (used in) investing activities			(846.0	)		(2,131.4	)		3,347.3
Financing activities
	Subordinate voting shares issued		299.8			299.7			–
	Subordinate voting shares repurchased		(7.4	)		(31.5	)		(30.6	)
	Purchase of treasury shares		(1.2	)		(7.8	)		(1.7	)
	Trust preferred securities of subsidiary repurchased		–			(27.4	)		(136.0	)
	Non-controlling interests		112.4			–			–
	Issue of OdysseyRe debt		125.0			–			225.0
	Issue of Crum & Forster debt		–			–			300.0
	Issue of convertible debentures		–			–			200.0
	Long term debt – repayment		(84.9	)		(240.2	)		(179.3	)
	Long term debt – issuances		–			308.6			–
	Purchase consideration payable		(20.0	)		(21.9	)		(23.3	)
	Cunningham Lindsey indebtedness		(25.3	)		71.5			(8.8	)
	Common share dividends		(22.5	)		(19.5	)		(13.9	)
	Preferred share dividends		(9.8	)		(10.1	)		(9.8	)
Cash provided by financing activities			366.1			321.4			321.6
Foreign currency translation			11.9			17.0			31.9
Increase (decrease) in cash resources			160.7			(1,674.6	)		4,094.2
Cash resources – beginning of year			4,429.7			6,104.3			2,010.1
Cash resources – end of year			4,590.4			4,429.7			6,104.3

See accompanying notes.

Cash resources consist of cash and short term investments, including subsidiary cash and short term investments, and excludes $216.4 ($169.7 at December 31, 2004; nil at December 31, 2003) of subsidiary cash and short term investments pledged for securities sold but not yet purchased, which is restricted. Short term investments are readily convertible into cash and have maturities of three months or less.

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Notes to Consolidated Financial Statements

for the years ended December 31, 2005, 2004 and 2003

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

1.      Business Operations

The company is a financial services holding company which, through its subsidiaries, is principally engaged in property and casualty insurance and reinsurance, investment management and insurance claims management.

2.      Restatement of Financial Results

The company has restated its previously reported consolidated financial statements as at and for the years ended December 31, 2001 through 2005 and all related disclosures. The restatement of the company’s consolidated financial statements followed an internal review of the company’s consolidated financial statements and accounting records that was undertaken in contemplation of the commutation of the company’s $1 billion corporate insurance cover ultimately reinsured with a Swiss Re subsidiary (the “Swiss Re Cover”). That review identified an overstatement of the consolidated net assets of the company and errors in accounting for the periodic consolidated earnings. The effects of the restatement, including the correction of all errors previously identified by management and deemed to be not material to the consolidated financial statements at that prior time, are reflected in the company’s consolidated financial statements and accompanying notes included herein.

The total cumulative impact of the restatement through December 31, 2005 is to decrease shareholders’ equity by $261.7. The $261.7 total cumulative impact on shareholders’ equity as at December 31, 2005 comprises a decrease in retained earnings in the amount of $125.8, a decrease in the currency translation account (“CTA”) in the amount of $123.7, a decrease in share capital (by way of an increase in treasury stock) of $17.3, and an increase in common stock of $5.1. Of the $125.8 cumulative decrease in retained earnings, the net effect of the restatement on earnings for each period is to decrease the 2005 net loss by $51.3, decrease the 2004 net loss by $72.9, increase 2003 net earnings by $18.6, decrease 2002 net earnings by $10.1, increase the 2001 net loss by $182.7, and decrease the net earnings of 2000 and prior years by $75.8.

The corrections, net of non-controlling interests and income tax effects as applicable, relate to:

Insurance/ Reinsurance Operations and Investments

(i)

Changes related to the accounting treatment of reinsurance contracts entered into in 2001 and commuted in 2004. Following an internal review, it was determined that the information currently available is insufficient to support reinsurance accounting. The company has restated the accounting for the contracts to apply the deposit method of accounting rather than reinsurance accounting. The restatement had no cumulative effect on shareholders’ equity as at December 31, 2005 and December 31, 2004, and had the net effect of decreasing the 2004 net loss by $89.5, increasing 2003 net earnings by $18.4, decreasing 2002 net earnings by $11.4 and increasing the 2001 net loss by $96.5.

(ii)

A change in the accounting treatment of a reinsurance contract entered into by a subsidiary in 1998 prior to its acquisition by the company. The contract was commuted in 2002. The contract was amended after its first year such that the amended terms reduced risk transfer under the contract. The company has restated the accounting for the contract to apply the deposit method of accounting rather than reinsurance accounting. The restatement had no cumulative effect on shareholders’ equity as at December 31, 2005 and December 31, 2004, and had the

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FAIRFAX FINANCIAL HOLDINGS LIMITED

	net effect of increasing 2002 net earnings by $1.7, decreasing the 2001 net loss by $11.9, and decreasing the net earnings of 2000 and prior years by $13.6.
(iii)	Adjustments related to the recording by the company of the restatement of the OdysseyRe consolidated financial statements as of and for the years ended December 31, 2000 through 2005 to correct for accounting errors associated with reinsurance contracts entered into by OdysseyRe between 1998 and 2004. OdysseyRe restated its financial results following a re-evaluation of the accounting considerations previously applied to those transactions. The contracts were restated to correct the application of EITF 93-6 and account for the treatment of deferred ceding commissions to be received by the company. The restatement resulted in a $4.8 and a $3.1 cumulative decrease in shareholders’ equity as at December 31, 2005 and December 31, 2004 respectively, and had the net effect of increasing 2005 net loss by $1.7, decreasing the 2004 net loss by $13.9, increasing 2003 net earnings by $3.7, increasing 2002 net earnings by $5.2, increasing the 2001 net loss by $22.7, and decreasing the net earnings of 2000 and prior years by $3.3.
(iv)	Adjustments required to correct the accounting for the company’s investment in Zenith National Insurance Corp. (“Zenith National”), which was incorrectly accounted for using the cost basis of accounting during the period 1999 to 2001. During that period, the company was deemed to have had the ability to exercise significant influence over Zenith National from an accounting perspective. The accounting for Zenith National was restated to record the company’s share of Zenith National net losses during the period 1999 to 2001 under the equity method of accounting and to record the increase in the realized gains on sales of interests in this investment in 2004 and 2005. The corrections resulted in an $11.6 cumulative decrease in shareholders’ equity as at December 31, 2005 and a cumulative decrease in shareholders’ equity of $16.8 at December 31, 2004, and had the net effect of decreasing the 2005 net loss by $5.2, decreasing the 2004 net loss by $14.1, increasing the 2001 net loss by $12.7, and decreasing the net earnings of 2000 and prior years by $18.2.

Consolidation Accounting and Intercompany Accounts

(v)

Bookkeeping errors in the accounting for various intercompany transactions including incorrect eliminations of gains and losses on intercompany purchases and sales of portfolio investments, write-offs of unreconciled intercompany balances, incorrect elimination of intercompany advances, and related foreign currency accounting. The omissions resulted in an unsupported net asset having been recorded in the consolidated financial statements of the company. The corrections resulted in a $157.7 and $166.1 cumulative decrease in shareholders’ equity as at December 31, 2005 and December 31, 2004 respectively, comprised of a cumulative increase in retained earnings of $1.3 and a cumulative net charge to the CTA of $159.0 as at December 31, 2005, and a cumulative decrease in retained earnings of $7.1 and a cumulative net charge to the CTA of $159.0 as at December 31, 2004. The corrections had the net effect of decreasing the 2005 net loss by $8.5, decreasing 2003 net earnings by $10.8, decreasing 2002 net earnings by $1.7, increasing the 2001 net loss by $4.8 and increasing the net earnings of 2000 and prior years by $10.2.

(vi)

Errors in recording realized foreign currency gains and losses of a subsidiary during the period 2000 to 2005. The amounts were recorded in accounts payable rather than in earnings. The corrections resulted in a cumulative effect of $nil and a cumulative decrease of $49.2 in shareholders’ equity as at December 31, 2005 and December 31, 2004 respectively, and had the net effect of decreasing the 2005 net

14

	loss by $49.2, increasing the 2004 net loss by $14.7, decreasing 2003 net earnings by $12.8, increasing 2002 net earnings by $23.2, increasing the 2001 net loss by $53.3, and increasing 2000 net earnings by $8.4. These corrections occurred in a lower tax rate jurisdiction and resulted in a 2005 income tax expense of $9.4, a 2004 income tax recovery of $4.7, a 2003 income tax expense of $0.1, a 2002 income tax expense of $1.8 and a 2001 income tax recovery of $6.7.
(vii)	Accounting errors related to the recognition in earnings of forgiveness of debt. The accounting was restated to reflect the forgiveness of debt in the appropriate periods. The corrections had no cumulative effect on shareholders’ equity as at December 31, 2005 and December 31, 2004, and had the net effect of decreasing the 2001 net loss by $20.8 and decreasing the net earnings of 2000 and prior years by $20.8.
(viii)	Certain losses related to an intercompany dispute that were not recorded in the consolidated financial statements. The restatement resulted in an $18.3 and $nil cumulative decrease in shareholders’ equity as at December 31, 2005 and December 31, 2004 respectively, and had the net effect of increasing the 2005 net loss by $18.3.
(ix)	Errors in the accounting for fair value adjustments to portfolio investments in the purchase equations for certain acquisitions. The corrections had no cumulative effect on shareholders’ equity as at December 31, 2005 and a $9.8 cumulative decrease in shareholders’ equity at December 31, 2004, and had the net effect of decreasing the 2005 net loss by $9.8, decreasing 2002 net earnings by $7.9, and decreasing the net earnings of 2000 and prior years by $1.9.
(x)	The treatment of losses on foreign exchange contracts that hedged the 1999 acquisition funding for TIG. The losses were incorrectly recorded as a charge to the CTA. The correction resulted in the revision of the purchase equation and the recording of goodwill associated with the Odyssey America Re subsidiary and a credit to the CTA in the amount of $23.8. The related unamortized goodwill balance as at December 31, 2005 and 2004 was $17.6. Retained earnings had a $6.2 cumulative decrease as at December 31, 2005 and December 31, 2004.
(xi)	Adjustments required to correct accounting errors arising primarily in the head office consolidation process during 2000 and prior years. The corrections resulted in a $25.3 cumulative decrease in shareholders’ equity as at December 31, 2005 and December 31, 2004, and had the net effect of decreasing net earnings of 2000 and prior years by $25.3.

Accounting for Income Taxes

The aggregate income tax effects of the corrections and adjustments described herein, excluding the effects of the tax-specific items (xii) through (xiv), resulted in a $10.7 and an $11.1 cumulative increase in shareholders’ equity as at December 31, 2005 and December 31, 2004 respectively, and had the net effect of increasing 2005 net loss by $0.5, increasing 2004 net loss by $52.8, and decreasing 2003 net earnings by $2.4.

(xii)	Errors in calculating the income tax provisions during the period 2001 to 2004. The corrections had no cumulative effect on shareholders’ equity as at December 31, 2005 and December 31, 2004, and had the net effect of increasing the 2004 net loss by $9.4, increasing 2003 net earnings by $16.5, increasing 2002 net earnings by $10.9, and increasing the 2001 net loss by $18.0.
(xiii)	Recognition of the tax impact of an intercorporate dividend. The correction resulted in a $17.2 cumulative decrease in shareholders’ equity as at December 31, 2005 and

15

FAIRFAX FINANCIAL HOLDINGS LIMITED

December 31, 2004, and had the net effect of increasing the 2004 net loss by $13.8, and decreasing 2003 net earnings by $3.4.

(xiv)

Errors in recording the income tax effects on certain foreign currency contracts hedging the company’s U.S. dollar investments in subsidiaries in the pre-2004 period which were recorded in earnings rather than in the CTA. The corrections had no impact on shareholders’ equity as at December 31, 2005 and December 31, 2004, and had the net effect of decreasing the 2004 net loss by $4.0, decreasing 2003 net earnings by $2.9, and decreasing 2002 net earnings by $13.0.

Other

(xv)	The recording of a dividend declared in 2004 in the amount of $22.5 in 2004 instead of 2005. The correction had no cumulative impact on shareholders’ equity as at December 31, 2005, and had the effect of decreasing shareholders’ equity as at December 31, 2004 by $22.5.
(xvi)	Recording the balance sheet reclassification of common shares owned by the company as an increase in treasury stock rather than as an increase in other assets. The correction resulted in a $17.3 increase in treasury stock and a corresponding $17.3 decrease in shareholders’ equity as at December 31, 2005, and a $17.4 increase in treasury stock and a corresponding $17.4 decrease in shareholders’ equity as at December 31, 2004.
(xvii)	Other unrelated adjustments of an immaterial nature individually that were either timing differences in the recording of amounts or corrections. The adjustments resulted in a $27.1 aggregate cumulative decrease in shareholders’ equity as at December 31, 2005, comprised of a $31.8 cumulative decrease in retained earnings, a $0.4 cumulative net charge to the CTA and a $5.1 cumulative increase in common stock. The adjustments resulted in a $59.2 aggregate cumulative decrease in shareholders’ equity as at December 31, 2004, comprised of a $30.5 cumulative decrease in retained earnings, a $33.8 cumulative net charge to the CTA and a $5.1 cumulative increase in common stock.
(xviii)	Adjustments that resulted in a $415.4 aggregate cumulative decrease in shareholders’ equity as at December 31, 2003, comprised of a $249.9 cumulative decrease in retained earnings, a $151.9 cumulative charge to the CTA, an $18.7 cumulative increase in treasury stock and a $5.1 cumulative increase in common stock, and adjustments that resulted in a $351.0 aggregate cumulative decrease in shareholders’ equity as at December 31, 2002, comprised of a $268.5 cumulative decrease in retained earnings, a $61.0 cumulative charge to the CTA, a $26.6 cumulative increase in treasury stock and a $5.1 cumulative increase in common stock.

The previously reported, restatement adjustments and restated amounts for those accounts affected by this restatement in the consolidated statements of earnings for the years ended December 31, 2005, 2004 and 2003 and on the consolidated balance sheets as at December 31, 2005 and 2004 are as follows. The accounts primarily affected by the adjustments above have been footnoted. Refer to Note 21 for the impact of the restatement on the US GAAP Reconciliation.

16

Consolidated Balance Sheet Data

as at December 31, 2005

	Previously			Restatement
	Reported			Adjustments				Restated
Assets
Recoverable from reinsurers		7,655.6			0.1				7,655.7
Portfolio investments – common stocks		2,099.7			(2.3	)	(v)		2,097.4
– strategic investments		247.8			(21.2	)	(iv)		226.6
Deferred premium acquisition costs		391.5			(6.4	)	(iii)		385.1
Future income taxes		1,134.3			(15.5	)	(iii)(xiii)		1,118.8
Goodwill		210.8			17.6		(x)		228.4
Other assets		104.2			4.0		(xvi)		108.2
Total assets		27,565.7			(23.7	)			27,542.0
Liabilities
Accounts payable and accrued liabilities		1,150.0			17.3		(v)		1,167.3
Provision for claims		16,029.2			205.9		(iii)(viii)		16,235.1
Unearned premiums		2,429.0			17.3		(iii)		2,446.3
Non-controlling interests		753.9			(2.5	)	(iii)		751.4
Shareholders’ equity
Common stock		2,074.5			5.1				2,079.6
Treasury stock		–			(17.3	)	(xvi)		(17.3	)
Retained earnings as at January 1, 2005		1,061.9			(199.6	)			862.3
Common share dividends		(22.5	)		22.5		(xv)		–
Retained earnings as at December 31, 2005		531.4			(125.8	)			405.6
Currency translation account		104.0			(123.7	)	(v)(x)		(19.7	)
Total shareholders’ equity as at December 31, 2005		2,905.9			(261.7	)			2,644.2

17

FAIRFAX FINANCIAL HOLDINGS LIMITED

Consolidated Statement of Earnings Data

year ended December 31, 2005

		Previously			Restatement
		Reported			Adjustments				Restated
Revenue
	Gross premiums written		5,572.0			(12.9	)			5,559.1
	Net premiums written		4,705.4			(10.8	)			4,694.6
	Net premiums earned		4,703.8			(11.3	)	(iii)		4,692.5
	Interest and dividends		466.1			–				466.1
	Realized gains on investments		352.1			33.6		(iv)(v)(vi)(ix)		385.7
	Claims fees		356.2			–				356.2
			5,878.2			22.3				5,900.5
Expenses
	Losses on claims		4,387.1			(16.2	)	(iii)(viii)		4,370.9
	Operating expenses		1,071.2			(11.5	)	(iii)		1,059.7
	Commissions, net		736.0			–				736.0
	Interest expense		201.5			(1.1	)			200.4
			6,395.8			(28.8	)			6,367.0
Earnings (loss) from operations before income taxes			(517.6	)		51.1				(466.5	)
Provisions for (recovery of) income taxes			(66.8	)		0.5		(vi)		(66.3	)
Earnings (loss) before non-controlling interests			(450.8	)		50.6				(400.2	)
Non-controlling interests			(47.1	)		0.7		(iii)		(46.4	)
Net earnings (loss)			(497.9	)		51.3				(446.6	)
Net earnings (loss) per share		$	(30.72	)	$	3.12			$	(27.75	)
Net earnings (loss) per diluted share		$	(30.72	)	$	2.94			$	(27.75	)

18

Consolidated Balance Sheet Data

as at December 31, 2004

	Previously			Restatement
	Reported			Adjustments				Restated
Assets
Accounts receivable and other		2,346.0			(0.1	)			2,345.9
Recoverable from reinsurers		8,135.5			7.0				8,142.5
Portfolio investments – bonds		7,288.8			(27.9	)	(v)(ix)		7,260.9
– strategic investments		311.5			(29.2	)	(iv)		282.3
Deferred premium acquisition costs		378.8			(9.5	)	(iii)		369.3
Future income taxes		973.6			(23.9	)	(iii)(xiii)		949.7
Premises and equipment		99.8			1.0				100.8
Goodwill		228.1			17.6		(x)		245.7
Other assets		112.3			4.9		(xvi)		117.2
Total assets		26,331.3			(60.1	)			26,271.2
Liabilities
Accounts payable and accrued liabilities		1,122.4			121.8		(v)(xv)		1,244.2
Provision for claims		14,983.5			182.5		(iii)		15,166.0
Unearned premiums		2,368.3			6.1		(iii)		2,374.4
Long term debt-holding company borrowings		1,420.9			2.0				1,422.9
Non-controlling interests		583.0			(3.5	)			579.5
Shareholders’ equity
Common stock		1,781.8			5.1				1,786.9
Treasury stock		–			(17.4	)	(xvi)		(17.4	)
Retained earnings as of January 1, 2004		1,114.9			(249.9	)			865.0
Common share dividends		(19.5	)		(22.6	)	(xv)		(42.1	)
Retained earnings as at December 31, 2004		1,061.9			(199.6	)			862.3
Currency translation account		131.0			(157.1	)	(v)(x)		(26.1	)
Total shareholders’ equity as at December 31, 2004		3,170.7			(369.0	)			2,801.7

19

FAIRFAX FINANCIAL HOLDINGS LIMITED

Consolidated Statement of Earnings Data

year ended December 31, 2004

		Previously			Restatement
		Reported			Adjustments				Restated
Revenue
	Gross premiums written		5,608.8			(5.7	)			5,603.1
	Net premiums written		4,786.5			(0.8	)			4,785.7
	Net premiums earned		4,801.5			2.8		(i)(iii)		4,804.3
	Interest and dividends		366.7			9.0		(i)		375.7
	Realized gains on investments		248.2			25.3		(iv)(vi)		273.5
	Realized gain on Northbridge secondary offering		40.1			–				40.1
	Claims fees		336.1			–				336.1
			5,792.6			37.1				5,829.7
Expenses
	Losses on claims		3,610.6			(103.1	)	(i)(iii)(vi)		3,507.5
	Operating expenses		1,037.6			(20.4	)	(iii)		1,017.2
	Commissions, net		827.3			–				827.3
	Interest expense		166.6			10.1				176.7
	Cunningham Lindsey TPA disposition costs		13.4			–				13.4
			5,655.5			(113.4	)			5,542.1
Earnings from operations before income taxes			137.1			150.5				287.6
Provision for income taxes			83.0			71.9		(xiv)(xiii)(xii)		154.9
Net earnings before non-controlling interests			54.1			78.6				132.7
Non-controlling interests			(73.9	)		(5.7	)	(iii)		(79.6	)
Net earnings (loss)			(19.8	)		72.9				53.1
Net earnings (loss) per share		$	(2.16	)	$	5.27			$	3.11
Net earnings (loss) per diluted share		$	(2.16	)	$	5.27			$	3.11

20

Consolidated Statement of Earnings Data

year ended December 31, 2003

		Previously			Restatement
		Reported			Adjustments				Restated
Revenue
	Gross premiums written		5,518.6			(30.8	)			5,487.8
	Net premiums written		4,448.1			(22.5	)			4,425.6
	Net premiums earned		4,209.0			29.6		(i)(iii)		4,238.6
	Interest and dividends		330.1			1.8		(i)		331.9
	Realized gains on investments		840.2			(14.1	)	(v)		826.1
	Realized gain on Northbridge IPO		5.7			–				5.7
	Claims fees		328.9			–				328.9
			5,713.9			17.3				5,731.2
Expenses
	Losses on claims		3,240.6			25.8		(i)(iii)(vi)		3,266.4
	Operating expenses		1,023.4			(25.9	)	(iii)		997.5
	Commissions, net		776.1			–				776.1
	Interest expense		147.4			6.7				154.1
			5,187.5			6.6				5,194.1
Earnings from operations before income taxes			526.4			10.7				537.1
Provision for (recovery of) income taxes			191.9			(7.9	)	(xiv)(xii)(xiii)		184.0
Net earnings before non-controlling interests			334.5			18.6				353.1
Non-controlling interests			(64.5	)		–		(iii)		(64.5	)
Net earnings			270.0			18.6				288.6
Net earnings per share		$	18.55		$	1.33			$	19.98
Net earnings per diluted share		$	18.23		$	1.29			$	19.51

3.      Summary of Significant Accounting Policies

The preparation of financial statements in accordance with Canadian generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as at the date of the financial statements and the reported amounts of revenue and expenses during the periods covered by the financial statements. The principal financial statement components subject to measurement uncertainty include other-than-temporary declines in the value of investments (note 5), the provision for claims (note 6), the allowance for unrecoverable reinsurance (note 10) and the carrying value of future tax assets (note 11). Actual results could differ from those estimates.

21

FAIRFAX FINANCIAL HOLDINGS LIMITED

Principles of consolidation

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

Canadian Insurance Northbridge Financial Corporation   (Northbridge) U.S. Insurance Crum & Forster Holdings Corp. (C&F) Fairmont Specialty Group   (Fairmont) Asian Insurance Fairfax Asia consists of: Falcon Insurance Company Limited First Capital Insurance Limited ICICI Lombard Joint Venture   (26.0% interest)

Reinsurance Odyssey Re Holdings Corp. (OdysseyRe) Runoff and Other U.S. runoff consists of: TIG Insurance Company (TIG) European runoff consists of: nSpire Re Limited (nSpire Re) RiverStone Insurance (UK) Limited   (RiverStone (UK)) RiverStone Managing Agency Syndicate 3500 Group Re consists of: CRC (Bermuda) Reinsurance Limited   (CRC (Bermuda)) Wentworth Insurance Company Ltd.   (Wentworth) Retention of U.S. business in nSpire Re

Other Hamblin Watsa Investment Counsel Ltd. (Hamblin Watsa) (investment management) Cunningham Lindsey Group Inc. (Cunningham Lindsey) (insurance claims management)

All subsidiaries are wholly-owned except for OdysseyRe with an 80.1% interest (2004 – 80.8%), Northbridge with a 59.2% interest (2004 – 59.2%) and Cunningham Lindsey with an 81.0% interest (2004 – 75.0%). The company has investments in Hub International Limited (“Hub”) with a 25.9% interest (2004 – 26.1%) and Advent Capital (Holdings) PLC (“Advent”) with a 46.8% interest (2004 – 46.8%), which are accounted for on the equity basis. The company also has an investment in Zenith National Insurance Corp. (“Zenith National”) with a 10.3% interest (2004 – 24.4%), which is accounted for on the cost basis since 2002 (prior to 2002 on the equity basis) as the company does not have the ability to exercise significant influence over Zenith National.

Acquisitions are accounted for by the purchase method, whereby the results of acquired companies are included only from the date of acquisition. Divestitures are included up to the date of disposal.

Premiums

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

Deferred premium acquisition costs

Certain costs, consisting of brokers’ commissions and premium taxes, of acquiring insurance premiums are deferred, to the extent that they are considered recoverable, and charged to income as the premiums are earned. The ultimate recoverability of deferred premium acquisition costs is determined without regard to investment income.

22

Investments

Bonds are carried at amortized cost providing for the amortization of the discount or premium on a yield to maturity basis. Preferred and common stocks are carried at cost. Real estate is carried at cost. When there has been a loss in value of an investment that is other than temporary, the investment is written down to its estimated net realizable value. Such writedowns are reflected in realized gains (losses) on investments.

Provision for claims

Claim provisions are established by the case method as claims are reported. For reinsurance, the provision for claims is based on reports and individual case estimates received from ceding companies. The estimates are regularly reviewed and updated as additional information on the estimated claims becomes known and any resulting adjustments are included in earnings. A provision is also made for management’s calculation of factors affecting the future development of claims including claims incurred but not reported (IBNR) based on the volume of business currently in force and the historical experience on claims.

Translation of foreign currencies

The operations of the company’s subsidiaries (principally in Canada, the United States and the United Kingdom) are self-sustaining. As a result, the assets and liabilities of the non U.S. dollar denominated subsidiaries are translated at the year-end rates of exchange. Revenue and expenses are translated at the average rate of exchange for the year. The net unrealized gains or losses which result from translation are deferred and included in shareholders’ equity.

Historically, prior to the company’s change in functional currency to U.S. dollars effective January 1, 2004, the company had entered into foreign currency contracts from time to time to hedge the foreign currency exposure related to its net investments in self-sustaining U.S. operations. Such contracts were translated at the year-end rates of exchange and the impact was included in shareholders’ equity. The remaining contracts were terminated during 2003.

Goodwill

The company assesses the carrying value of goodwill based on the underlying discounted cash flows and operating results of its subsidiaries. The carrying value of goodwill will be charged to earnings if and to the extent that it is determined that an impairment in value exists. Management has compared the carrying value of goodwill balances as at December 31, 2005 and the estimated fair values of the underlying operations and concluded that there was no impairment in the value of goodwill. The estimated fair values are sensitive to the cash flow projections and discount rates used in the valuation and more specifically the ability of Cunningham Lindsey’s U.K. operations to meet their profit and cash flow forecasts for 2006 and future years.

Negative goodwill arising on acquisitions during the year is recognized in the consolidated statement of earnings as an extraordinary item.

Reinsurance

The company reflects third party reinsurance balances on the balance sheet on a gross basis to indicate the extent of credit risk related to third party reinsurance and its obligations to policyholders and on a net basis in the statement of earnings to indicate the results of its retention of premiums written.

In order to control the company’s exposure to loss from adverse development of reserves or reinsurance recoverables on pre-acquisition reserves of companies acquired or from future adverse development on long tail latent or other potentially volatile claims, and to protect capital, the company obtains vendor indemnities or purchases excess of loss reinsurance

23

FAIRFAX FINANCIAL HOLDINGS LIMITED

protection from reinsurers. For excess of loss reinsurance treaties (other than vendor indemnities), the company generally pays the reinsurer a premium as losses from adverse development are ceded under the treaty. The company records both the premium charge and the related reinsurance recovery in its consolidated statement of earnings in the period in which the adverse development is ceded to the reinsurer.

Income taxes

Income taxes reflect the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities and their tax bases based on tax rates which are expected to be in effect when the asset or liability is settled.

Pensions

Accrued benefit obligations for pensions and other post retirement benefits are actuarially determined using the projected benefit method prorated on service and incorporates management’s best estimate of future salary levels, other cost escalation, retirement ages of the employees and other actuarial factors.

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

Actuarial gains (losses) arise from the difference between the actual long term rate of return and the expected long term rate of return on plan assets for that period or from changes in actuarial assumptions used to determine the accrued benefit obligation. The excess of the net accumulated actuarial gain (loss) over 10 percent of the greater of the benefit obligation and the fair value of plan assets is amortized over the average remaining service period of active employees.

Past service costs arising from plan amendments are deferred and amortized on a straight line basis over the average remaining service period of employees active at the date of amendment.

Future accounting changes

The Canadian Institute of Chartered Accountants (CICA) has issued three new accounting standards: Financial Instruments – Recognition and Measurement, Hedges and Comprehensive Income which the company will adopt effective January 1, 2007.

Financial Instruments – Recognition and Measurement. The company’s financial assets and liabilities will be carried at fair value in its consolidated balance sheet, except for receivables and non-trading financial liabilities, which will be carried at amortized cost. Realized and unrealized gains and losses on financial assets and liabilities which are held for trading will continue to be recorded in the consolidated statement of earnings. Unrealized gains and losses on financial assets which are held as available for sale will be recorded in other comprehensive income until realized, at which time the gain or loss will be recorded in the consolidated statement of earnings. All derivatives will be recorded at fair value in the consolidated balance sheet.

Hedges – For fair value hedges, the change in fair value of the hedging derivative will be offset in the consolidated statement of earnings against the change in the fair value of the hedged item relating to the hedged risk. For cash flow hedges, the change in fair value of the derivative to the extent effective will be recorded in other comprehensive income until the asset or liability being hedged affects the consolidated statement of earnings, at which time the related change in fair value of the derivative will also be recorded in the consolidated statement of earnings. Any hedge ineffectiveness will be recorded in the consolidated statement of earnings.

Accumulated Other Comprehensive Income – Unrealized gains and losses on financial assets which are classified as available for sale, unrealized foreign currency translation amounts arising from self-sustaining foreign operations, and changes in the fair value of cash flow hedging instruments will be recorded in a statement of accumulated other comprehensive

24

income until recognized in the consolidated statement of earnings. Accumulated other comprehensive income will form part of shareholders’ equity.

The transitional impact of these new standards is dependent on the company’s outstanding positions, hedging strategies and market volatility at the time of transition; however, these standards generally align Canadian GAAP with existing US GAAP. The effects of US GAAP are disclosed in the company’s US GAAP reconciliation note (note 21).

4. Cash, Short Term Investments and Marketable Securities

Cash, short term investments and marketable securities are as follows:

	2005		2004
Cash and short term investments		278.8		534.6
Cash held in Crum & Forster (including $nil (2004 – $16.3) in interest escrow account)		1.7		17.1
Marketable securities		278.5		15.1
		559.0		566.8

Marketable securities include corporate bonds and equities, with a fair value of $284.5 (2004 – $15.1).

25

FAIRFAX FINANCIAL HOLDINGS LIMITED

5. Investment Information

Portfolio investments are comprised as follows, with the estimated fair values of debt securities and preferred and common stocks based on quoted market values.

		2005 Restated									2004 Restated
				Gross		Gross							Gross		Gross
		Carrying		Unrealized		Unrealized			Estimated		Carrying		Unrealized		Unrealized			Estimated
		Value		Gains		Losses			Fair Value		Value		Gains		Losses			Fair Value
Subsidiary cash and short term investments			3,788.9		–		–			3,788.9		3,476.3		–		–			3,476.3
Subsidiary cash and short term investments pledged for securities sold but not yet purchased			737.4		–		–			737.4		571.4		–		–			571.4
Bonds
	Canadian – government		1,345.1		87.2		(2.2	)		1,430.1		693.6		49.6		–			743.2
	– government bonds pledged for securities sold but not yet              purchased		84.7		4.7		–			89.4		82.7		2.6		–			85.3
	– corporate		185.4		33.0		–			218.4		275.6		16.4		(0.1	)		291.9
	U.S. – government		4,574.4		4.9		(143.6	)		4,435.7		4,352.0		59.1		(193.0	)		4,218.1
	– government bonds pledged for securities sold but not yet purchased		184.0		–		(1.5	)		182.5		78.8		–		(1.6	)		77.2
	– corporate		1,400.4		27.5		(100.8	)		1,327.1		1,227.1		148.5		(66.7	)		1,308.9
	Other – government		316.8		9.0		(6.3	)		319.5		371.1		22.0		–			393.1
	– corporate		36.6		0.5		(1.4	)		35.7		180.0		4.6		(9.6	)		175.0
Preferred stocks
	Canadian		15.8		0.8		–			16.6		135.8		0.6		–			136.4
Common stocks
	Canadian		273.9		95.7		(5.4	)		364.2		340.0		100.8		(5.8	)		435.0
	U.S.		854.1		47.3		(43.2	)		858.2		511.1		48.2		(58.2	)		501.1
	Other		969.4		353.7		(14.8	)		1,308.3		827.5		210.7		(16.4	)		1,021.8
	Hub, Zenith National and Advent		226.6		212.5		–			439.1		282.3		168.2		–			450.5
Real estate			17.2		0.8		–			18.0		28.0		5.5		–			33.5
			15,010.7		877.6		(319.2	)		15,569.1		13,433.3		836.8		(351.4	)		13,918.7

The number of continuous months in which securities have been in unrealized loss position as at December 31, 2005 is as follows:

		Restated
		Less than 12 Months							Greater than 12 Months							Total
		Estimated		Gross			Number		Estimated		Gross			Number		Estimated		Gross			Number
		Fair		Unrealized			of		Fair		Unrealized			of		Fair		Unrealized			of
		Value		Losses			Securities		Value		Losses			Securities		Value		Losses			Securities
Bonds
	Canadian – government		420.2		(2.2	)		2		–		–			–		420.2		(2.2	)		2
	U.S.         – government		4,107.9		(144.4	)		36		15.8		(0.7	)		5		4,123.7		(145.1	)		41
	– corporate		328.5		(50.1	)		47		630.3		(50.7	)		18		958.8		(100.8	)		65
	Other       – government		193.6		(6.3	)		7		–		–			–		193.6		(6.3	)		7
	– corporate		12.0		(1.4	)		2		–		–			–		12.0		(1.4	)		2
Common stocks
	Canadian		78.0		(5.4	)		5		–		–			–		78.0		(5.4	)		5
	U.S.		439.6		(43.2	)		8		–		–			–		439.6		(43.2	)		8
	Other		171.4		(14.3	)		8		2.8		(0.5	)		4		174.2		(14.8	)		12
Total			5,751.2		(267.3	)		115		648.9		(51.9	)		27		6,400.1		(319.2	)		142

26

Management has reviewed currently available information regarding those investments whose estimated fair value is less than carrying value at December 31, 2005. Debt securities whose carrying value exceeds market value are expected to be held until maturity or until market value exceeds carrying value. All investments have been reviewed to ensure that corporate performance expectations have not changed significantly to adversely affect the market value of these securities other than on a temporary basis. The company has made investments in certain high yield debt securities for which the market value of the investments is below the carrying value to the company. The company has written down the carrying value of these investments to reflect other than temporary declines in value. The carrying values have been written down to the company’s assessment of the underlying fair value of the investments when the company does not view the current quoted market value as being reflective of the underlying value of the investments. At December 31, 2005, the company had total bonds rated less than investment grade with an aggregate carrying value of $674.7 (2004 – $477.3), aggregate quoted market value of $644.5 (2004 – $498.7), gross unrealized gains of $43.1 (2004 – $69.0) and gross unrealized losses of $73.2 (2004 – $47.6).

At December 31, 2005, as an economic hedge against a decline in the equity markets, the company had short sales of approximately $500.0 notional amount of Standard & Poor’s Depository Receipts (“SPDRs”) and $60.3 of common stocks as well as a Total Return Swap (“swap”) with a notional value of approximately $550.0 (constituting together hedges with an aggregate notional value of approximately $1,110.3), as described in the two following paragraphs. At December 31, 2005, common stocks in the company’s portfolio aggregated $2,097.4, with a market value of $2,530.7.

Simultaneously with short sales of approximately $500.0 ($400.0 at December 31, 2004) notional amount of SPDRs and $60.3 ($50.0 at December 31, 2004) of common stocks, the company entered into two-year call options (“options”) to limit the potential loss on the future purchase of the SPDRs and the common stocks to $112.1 ($90.0 at December 31, 2004). The company is required to provide collateral for the obligation to purchase the SPDRs, which amounted to $521.0 ($401.7 at December 31, 2004) of cash and short term securities and $271.9 ($162.5 at December 31, 2004) of bonds at market value (shown on the table above as subsidiary cash and short term investments and bonds pledged for securities sold but not yet purchased). The collateral provided for the purchase of common stocks sold short is $112.3 ($70.5 at December 31, 2004) of cash. Both the obligation to purchase the securities sold short and options are carried at fair value in the consolidated financial statements. The fair value of the obligation to purchase the SPDRs and common stocks is included in securities sold but not yet purchased and the fair value of the options is included in common stocks on the consolidated balance sheet.

The company also has a Total Return Swap (the “swap”) with a notional value of approximately $550.0 ($450.0 at December 31, 2004). The company receives floating payments based on the notional value multiplied by LIBOR. The company pays or receives a fixed rate based on the change of the SPDRs which are the underlying security multiplied by the notional value of the swap. Simultaneously, the company entered into an option to limit the potential loss on the swap to $110.0 ($90.0 at December 31, 2004). Short term securities have been pledged as collateral for the swap in the amount of $104.1 ($99.2 at December 31, 2004). The fair value of the swap is a liability of $60.5 ($44.9 at December 31, 2004) and is included in securities sold but not yet purchased on the consolidated balance sheet.

The company also has purchased credit default swaps and put bond warrants which are carried at fair value of $142.2 ($52.5 at December 31, 2004) and classified as bonds in the table above.

27

FAIRFAX FINANCIAL HOLDINGS LIMITED

Changes in the fair value for the transactions described above and other derivatives have been included in realized gains on investments in the consolidated statement of earnings as follows:

	2005			2004			2003
SPDRs, common stocks and related options		(20.7	)		(36.9	)		–
Swap and related option		(25.8	)		(38.2	)		–
Credit default swaps		(101.6	)		(13.7	)		(12.5	)
Put bond warrants and other		(10.6	)		25.5			6.8
Gains (losses)		(158.7	)		(63.3	)		(5.7	)

In addition to the amounts disclosed in note 13, the company’s subsidiaries have pledged cash and investments of $2.2 billion 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). These pledges are in the normal course of business and are generally released when the payment obligation is fulfilled.

Liquidity and Interest Rate Risk

Maturity profile as at December 31, 2005 and 2004 (restated):

	Within 1		1 to 5		6 to 10		Over 10		2005
	Year		Years		Years		Years		Total
Bonds (market value)		321.5		683.3		1,197.7		5,835.9		8,038.4
Bonds (carrying value)		325.1		674.6		1,154.1		5,973.6		8,127.4
Effective interest rate										5.0%

	Within 1		1 to 5		6 to 10		Over 10		2004
	Year		Years		Years		Years		Total
Bonds (market value)		364.4		685.5		867.8		5,375.0		7,292.7
Bonds (carrying value)		364.4		648.7		874.7		5,373.1		7,260.9
Effective interest rate										5.2%

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

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Investment Income

		2005			2004			2003
		Restated			Restated			Restated
Interest and dividends:
	Cash and short term investments		118.5			55.2			51.4
	Bonds		313.3			241.0			227.0
	Preferred stocks		3.7			3.7			7.3
	Common stocks		52.1			90.4			61.7
			487.6			390.3			347.4
	Expenses		(21.5	)		(14.6	)		(15.5	)
			466.1			375.7			331.9
Realized gains on investments:
	Bonds – gain		323.5			147.1			731.9
	– (loss)		(27.7	)		(11.2	)		(58.0	)
	Preferred stocks – gain		–			–			0.1
	– (loss)		–			(0.1	)		–
	Common stocks – gain		274.4			263.1			200.2
	– (loss)		(20.0	)		(7.0	)		(11.6	)
	Derivatives      – gain		66.6			–			–
	– (loss)		(15.7	)		(6.4	)		–
	Mark to market on derivative instruments		(158.7	)		(63.3	)		(5.7	)
	Repurchase of debt		0.5			(27.0	)		–
	Northbridge secondary offering and IPO		–			40.1			5.7
	Other		(8.7	)		9.9			1.2
Provision for losses and writedowns			(48.5	)		(31.6	)		(32.0	)
			385.7			313.6			831.8
Net investment income			851.8			689.3			1,163.7

Equity earnings (losses) for Hub and Advent of $3.7 and $(45.1) respectively, for the year ended December 31, 2005 (2004 – $5.5 and $4.1 respectively; 2003 – $9.0 and $22.1 respectively) are included in interest and dividends – common stock.

6. Provision for Claims

The provisions for unpaid claims and adjustment expenses and for the third party reinsurers’ share thereof are estimates subject to variability, and the variability could be material in the near term. The variability arises because all events affecting the ultimate settlement of claims have not taken place and may not take place for some time. Variability can be caused by receipt of additional claim information, changes in judicial interpretation of contracts or liability, significant changes in severity or frequency of claims from historical trends, expansion of coverage to include unanticipated exposures, or a variety of other reasons. The estimates are principally based on the company’s historical experience. Methods of estimation have been used which the company believes produce reasonable results given current information.

29

FAIRFAX FINANCIAL HOLDINGS LIMITED

Changes in claim liabilities recorded on the consolidated balance sheets as at December 31, 2005 and 2004 and their impact on unpaid claims and allocated loss adjustment expenses for these two years are as shown in the following table:

		2005			2004
		Restated			Restated
Unpaid claim liabilities – beginning of year – net			7,821.5			7,161.2
Foreign exchange effect of change in claim liabilities			16.8			168.4
Increase in estimated losses and expenses for losses occurring in prior years			558.3			265.2
Recovery under Swiss Re cover			–			(3.9	)
Provision for losses and expenses on claims occurring in the current year			3,784.5			3,224.7
Paid on claims occurring during:
	the current year		(854.4	)		(703.2	)
	prior years		(2,002.7	)		(2,384.2	)
Unpaid claims liabilities of acquired companies at December 31			38.2			93.3
Unpaid claim liabilities – end of year – net			9,362.2			7,821.5
Unpaid claim liabilities at December 31 of Federated Life			–			26.2
Unpaid claim liabilities – end of year – net			9,362.2			7,847.7
Reinsurance gross-up			6,872.9			7,318.3
Unpaid claim liabilities – end of year – gross			16,235.1			15,166.0

The foreign exchange effect of change in claim liabilities results from the fluctuation of the value of the U.S. dollar in relation to primarily the Canadian dollar and European currencies.

The basic assumptions made in establishing actuarial liabilities are best estimates of possible outcomes. The company uses tabular reserving for workers’ compensation liabilities that are considered fixed and determinable, and discounts such reserves using interest rates of 3.5% to 5.0% and standard mortality assumptions. Otherwise, the company presents its claims on an undiscounted basis.

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7. Long Term Debt

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

				2004
	2005			Restated
Fairfax unsecured senior notes at 7.375% due March 15, 2006(1)(2)		60.6			67.6
Fairfax€45.7 secured debt at 2.5% due February 27, 2007 (effectively a€33.6 debt at 8%)(5)		51.3			54.8
Fairfax unsecured senior notes at 6.875% due April 15, 2008(1)(2)(3)		62.1			62.7
Fairfax unsecured senior notes at 7.75% due April 15, 2012(2)		466.4			466.4
Fairfax unsecured senior notes at 8.25% due October 1, 2015(3)		100.0			100.0
Fairfax unsecured senior notes at 7.375% due April 15, 2018(1)(3)(4)		184.2			190.2
Fairfax unsecured senior notes at 8.30% due April 15, 2026(2)(3)		97.6			97.6
Fairfax unsecured senior notes at 7.75% due July 15, 2037(1)(3)		91.3			105.5
Fairfax 5% convertible senior debentures due July 15, 2023(6)		137.4			136.2
Fairfax Inc. 3.15% exchangeable debenture due November 19, 2009(7)		101.0			101.0
TIG senior unsecured non-callable notes at 8.125% due April 15, 2005(1)(2)		–			27.3
Other debt – 6.15% secured loan due January 28, 2009		13.4			13.6
Long term debt – holding company borrowings		1,365.3			1,422.9
OdysseyRe unsecured senior non-callable notes at 7.49% due November 30, 2006		40.0			40.0
OdysseyRe unsecured senior notes at 6.875% due May 1, 2015(1)(8)		125.0			–
OdysseyRe convertible senior debentures at 4.375% due June 22, 2022(1)(9)		79.5			109.9
OdysseyRe unsecured senior notes at 7.65% due November 1, 2013(8)		225.0			225.0
Crum & Forster unsecured senior notes at 10.375% due June 15, 2013		300.0			300.0
Cunningham Lindsey unsecured Series B debentures of Cdn$125 at 7.0% due June 16, 2008		107.0			104.3
Other long term debt of Cunningham Lindsey		0.3			0.7
		876.8			779.9
Less: Cunningham Lindsey debentures held by Fairfax		(7.5	)		(6.9	)
Long term debt – subsidiary company borrowings		869.3			773.0
		2,234.6			2,195.9

(1) During 2005, the company or one of its subsidiaries completed the following transactions with respect to its debt:

(a)	The company purchased $7.0 of its notes due in 2006, $0.6 of its notes due in 2008, $6.0 of its notes due in 2018 and $14.2 of its notes due in 2037 and repaid the $27.3 of TIG senior notes which matured for cash payments of $50.7.
(b)	OdysseyRe issued $125.0 principal amount of 6.875% senior notes due in 2015.
(c)	OdysseyRe repurchased $30.4 principal amount of its 4.375% convertible senior debentures due 2022 for cash payments of $34.2.

(2) During 2004, the company completed the following transactions with respect to its debt:

(a)	Exchanged $204.6 of outstanding notes due in 2005 through 2008 for cash of $59.4 (including accrued interest) and the issue of $160.4 of notes due in 2012 (which were accounted for as a modification of debt).
(b)	Issued an aggregate of $295.0 notes due in 2012.
(c)	Purchased $175.5 of notes due in 2005 through 2008 and in 2026.
(d)	Exchanged $10.0 of notes due in 2006 for $11.0 of notes due in 2012.

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FAIRFAX FINANCIAL HOLDINGS LIMITED

(3)	During 2002, the company closed out the swaps for this debt and deferred the resulting gain which is amortized to earnings over the remaining term to maturity. The unamortized balance at December 31, 2005 is $44.6 (2004  – $54.2).
(4)	During 1998, the company swapped $125.0 of its debt due 2018 for Japanese yen denominated debt of the same maturity. The company pays fixed interest at 3.93% on ¥16.5 billion and receives a fixed rate interest at 9.2% on a notional amount of $125.0. Inception to date, this instrument has yielded income of $5.3 (2004 – $10.6 loss), all of which has been settled except for $0.4 (2004 – $0.4) which is due from the counter party at year end.
(5)	Secured by LOCs.
(6)	Each $1,000 principal amount of debentures is convertible under certain circumstances into 4.7057 subordinate voting shares ($212.51 per share). Prior to July 15, 2008, the company may redeem the debentures (effectively forcing conversion) if the share price exceeds $293.12 for 20 trading days in any30-day trading period. The company may redeem the debentures at any time commencing July 15, 2008, and the debenture holders can put their debentures to the company for repayment on July 15, 2008, 2013 and 2018. The company has the option to repay the debentures in cash, subordinate voting shares or a combination thereof. In accordance with Canadian GAAP, these convertible debentures are recorded as components of debt and equity (see Change in accounting policy below). During 2004, the company purchased for cancellation $6.5 principal amount of these debentures at a cost of $6.7 (including accrued interest).
(7)	During 2004, the company, through one if its subsidiaries, purchased its $78.0 principal amount of 3.15% exchangeable debentures due 2010 in a private transaction. As consideration, the subsidiary issued $101.0 principal amount of new 3.15% exchangeable debentures due 2009 which are collectively exchangeable at the option of the holders into an aggregate of 4,300,000 OdysseyRe common shares in August 2006 (with respect to $32.9 principal amount of new debentures) and November 2006 (with respect to $68.1 principal amount of new debentures).
(8)	Redeemable at OdysseyRe’s option at any time.
(9)	Redeemable at OdysseyRe’s option. Each holder may, at its option, require OdysseyRe to repurchase all or a portion of this debt (for cash or OdysseyRe common shares, at OdysseyRe’s option) on June 22, 2007, 2009, 2012 and 2017. Convertible at the holder’s option, under certain circumstances, into OdysseyRe common shares in the ratio of 46.9925 OdysseyRe shares for every $1,000 principal amount of this debt ($21.28 per share).
(10)	On September 23, 2005, OdysseyRe entered into a three-year $150.0 credit facility with a syndicate of lenders, replacing its existing $90.0 credit facility.

Interest expense on long term debt amounted to $191.8 (2004 – $170.5; 2003 – $152.6). Interest expense on Cunningham Lindsey’s total indebtedness amounted to $8.6 (2004 – $6.2; 2003 – $1.5).

Principal repayments are due as follows:

2006	100.6
2007	51.3
2008	161.9
2009	114.4
2010	–
Thereafter	1,806.4

On February 22, 2006, OdysseyRe issued $100.0 floating rate senior notes. The notes were sold in two tranches; $50.0 of Series A due in 2021 and $50.0 of Series B due in 2016.

Change in accounting policy

Effective January 1, 2005, the company retroactively adopted a new pronouncement issued by the CICA amending the accounting for certain financial instruments that have the characteristics of both a liability and equity. This pronouncement requires that those

32

instruments which can be settled at the issuer’s option by issuing a variable number of the issuer’s own equity instruments be presented partially as liabilities rather than solely as equity.

This affected the company’s 5% convertible senior debentures due July 15, 2023. The portion of these debentures which was formerly classified as other paid in capital in shareholders’ equity (other than the $59.4 which represents the value of the holders’ option to convert the debentures into subordinate voting shares) was reclassified to long term debt. Consequently, the disbursement associated with this instrument was recorded as interest expense, whereas prior to the accounting policy change, that disbursement would have directly reduced retained earnings as a cost of the convertible debentures. The amount currently recorded as long term debt will accrete to the $193.5 face value of the debt over the remaining term to maturity ending in 2023.

8.      Trust Preferred Securities of Subsidiaries

TIG Holdings has issued 8.597% junior subordinated debentures to TIG Capital Trust (a statutory business trust subsidiary of TIG Holdings) which, in turn, has issued 8.597% mandatory redeemable capital securities, maturing in 2027. During 2004, the company acquired $27.4 of these trust preferred securities for approximately $23.9, with $52.4 outstanding at December 31, 2005 and 2004.

9.      Shareholders’ Equity

Capital Stock

Authorized capital

The authorized share capital of the company consists of an unlimited number of preferred shares issuable in series, an unlimited number of multiple voting shares carrying ten votes per share and an unlimited number of subordinate voting shares carrying one vote per share.

Issued capital

Issued capital includes both multiple and subordinate voting shares, Series A preferred shares and Series B preferred shares.

Series A preferred shares are floating (previously fixed/ floating) rate cumulative redeemable (at the company’s option) preferred shares with an annual dividend rate based on the prime rate, but in any event not less than 5% per annum and with stated capital of Cdn$25 per share.

Series B preferred shares are fixed rate cumulative redeemable (at the company’s option) preferred shares with a dividend rate of 6.5% per annum until November 30, 2009 and thereafter at an annual rate based upon the yield of five year Government of Canada bonds, and stated capital of Cdn$25 per share.

Treasury shares

The company acquires its own subordinate voting shares on the open market to be used in its various senior share plans which are discussed more fully in note 13.

Capital transactions

(a)	On October 5, 2005, the company issued 1,843,318 subordinate voting shares at $162.75 per share for net proceeds after issue costs (net of tax) of $299.8.
(b)	Under the terms of normal course issuer bids approved by the Toronto Stock Exchange, during 2005 the company purchased and cancelled 49,800 (2004 – 215,200; 2003 – 240,700) subordinate voting shares for an aggregate cost of $7.4

33

FAIRFAX FINANCIAL HOLDINGS LIMITED

	(2004 – $31.5; 2003 – $30.6), of which $0.3 (2004 – $3.6; 2003 – $4.9) was charged to retained earnings.
(c)	On December 16, 2004, the company issued 2,406,741 subordinate voting shares at $124.65 per share for net proceeds after issue costs (net of tax) of $299.7.
(d)	During 2004, certain holders of the preferred shares elected to convert 5,000,000 of Series A preferred shares into Series B preferred shares on a one-for-one basis. At November 30, 2009 and every five years thereafter, the holders of the preferred shares – both Series A and B – have the right to convert to the other Series.

10. Reinsurance

The company follows the policy of underwriting and reinsuring contracts of insurance and reinsurance which, depending on the type of contract, generally limits the liability of the individual insurance and reinsurance subsidiaries to a maximum amount on any one loss of $10.0 for OdysseyRe, $7.5 (excluding workers’ compensation) for Crum & Forster and $3.3 for Northbridge. Reinsurance is generally placed on an excess of loss basis in several layers. The company’s reinsurance does not, however, relieve the company of its primary obligation to the policyholders.

The company has guidelines and a review process in place to assess the creditworthiness of the companies to which it cedes.

The company makes specific provisions against reinsurance recoverable from companies considered to be in financial difficulty. In addition, the company records a general allowance based upon analysis of historical recoveries, the level of allowance already in place and management’s judgment on future collectibility. The allocation of the allowance for loss is as follows:

	2005		2004
Specific		377.6		385.0
General		54.9		149.7
Total		432.5		534.7

During the year, the company ceded premiums earned of $860.1 (2004 – $862.7; 2003 – $1,350.4) and claims incurred of $1,522.9 (2004 – $1,166.9; 2003 – $1,600.4). For the last three years, Fairfax has had reinsurance bad debts of $51.1 for 2005, $62.8 for 2004 and $15.1 for 2003.

11. Income Taxes

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

	2005			2004		2003
	Restated			Restated		Restated
Current		85.5			77.4		64.9
Future		(151.8	)		77.5		119.1
		(66.3	)		154.9		184.0

The provision for income taxes differs from the statutory tax rate as certain sources of income are exempt from tax or are taxed at rates other than the statutory rate. A reconciliation of

34

income tax calculated at the statutory tax rate with the income tax provision at the effective tax rate in the financial statements is summarized in the following table:

	2005			2004			2003
	Restated			Restated			Restated
Provision for (recovery of) income taxes at the statutory income tax rate		(168.5	)		104.7			197.1
Non-taxable investment income		(20.2	)		(19.7	)		(20.6	)
Tax rate differential on losses incurred (income earned) outside Canada		74.9			25.8			(8.6	)
Foreign exchange		0.6			20.1			–
Change in tax rate for future income taxes		–			–			(14.2	)
Unrecorded tax benefit of losses		47.6			16.4			53.6
Other including permanent differences		(0.7	)		7.6			(23.3	)
Provision for (recovery of) income taxes		(66.3	)		154.9			184.0

Future income taxes of the company are as follows:

	2005			2004
	Restated			Restated
Operating and capital losses		624.8			525.3
Claims discount		298.7			288.5
Unearned premium reserve		88.3			85.5
Deferred premium acquisition cost		(88.4	)		(88.5	)
Allowance for doubtful accounts		22.0			21.7
Investments and other		173.4			117.2
Future income taxes		1,118.8			949.7

The company has loss carryforwards in the U.S. of approximately $1,159.1, all of which expire after 2018, in Canada of approximately $125.8 expiring from 2006 to 2015, in Ireland of $232.6 with no expiry date and in the U.K. of $323.6 with no expiry date. The majority of the future tax balances relate to the U.S. operations.

Management reviews the valuation of the future income taxes on an ongoing basis and adjusts the valuation allowance, as necessary, to reflect its anticipated realization. As at December 31, 2005, management has recorded a valuation allowance of $99.9 (2004 – $54.6), of which $49.2 relates to losses of Cunningham Lindsey and $50.7 relates to losses incurred primarily in the U.K. and Ireland. Management expects that recorded future income taxes will be realized in the normal course of operations.

12. Statutory Requirements

The retained earnings of the company are largely represented by retained earnings at the insurance and reinsurance subsidiaries. The company’s insurance and reinsurance subsidiaries are subject to certain requirements and restrictions under their respective insurance company Acts including minimum capital requirements and dividend restrictions. The company’s share of dividends paid in 2005 by the subsidiaries was $121.7. The company’s ability to receive funds from OdysseyRe and Northbridge is limited, as these are public companies with independent boards of directors who control dividend policies. At December 31, 2005, the company has access to $126 of dividend capacity at Crum & Forster.

35

FAIRFAX FINANCIAL HOLDINGS LIMITED

13. Contingencies and Commitments

On September 7, 2005, the company announced that it had received a subpoena from the U.S. Securities and Exchange Commission (the “SEC”) requesting documents regarding any non-traditional insurance or reinsurance product transactions entered into by the entities in the consolidated group and any non-traditional insurance or reinsurance products offered by the entities in that group. On September 26, 2005, the company announced that it had received a further subpoena from the SEC as part of its investigation into such loss mitigation products, requesting documents regarding any transactions in the company’s securities, the compensation for such transactions and the trading volume or share price of such securities. Previously, on June 24, 2005, the company announced that the company’s Fairmont subsidiary had received a subpoena from the SEC requesting documents regarding any non-traditional insurance product transactions entered into by Fairmont with General Re Corporation or affiliates thereof. The U.S. Attorney’s office for the Southern District of New York is reviewing documents produced by the company to the SEC and is participating in the investigation of these matters. The company is cooperating fully with these requests. The company has prepared presentations and provided documents to the SEC and the U.S. Attorney’s office, and its employees, including senior officers, have attended or have been requested to attend interviews conducted by the SEC and the U.S. Attorney’s office.

The company and Prem Watsa, the company’s Chief Executive Officer, received subpoenas from the SEC in connection with the answer to a question on the February 10, 2006 investor conference call concerning the review of the company’s finite insurance contracts. In the fall of 2005, Fairfax and its subsidiaries prepared and provided to the SEC a list intended to identify certain finite contracts and contracts with other non-traditional features of all Fairfax group companies. As part of the 2005 year-end reporting and closing process, Fairfax and its subsidiaries internally reviewed all of the contracts on the list provided to the SEC and some additional contracts as deemed appropriate.

It is possible that other governmental and enforcement agencies will seek to review information related to these matters, or that the company, or other parties with whom it interacts, such as customers or shareholders, may become subject to direct requests for information or other inquiries by such agencies. These inquiries are ongoing and the company continues to comply with requests for information from the SEC and the U.S. Attorney’s office. At the present time the company cannot predict the outcome from these continuing inquiries, or the ultimate effect on its financial statements, which effect could be material and adverse.

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.

In addition to the secured letters of credit referred to in note 5, at December 31, 2005 letters of credit aggregating $450.0 had been issued upon the company’s application and pledged as security for subsidiaries’ reinsurance balances, all relating to intercompany reinsurance between subsidiaries. These letters of credit are effectively secured by the assets held in trust derived from the premiums on the company’s corporate insurance cover ultimately reinsured with a Swiss Re subsidiary, and the interest thereon. The lenders have the ability, in the event of a default, to cause the commutation of this cover, thereby gaining access to the above-mentioned assets.

At December 31, 2005, OdysseyRe had pledged and placed on deposit at Lloyd’s approximately $188.8 (£110.0) of U.S. Treasury Notes on behalf of Advent. Subsequent to year end, $65.2 (£38.0) of these pledged funds were substituted with funds from Advent, thereby reducing funds pledged and deposited by OdysseyRe to $123.6 (£72.0). nSpire Re had previously pledged assets at Lloyd’s on behalf of Advent pursuant to a November 2000 Funding Agreement with Advent whereby the funds are used to support Advent’s underwriting activities for the 2001 to

36

2005 underwriting years of account. Advent is responsible for the payment of any losses resulting from the use of these funds to support its underwriting activities.

A subsidiary of Cunningham Lindsey owes $62.3 (Cdn$72.8) (2004 – $78.3 (Cdn$105.0)) under an unsecured non-revolving term credit facility. Fairfax has extended its letter of support of Cunningham Lindsey to apply to a two-year extension of this credit facility.

The company under certain circumstances may be obligated to assume loans to officers and directors of the company and its subsidiaries from Canadian chartered banks totalling $9.5 (2004 – $9.3) for which 214,186 (2004 – 214,186) subordinate voting shares of the company with a year-end market value of $30.8 (2004 – $36.1) have been pledged as security by the borrowers.

The company also has restricted stock 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. At December 31, 2005, 245,858 (2004 – 237,853) subordinate voting shares had been purchased for the plans at a cost of $54.1 (2004 – $51.6).

Shares for the above-mentioned plans are purchased on the open market. The costs of these plans are amortized to compensation expense over the vesting period. Amortization expense for the year for these plans amounted to $6.7 (2004 – $10.5; 2003 – $7.7).

14. Pensions

The company’s subsidiaries have various pension and post retirement benefit plans for their employees. These plans are a combination of defined benefit plans which use various measurement dates between September 30, 2005 and December 31, 2005 and defined contribution plans. The investment policy for the defined benefit pension plans is to invest in highly rated, lower risk securities that preserve the investment asset value of the plans while seeking to maximize the return on those invested assets. The plans’ assets as of December 31, 2005 and 2004 are invested principally in highly rated fixed income securities. The long term rate of return assumption is based on the fixed income securities portfolio. The actual return on assets has historically been in line with the company’s assumptions of expected returns. The following tables set forth the funded status of the company’s benefit plans along with

37

FAIRFAX FINANCIAL HOLDINGS LIMITED

amounts recognized in the company’s consolidated financial statements for both pension plans and post retirement benefit plans as of December 31, 2005 and 2004.

			Defined Benefit						Post Retirement
			Pension Plans						Benefit Plans
			2005			2004			2005			2004
Accrued benefit obligation:
	Balance – beginning of year			431.7			357.0			64.9			58.9
		Current service cost		14.3			13.3			3.6			1.8
		Interest cost		22.9			21.4			3.4			3.5
		Actuarial losses		80.0			25.9			(0.3	)		4.3
		Benefits paid		(10.0	)		(10.2	)		(5.2	)		(4.6	)
		Plan amendments		0.1			2.0			–			(0.6	)
		Foreign exchange (gain) loss		(25.7	)		22.3			0.7			1.6
	Balance – end of year			513.3			431.7			67.1			64.9
Fair value of plan assets:
	Balance – beginning of year			387.1			325.1			–			–
		Return on plan assets		41.6			29.6			–			–
		Employer contributions		13.0			20.4			3.9			3.5
		Employee contributions		1.8			2.0			1.3			1.1
		Benefits paid		(10.0	)		(10.2	)		(5.2	)		(4.6	)
		Foreign exchange gain (loss)		(22.9	)		20.2			–			–
	Balance – end of year			410.6			387.1			–			–
Funded status of plans – surplus (deficit)				(102.7	)		(44.6	)		(67.1	)		(64.9	)
	Unamortized net actuarial loss			91.2			38.2			12.5			13.7
	Unamortized past service costs			1.7			2.6			(7.9	)		(9.0	)
	Unamortized transitional obligation			(9.5	)		(10.8	)		9.2			10.3
	Accrued benefit asset (liability)			(19.3	)		(14.6	)		(53.3	)		(49.9	)
Plan assets consist of:
	Fixed income securities			274.4			227.7			–			–
	Equity securities			107.5			124.5			–			–
	Real estate			20.4			18.7			–			–
	Other			8.3			16.2			–			–
				410.6			387.1			–			–

The accumulated benefit obligation for the defined pension plans noted above is $456.2 and $446.3 at December 31, 2005 and December 31, 2004, respectively. Plans with accumulated benefit obligations in excess of the fair value of plan assets are $45.6 and $76.5 at December 31, 2005 and December 31, 2004, respectively.

Plans with accrued benefit obligations in excess of the fair value of plan assets are as follows:

	Defined Benefit						Post Retirement
	Pension Plans						Benefit Plans
	2005			2004			2005			2004
Accrued benefit obligation		(513.3	)		(335.4	)		(67.1	)		(64.9	)
Fair value of plan assets		410.6			278.9			–			–
		(102.7	)		(56.5	)		(67.1	)		(64.9	)

38

Elements of expense recognized in the year are as follows:

	Defined Benefit						Post Retirement
	Pension Plans						Benefit Plans
	2005			2004			2005			2004
Current service cost, net of employee contributions		12.5			11.3			2.3			0.7
Interest cost		22.9			21.4			3.4			3.5
Actual return on plan assets		(41.6	)		(29.6	)		–			–
Actuarial losses		80.0			25.9			(0.3	)		4.3
Plan amendments		0.1			2.0			–			(0.6	)
Elements of employee future benefits cost before adjustments to recognize the long term nature of these costs		73.9			31.0			5.4			7.9
Adjustments to recognize the long term nature of employee future benefits costs:
Difference between expected return and actual return on plan assets for year		18.8			8.9			–			–
Difference between actuarial (gain) loss recognized for the year and actuarial (gain) loss on accrued benefit obligation for year		(74.7	)		(16.5	)		1.9			(3.8	)
Difference between amortization of past service costs for year and actuarial plan amendments for year		0.9			–			(1.1	)		(0.3	)
Amortization of the transitional obligation		(1.3	)		(1.3	)		1.1			1.1
		(56.3	)		(8.9	)		1.9			(3.0	)
Defined benefit plans expense		17.6			22.1			7.3			4.9

The significant assumptions used are as follows (weighted average):

	Defined Benefit				Post Retirement
	Pension Plans				Benefit Plans
	2005		2004		2005		2004
Accrued benefit obligation as of December 31:
Discount rate		4.9%		5.5%		5.3%		5.8%
Rate of compensation increase		4.3%		4.3%		4.0%		4.7%
Benefit costs for year ended December 31:
Discount rate		5.5%		5.8%		5.9%		6.0%
Expected long term rate of return on plan assets		6.2%		6.6%		–		–
Rate of compensation increase		4.3%		4.3%		4.0%		4.7%

The total expense recognized for the companies’ defined contribution plans for the year was $18.5 (2004 – $16.0).

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FAIRFAX FINANCIAL HOLDINGS LIMITED

15. Operating Leases

Aggregate future minimum commitments at December 31, 2005 under operating leases relating to premises, automobiles and equipment for various terms up to ten years are as follows:

2006	72.0
2007	62.4
2008	49.8
2009	37.4
2010	30.5
Thereafter	141.6

16. Earnings per Share

Earnings per share are calculated after providing for dividends on the Series A floating and the Series B fixed cumulative redeemable preferred shares.

The weighted average number of shares for 2005 was 16,448,995 (2004 – 13,827,874; 2003 – 13,957,035).

Diluted earnings per share calculations in 2003 include the impact of converting the convertible debentures into 941,140 common shares. The impact was anti-dilutive in 2005 and 2004.

17. Acquisitions and Divestitures

Year ended December 31, 2005

On October 21, 2005, OdysseyRe issued 2.0 million 8.125% Series A preferred shares and 2.0 million floating rate Series B preferred shares for net proceeds of $97.5. The Series A and Series B preferred shares each have a liquidation preference of $25.00 per share. A subsidiary of the company subscribed for 530,000 Series A preferred shares and 70,000 Series B preferred shares. As at December 31, 2005, 200,000 of the Series A preferred shares had been sold at no gain or loss.

On October 6, 2005, OdysseyRe, through an underwritten public offering, raised net proceeds of $102.1 through the issuance of 4.1 million shares of common stock at an offering price of $24.96 per share. The company purchased 3.1 million of the shares issued, which decreased its percentage ownership of OdysseyRe from 80.4% to 80.1%. This share offering closed on October 12, 2005.

For each of the OdysseyRe transactions described above, the financing raised from unrelated parties has been recorded in non-controlling interests on the balance sheet.

On August 31, 2005, Cunningham Lindsey completed its rights offering, issuing a total of 7,791,712 subordinate voting shares at Cdn$4.25 per share for net proceeds, after offering expenses, of $27.1 (Cdn$32.2). The net proceeds of the offering were used to partially repay the Cdn$105.0 million of borrowings by a subsidiary of Cunningham Lindsey under an unsecured non-revolving term credit facility due March 31, 2006. The company exercised all rights issued to it, purchasing 7,154,628 subordinate voting shares at a cost of $25.6 (Cdn$30.4), which increased its percentage ownership of Cunningham Lindsey from 75.0% to 81.0%.

On August 2, 2005, subsidiaries of the company sold 2.0 million shares of Zenith National common stock at $66.00 per share. Net proceeds from the transaction were $132.0, resulting in a pre-tax realized gain of $86.1. On September 23, 2005, subsidiaries of the company sold an additional 157,524 shares of Zenith National common stock at $63.70 per share and $30.0 par value of debentures convertible into the common stock of Zenith National for net proceeds of

40

$86.5, resulting in a pre-tax realized gain of $53.3. These two transactions reduced the company’s ownership of Zenith National from 24.4% to 10.3% at year-end. Subsequent to year-end, subsidiaries of the company sold the remaining 3.8 million shares (adjusted for a three-for-two stock split) of Zenith National common stock at $50.38 per share for net proceeds of $193.8, resulting in a realized pre-tax gain of $137.3.

On June 3, 2005, Advent, through an underwritten public offering, raised gross proceeds of $118.4 (£65.0): $72.9 (£40.0) of equity at $0.64 (35 pence) per share and $45.5 (£25.0) of debt. Concurrent with the equity issue, the shares were listed on the Alternative Investments Market of the London Stock Exchange. The company maintained its 46.8% interest in Advent by purchasing its pro rata share of this equity at a total cost of $34.1 (£18.7).

Subsequent to year end, Advent raised an additional $51.5 (£30.0) of equity at $0.34 (20 pence) per share with the company purchasing its pro rata share at a cost of $24.0 (£14.0), thereby maintaining its 46.8% interest in Advent.

On December 29, 2004, the company agreed to acquire 100% of the issued and outstanding common shares of Compagnie de Réassurance d’Ile de France (“Corifrance”), a French reinsurance company, for $59.8 (€44.0) payable on April 7, 2005. As at January 11, 2005 (the date of acquisition), the fair value of assets and liabilities acquired was $122.2 (€89.9) and $62.4 (€45.9) respectively, resulting in no goodwill. In addition, the seller agreed to indemnify the company, up to the purchase price, for any adverse development on acquired net reserves.

Year ended December 31, 2004

On November 15, 2004, OdysseyRe acquired Overseas Partners U.S. Reinsurance Company, a reinsurance company domiciled in the state of Delaware, for $43.0. The fair value of assets and liabilities acquired was $237.8 and $194.8 respectively, resulting in no goodwill.

Subsidiaries of the company sold 3.1 million shares of common stock of Zenith National at $43 per share, in an underwritten public offering which closed on July 30, 2004, resulting in a pre-tax realized gain after expenses of $62.5.

On May 18, 2004, the company recorded a pre-tax realized gain of $40.1 (Cdn$53.5) on the sale of 6.0 million common shares of its Northbridge subsidiary in an underwritten secondary offering at a price of Cdn$25.60 per share, generating net proceeds of $104.8 (Cdn$146.0) and reducing the company’s ownership of Northbridge from 71.0% to 59.2%.

On March 14, 2004, Cunningham Lindsey completed the sale of its U.S. third party claims administration business for a cash payment by Cunningham Lindsey of $22.0. The disposition of this business resulted in a charge to earnings of $13.4, consisting of a $3.6 loss on the sale of the business and other related accruals, including lease termination costs, of $9.8.

Year ended December 31, 2003

On May 28 and June 10, 2003, Northbridge, the Canadian holding company for Lombard Canada Ltd., Commonwealth Insurance Company, Markel Insurance Company of Canada and Federated Holdings of Canada Ltd. and their respective subsidiaries, issued an aggregate of 14,740,000 common shares in an initial public offering at Cdn$15 (US$10.82) per share. Net proceeds (after expenses of issue) were $148.9 (Cdn$206.4). After the offering, Fairfax held 36.1 million (71.0%) of Northbridge’s common shares. Fairfax recorded a $5.7 (Cdn$8.0) gain on its effective sale of a 29.0% interest in Northbridge which is included in realized gains on investments in the consolidated statement of earnings.

On May 30, 2003, Cunningham Lindsey acquired all of the outstanding common shares of RSKCo Services, Inc. (“RSKCo”), a claims management service provider in the U.S. The

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FAIRFAX FINANCIAL HOLDINGS LIMITED

purchase price payable was $10.1 and the fair value of the assets acquired, including goodwill of approximately $4.7, and liabilities assumed were both $37.7.

On March 3, 2003, the company purchased an additional 4.3 million outstanding common shares of OdysseyRe for $18.15 per share, increasing its interest in OdysseyRe from 73.8% to 80.6%. As consideration, the company issued seven-year 3.15% notes exchangeable in November 2004 and February 2005 into the same number of OdysseyRe shares purchased.

18.     Purchase Consideration Payable

On December 16, 2002, the company acquired Xerox’s 72.5% economic interest in TRG, the holding company of International Insurance Company (“IIC”), in exchange for payments over the next 15 years of $424.4 ($203.9 at December 16, 2002 using a discount rate of 9.0% per annum), payable approximately $5.0 a quarter from 2003 to 2017 and approximately $128.2 on December 16, 2017. Upon this acquisition, Xerox’s non-voting shares were amended to make them mandatorily redeemable for the payments described above and to eliminate Xerox’s participation in the operations of IIC, and a direct contractual obligation was effectively created from the company to Xerox. On December 16, 2002, TIG merged with IIC.

19.     Segmented Information

The company is a financial services holding company which, through its subsidiaries, is primarily engaged in property and casualty insurance conducted on a direct and reinsurance basis. The runoff business segment comprises nSpire Re (which fully reinsures the U.K. and international runoff operations, conducted primarily through RiverStone (UK)) and the U.S. runoff company formed on the merger of TIG and IIC combined with Old Lyme. The U.K. and international runoff operations have reinsured their reinsurance portfolios to nSpire Re to provide consolidated investment and liquidity management services, with the RiverStone Group retaining full responsibility for all other aspects of the business. Included in the runoff segment is Group Re which, through CRC (Bermuda) (Canadian business), Wentworth (international business) and nSpire Re (U.S. business), writes and retains insurance business written by other Fairfax subsidiaries. The company also provides claims adjusting, appraisal and loss management services. The segmented information has been revised to reflect the impact of the restatement adjustments in note 2.

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			Canada									United States									Europe and Far East								Corporate and other									Total
			2005			2004			2003			2005			2004			2003			2005			2004			2003		2005			2004			2003			2005			2004			2003
Revenue
Net premiums earned
Insurance – Canada				891.0			835.7			625.0			57.4			76.9			55.2			10.8			26.4			23.0		–			–			–			959.2			939.0			703.2
		– U.S.		–			–			–			1,053.1			1,027.6			991.7			–			–			–		–			–			–			1,053.1			1,027.6			991.7
		– Asia		–			–			–			–			–			–			68.2			57.8			37.2		–			–			–			68.2			57.8			37.2
	Reinsurance			50.9			46.2			40.5			1,324.6			1,384.0			1,228.4			900.4			893.0			703.0		–			–			–			2,275.9			2,323.2			1,971.9
	Runoff and Group Re			221.4			154.9			173.5			68.7			277.4			109.0			46.0			24.4			252.1		–			–			–			336.1			456.7			534.6
				1,163.3			1,036.8			839.0			2,503.8			2,765.9			2,384.3			1,025.4			1,001.6			1,015.3		–			–			–			4,692.5			4,804.3			4,238.6
Interest and dividends																																							466.1			375.7			331.9
Realized gains																																							385.7			313.6			831.8
Claims fees																																							356.2			336.1			328.9
																																							5,900.5			5,829.7			5,731.2
Allocation of revenue				24.8%			21.6%			19.8%			53.3%			57.6%			56.2%			21.9%			20.8%			24.0%
Earnings (loss) before income taxes
Underwriting results
	Insurance – Canada			125.9			105.9			40.3			(45.3	)		9.2			2.4			(12.4	)		0.4			9.6		–			–			–			68.2			115.5			52.3
		– U.S.		–			–			–			(9.1	)		(55.0	)		(27.1	)		–			–			–		–			–			–			(9.1	)		(55.0	)		(27.1	)
		– Asia		–			–			–			–			–			–			4.8			4.7			1.5		–			–			–			4.8			4. 7			1.5
	Reinsurance			1.6			3.7			3.4			(396.6	)		(16.5	)		24.7			(2.8	)		82.4			40.3		–			–			–			(397.8	)		69.6			68.4
				127.5			109.6			43.7			(451.0	)		(62.3	)		—			(10.4	)		87.5			51.4		–			–			–			(333.9	)		134.8			95.1
Interest and dividends				67.4			61.2			57.1			228.5			217.3			140.2			49.5			22.9			16.8		–			–			–			345.4			301.4			214.1
Operating income				194.9			170.8			100.8			(222.5	)		155.0			140.2			39.1			110.4			68.2		–			–			–			11.5			436.2			309.2
Realized gains (losses)				106.4			34.7			67.2			217.8			141.2			312.7			(2.2	)		7.3			284.1		2.1			(12.1	)		(143.5	)		324.1			171.1			520.5
				301.3			205.5			168.0			(4.7	)		296.2			452.9			36.9			117.7			352.3		2.1			(12.1	)		(143.5	)		335.6			607.3			829.7
Runoff and Group Re				41.5			11.6			–			(435.2	)		(28.2	)		(136.1	)		(224.7	)		(53.4	)		34.1		–			–			–			(618.4	)		(70.0	)		(102.0	)
Claims adjusting				(18.4	)		(16.4	)		(10.8	)		(0.7	)		(18.4	)		(28.1	)		28.4			22.6			27.7		–			–			–			9.3			(12.2	)		(11.2	)
Interest expense				–			–			–			(62.9	)		(58.8	)		(31.4	)		–			–			–		(121.7	)		(104.6	)		(115.0	)		(184.6	)		(163.4	)		(146.4	)
Corporate and other				(14.6	)		(8.3	)		(4.4	)		(27.5	)		(20.8	)		(13.8	)		(2.4	)		(2.8	)		–		36.1			(42.2	)		(14.8	)		(8.4	)		(74.1	)		(33.0	)
				309.8			192.4			152.8			(531.0	)		170.0			243.5			(161.8	)		84.1			414.1		(83.5	)		(158.9	)		(273.3	)		(466.5	)		287.6			537.1
Identifiable assets
Insurance				3,380.7			2,683.1			2,373.8			6,718.3			6,567.4			6,283.5			320.9			326.3			234.0		–			–			–			10,419.9			9,576.8			8,891.3
Reinsurance				145.3			169.7			135.3			6,593.1			5,399.9			5,251.2			1,321.7			1,457.2			960.6		–			–			–			8,060.1			7,026.8			6,347.1
Runoff and Group Re				463.4			464.9			516.6			4,785.8			5,078.8			5,541.1			2,678.2			2,979.5			2,656.2		–			–			–			7,927.4			8,523.2			8,713.9
Claims adjusting				37.7			43.4			27.3			36.0			33.3			53.2			253.9			282.3			270.7		–			–			–			327.6			359.0			351.2
Corporate				–			–			–			–			–			–			–			–			–		807.0			785.4			573.6			807.0			785.4			573.6
				4,027.1			3,361.1			3,053.0			18,133.2			17,079.4			17,129.0			4,574.7			5,045.3			4,121.5		807.0			785.4			573.6			27,542.0			26,271.2			24,877.1
				14.6%			12.8%			12.3%			65.9%			65.0%			68.8%			16.6%			19.2%			16.6%		2.9%			3.0%			2.3%
Amortization				7.4			11.1			12.3			13.0			18.5			26.2			4.8			13.0			9.5		–			–			–			25.2			42.6			52.1

43

FAIRFAX FINANCIAL HOLDINGS LIMITED

Interest and dividend income for the Canadian Insurance, U.S. Insurance, Asian Insurance and Reinsurance segments is $65.7, $105.0, $7.5 and $167.2, respectively (2004 – $60.9, $81.3, $2.9 and $156.3) (2003 – $50.8, $72.7, $0.7 and $89.9). Included in interest and dividend income for Canadian Insurance, U.S. Insurance, Asian Insurance and Reinsurance segments are equity earnings (losses) of $1.7, ($16.8), nil and ($12.6), respectively (2004 – $2.5, $1.5, nil and $4.1)(2003 – $4.1, $8.2, nil and $11.7).

Realized gains for the Canadian Insurance, U.S. Insurance, Asian Insurance and Reinsurance segments are $104.0, $113.9, $1.0 and $103.2, respectively (2004 – $22.6, $85.0, nil and $75.1) (2003 – $67.2, $308.8, $3.8 and $284.1).

Interest expense for the Canadian Insurance, U.S. Insurance, Asian Insurance and Reinsurance segments is nil, $32.9, nil and $30.0, respectively (2004 – nil, $33.2, nil and $25.6) (2003 – nil, $18.7, nil and $12.7).

Geographic premiums are determined based on the domicile of the various subsidiaries and where the primary underlying risk of the business resides.

Corporate and other includes the company’s interest expense and corporate overhead. Corporate assets include cash and short term investments and miscellaneous other assets in the holding company.

20.     Fair Value

Information on the fair values of financial instruments of the company, including where those values differ from their carrying values in the financial statements at December 31, 2005, include:

	Note		Carrying		Estimated
	Reference		Value		Fair Value
Marketable securities at holding company		4		278.5		284.5
Portfolio investments		5		15,010.7		15,569.1
Securities sold but not yet purchased		5		700.3		700.3
Long term debt		7		2,234.6		2,198.6
Trust preferred securities of subsidiaries		8		52.4		42.2
Purchase consideration payable		18		192.1		192.1

The amounts above do not include the fair value of underlying lines of business. While fair value amounts are designed to represent estimates of the amounts at which instruments could be exchanged in current transactions between willing parties, certain of the company’s financial instruments lack an available trading market. Therefore, these instruments have been valued on a going concern basis. Fair value information on the provision for claims and reinsurance recoverables are not determinable.

These fair values have not been reflected in the financial statements.

21.     US GAAP Reconciliation

Restatement of Financial Results

The effects of the restatement of the company’s previously reported consolidated financial statements described in note 2, including the additional US GAAP corrections relating to the company’s US GAAP reconciliation, are reflected below. Under US GAAP, the total after-tax cumulative impact of the restatement through December 31, 2005 is to decrease shareholders’ equity by $384.3, comprised of the decrease in Canadian GAAP shareholders’ equity referred to in note 2 of $261.7, an increase in the cumulative reduction in net earnings under US GAAP of $91.4 and a decrease in accumulated other comprehensive income under US GAAP of $31.2.

44

The previously reported column included within this note reflects the US GAAP financial results as originally released on March 31, 2006 and unless otherwise stated all other restatement adjustments comprise adjustments announced as part of the August 31, 2006 restatement.

The US GAAP corrections relate to:

(i)	The accounting treatment for convertible bond securities and other fixed income securities with embedded derivatives which are held as investments. The securities that are subject to the restatement were held as investments by the company and were purchased between 2001 and 2005. These securities were carried at fair value in accordance with Statement of Financial Accounting Standard No. 115 “Accounting for Certain Investments in Debt and Equity Securities” due to their designation as available for sale, with corresponding changes in their fair value recorded as a component of other comprehensive income within shareholders’ equity. The treatment for these investments was restated to correct for the application of FAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” (“FAS 133”). Under FAS 133, changes in the fair value attributable to the embedded option in a convertible bond or other security is required to be recognized in income through realized gains or losses rather than unrealized gains and losses, a component of shareholders’ equity, as previously reported by the company. The corrections had no cumulative effect on shareholders’ equity as at December 31, 2005 or December 31, 2004, and had the net effect of decreasing the 2005 net loss by $29.3, decreasing the 2004 net loss by $8.0, and increasing 2003 net earnings by $6.5. For each such period, there is a corresponding offsetting change in other comprehensive income.
(ii)	Recording the minimum pension liability under US GAAP which previously had been considered immaterial. The corrections resulted in a $12.2 after-tax cumulative decrease in shareholders’ equity as at December 31, 2005, and had the net effect of increasing the 2005 other comprehensive loss by $10.9, increasing 2004 other comprehensive income by $1.4 and increasing 2003 other comprehensive income by $0.3.
(iii)	The accounting treatment of the Swiss Re Cover. In reviewing the accounting for the contemplated commutation of the Swiss Re Cover, the company identified that it had incorrectly calculated the deferred gain, which ultimately impacted the amortization thereof recorded in each period. In addition, the company identified that on the assignment of this cover to nSpire Re, its subsidiary in Ireland, the deferred tax asset recorded for purposes of US GAAP had not been properly adjusted to recognize the differential in statutory income tax rates between Canada and Ireland. These corrections resulted in a $113.6 after-tax cumulative decrease in shareholders’ equity as at December 31, 2005 and a $123.1 cumulative decrease in shareholders’ equity as at December 31, 2004, and had the net effect of decreasing the 2005 net loss by $9.5 including a reversal of income tax expense of $3.6, increasing 2004 net earnings by $23.2 including a reversal of income tax expense of $12.4, decreasing 2003 net earnings by $36.9 including a reversal of income tax recovery of $17.7 and decreasing the net earnings of 2002 and prior years by $109.4. In addition, these corrections resulted in an increase in the deferred gain by $33.4 and $40.5 as at December 31, 2005 and 2004 respectively, and a decrease in future income taxes of $80.2 and $82.6, as at December 31, 2005 and 2004 respectively.
(iv)	Timing differences as described in section (i) of note 2 which are related to insurance contracts which have also been restated to use deposit accounting under US GAAP (formerly retroactive reinsurance and prospective accounting). The corrections had no cumulative effect on shareholders’ equity as at December 31, 2005 and

45

FAIRFAX FINANCIAL HOLDINGS LIMITED

	December 31, 2004, and had the net effect of decreasing 2004 net earnings by $33.2, decreasing 2003 net earnings by $9.4, and increasing the net earnings of 2002 and prior years by $42.6.
(v)	Foreign exchange losses from a hedge contract recorded as goodwill for purposes of Canadian GAAP as described in section (x) of note 2 are not considered a hedge for purposes of US GAAP. As a result, these foreign exchange losses have been reclassified from goodwill as a charge to opening retained earnings for US GAAP.
(vi)	In addition, from the company’s review of its embedded derivatives for the three and nine months ended September 30, 2006 and 2005, management identified an additional error in its previously reported restated results as at and for the year ended December 31, 2005. In the original restatement for FAS 133 described in (i) above, management incorrectly calculated the net income and other comprehensive income components for certain instruments sold during the year. The corrections had the effect of increasing the 2005 net loss by $26.8 with offsetting increases in the unrealized net appreciation of investments included in other comprehensive income (loss).

The consolidated financial statements of the company have been prepared in accordance with Canadian GAAP which are different in some respects from those applicable in the United States, as described below.

Consolidated Statements of Earnings GAAP differences

For the years ended December 31, 2005, 2004 and 2003, significant differences between consolidated net earnings under Canadian GAAP and consolidated net earnings under US GAAP as previously reported were as follows:

(a)

Under Canadian GAAP, recoveries on certain stop loss reinsurance treaties (including with Swiss Re) protecting Fairfax, Crum & Forster and TIG are recorded at the same time as the claims incurred are ceded. Under US GAAP, these recoveries, which are considered to be retroactive reinsurance, are recorded up to the amount of the premium paid with the excess of the ceded liabilities over the premium paid recorded as a deferred gain. The deferred gain is amortized to income over the estimated settlement period over which the company expects to receive the recoveries and is recorded in accounts payable and accrued liabilities.

(b)

Other than temporary declines are recorded in earnings. Declines in fair values are generally presumed to be other than temporary if they have persisted over a period of time and factors indicate that recovery is uncertain. Under Canadian GAAP, other than temporary declines in the value of investment securities to fair value are recorded in earnings. Under US GAAP, securities are written down to quoted market value when an other than temporary decline occurs.

46

The following show the net earnings in accordance with US GAAP:

For the year ended December 31, 2005

							Restatement
							Adjustments
				Restatement			as at
	Previously			Adjustments			November 2006			Restated
	Reported
Net earnings (loss), Canadian GAAP		(497.9	)		51.3			–			(446.6	)
Recoveries on retroactive reinsurance (a)(iii)(iv)		163.8			6.0			–			169.8
Other than temporary declines (b)		27.7			(6.0	)		–			21.7
Embedded bond investment derivatives (i)(vi)		–			46.2			(41.3	)		4.9
Other differences		(2.0	)		–			–			(2.0	)
Tax effect		(62.4	)		(13.3	)		14.5			(61.2	)
Net earnings (loss), US GAAP		(370.8	)		84.2			(26.8	)		(313.4	)
Unrealized net appreciation (depreciation) of investments		24.0			(48.4	)		26.8			2.4
Change in currency translation account		(27.0	)		33.4			–			6.4
Minimum pension liability (ii)		–			(10.9	)		–			(10.9	)
Other comprehensive income (loss)		(3.0	)		(25.9	)		26.8			(2.1	)
Comprehensive income (loss), US GAAP		(373.8	)		58.3			–			(315.5	)
Net earnings (loss) per share, US GAAP	$	(23.03	)	$	5.11		$	(1.63	)	$	(19.65	)
Net earnings (loss) per diluted share, US GAAP	$	(23.03	)	$	4.82		$	(1.63	)	$	(19.65	)

For the year ended December 31, 2004

	Previously			Restatement
	Reported			Adjustments			Restated
Net earnings (loss), Canadian GAAP		(19.8	)		72.9			53.1
Recoveries (deferred gains) on retroactive reinsurance (a) (iii)(iv)		25.3			(40.4	)		(15.1	)
Other than temporary declines (b)		28.1			–			28.1
Embedded bond investment derivatives (i)		–			12.6			12.6
Other differences		(14.4	)		(0.1	)		(14.5	)
Tax effect		(13.1	)		25.7			12.6
Net earnings, US GAAP		6.1			70.7			76.8
Unrealized net appreciation (depreciation) of investments		95.1			(19.6	)		75.5
Change in currency translation account		75.9			(5.2	)		70.7
Minimum pension liability (ii)		–			1.4			1.4
Other comprehensive income (loss)		171.0			(23.4	)		147.6
Comprehensive income, US GAAP		177.1			47.3			224.4
Net earnings (loss) per share, US GAAP	$	(0.29	)	$	5.12		$	4.82
Net earnings (loss) per diluted share, US GAAP	$	(0.29	)	$	4.78		$	4.82

47

FAIRFAX FINANCIAL HOLDINGS LIMITED

For the year ended December 31, 2003

	Previously			Restatement
	Reported			Adjustments			Restated
Net earnings, Canadian GAAP		270.0			18.6			288.6
Recoveries (deferred gains) on retroactive reinsurance (a) (iii)(iv)		(209.4	)		(33.6	)		(243.0	)
Embedded bond investment derivatives (i)		–			10.3			10.3
Other than temporary declines (b)		(49.9	)		6.0			(43.9	)
Other differences		1.5			–			1.5
Tax effect		91.0			(16.5	)		74.5
Net earnings (loss), US GAAP		103.2			(15.2	)		88.0
Unrealized net appreciation of investments		92.7			2.7			95.4
Change in currency translation account		352.9			(90.9	)		262.0
Minimum pension liability (ii)		–			0.3			0.3
Other comprehensive income (loss)		445.6			(87.9	)		357.7
Comprehensive income (loss), US GAAP		548.8			(103.1	)		445.7
Net earnings (loss) per share, US GAAP	$	6.66		$	(1.09	)	$	5.60
Net earnings (loss) per diluted share, US GAAP	$	6.66		$	(1.09	)	$	5.60

Consolidated Balance Sheets

In Canada, portfolio investments are carried at cost or amortized cost with a provision for declines in value which are considered to be other than temporary. Strategic investments include Hub and Advent which are equity accounted and Zenith National which is carried at cost. In the U.S., such investments (excluding equity accounted investments) are classified as available for sale and recorded at market values through shareholders’ equity.

As described in footnote (6) in note 7, under Canadian GAAP the value of the conversion option of the company’s 5% convertible senior debentures is included in Other paid in capital. Under US GAAP the full principal amount of the debentures is included in debt.

48

The following shows the balance sheet amounts in accordance with US GAAP, setting out individual amounts where different from the amounts reported under Canadian GAAP:

As at December 31, 2005

				Restatement
		Previously		Adjustments						Restated
		Reported		Canadian			US
				GAAP			GAAP
Assets
Marketable securities			–					287.1			287.1
Portfolio investments
	Subsidiary cash and short term investments		3,788.9		–			–			3,788.9
	Bonds		7,766.5		–			–			7,766.5
	Preferred stocks		16.6		–			–			16.6
	Common stocks		2,533.0		(2.3	)		–			2,530.7
	Strategic investments		351.0		(21.2	)		18.0			347.8
	Investments (including subsidiary cash and short term investments) pledged for securities sold but not yet purchased		1,009.3		–			–			1,009.3
Total portfolio investments			15,465.3		(23.5	)		18.0			15,459.8
Future income taxes			1,150.2		(15.5	)		(83.3	)		1,051.4
Goodwill			263.0		17.6			(12.3	)		268.3
All other assets			11,203.6		(2.3	)		(278.4	)		10,922.9
Total assets			28,082.1		(23.7	)		(68.9	)		27,989.5
Liabilities
Accounts payable and accrued liabilities			1,749.7		17.3			51.1			1,818.1
Securities sold but not yet purchased			700.3		–			2.6			702.9
Long term debt – holding company borrowings			1,424.7		–			–			1,424.7
Long term debt – subsidiary company borrowings			869.3		–			–			869.3
All other liabilities			19,628.9		223.2			–			19,852.1
Total liabilities			24,372.9		240.5			53.7			24,667.1
Mandatorily redeemable shares of TRG			192.1		–			–			192.1
Non-controlling interests			752.3		(2.5	)		–			749.8
			944.4		(2.5	)		–			941.9
Shareholders’ Equity			2,764.8		(261.7	)		(122.6	)		2,380.5
			28,082.1		(23.7	)		(68.9	)		27,989.5

49

FAIRFAX FINANCIAL HOLDINGS LIMITED

As at December 31, 2004

				Restatement
		Previously		Adjustments						Restated
		Reported		Canadian			US
				GAAP			GAAP
Assets
Marketable securities			–					29.6			29.6
Portfolio investments
	Subsidiary cash and short term investments		3,476.3		–			–			3,476.3
	Bonds		7,130.2		(27.9	)		27.9			7,130.2
	Preferred stocks		136.4		–			–			136.4
	Common stocks		1,957.9		–			–			1,957.9
	Strategic investments		412.2		(29.2	)		25.9			408.9
	Investments (including subsidiary cash and short term investments) pledged for securities sold but not yet purchased		733.9		–			–			733.9
Total portfolio investments			13,846.9		(57.1	)		53.8			13,843.6
Future income taxes			1,066.3		(23.9	)		(101.2	)		941.2
Goodwill			280.2		17.6			(12.3	)		285.5
All other assets			11,667.2		3.3			(14.7	)		11,655.8
Total assets			26,860.6		(60.1	)		(44.8	)		26,755.7
Liabilities
Accounts payable and accrued liabilities			1,884.3		121.8			42.9			2,049.0
Securities sold but not yet purchased			539.5					14.5			554.0
Long term debt – holding company borrowings			1,480.3		2.0						1,482.3
Long term debt – subsidiary company borrowings			773.0		–			–			773.0
All other liabilities			18,526.8		188.6						18,715.4
Total liabilities			23,203.9		312.4			57.4			23,573.7
Mandatorily redeemable shares of TRG			195.2		–			–			195.2
Non-controlling interests			583.0		(3.5	)		(6.0	)		573.5
			778.2		(3.5	)		(6.0	)		768.7
Shareholders’ Equity			2,878.5		(369.0	)		(96.2	)		2,413.3
			26,860.6		(60.1	)		(44.8	)		26,755.7

The difference in consolidated shareholders’ equity is as follows:

	2005			2004			2003
	Restated			Restated			Restated
Shareholders’ equity based on Canadian GAAP		2,644.2			2,801.7			2,463.9
Accumulated other comprehensive income (excluding currency translation account)		275.3			283.8			206.9
Reduction of other paid in capital		(59.4	)		(59.4	)		(62.7	)
Cumulative reduction in net earnings under US GAAP		(479.6	)		(612.8	)		(636.5	)
Shareholders’ equity based on US GAAP		2,380.5			2,413.3			1,971.6

50

Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income”, requires the company to disclose items of other comprehensive income in a financial statement and to disclose accumulated balances of other comprehensive income in the equity section of financial statements. A new Canadian GAAP standard will require this presentation to be adopted in 2007 (see Future accounting changes in note 3). Other comprehensive income includes (besides the currency translation account, which is disclosed under Canadian GAAP) unrealized gains and losses on investments and other items, as follows:

	2005			2004			2003
	Restated			Restated			Restated
Unrealized gain on investments available for sale		447.0			436.5			327.0
Minimum pension liability		(17.6	)		(2.0	)		(4.2	)
Related deferred income taxes		(154.1	)		(150.7	)		(115.9	)
		275.3			283.8			206.9

The November 2006 restatement had no net effect on shareholders’ equity but resulted in a correction within shareholders’ equity, increasing accumulated other comprehensive income (excluding currency translation account) and decreasing cumulative reduction in net earnings under US GAAP as at December 31, 2005 by $26.8, respectively. The cumulative reduction in net earnings under US GAAP of $479.6 at December 31, 2005 relates primarily to the deferred gain on retroactive reinsurance ($533.9 after tax) which is amortized into income as the underlying claims are paid.

Disclosure of Interest and Income Taxes Paid

The aggregate amount of interest paid for the years ended December 31, 2005, 2004 and 2003 was $198.4, $175.1 and $140.9, respectively. The aggregate amount of income taxes paid for the years ended December 31, 2005, 2004 and 2003 was $102.4, $132.6 and $42.9, respectively.

Statement of Cash Flows

There are no significant differences on the statement of cash flows under US GAAP as compared to Canadian GAAP.

51