Exhibit 99.2

---



Management's Responsibility for the Financial Statements

The preparation and presentation of the accompanying consolidated financial statements, Management's Discussion and Analysis ("MD&A") and all financial information are the
responsibility of management and have been approved by the Board of Directors.

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

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

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

The
Audit Committee is appointed by the Board of Directors and reviews the consolidated financial statements and MD&A; considers the report of the external auditors; assesses the adequacy of the
internal controls of the company, including management's assessment described below; examines the fees and expenses for audit services; and recommends to the Board the independent auditors for
appointment by the shareholders. The independent auditors have full and free access to the Audit Committee and meet with it to discuss their audit work, Fairfax's internal control over financial
reporting and financial reporting matters. The Audit Committee reports its findings to the Board for consideration when approving the consolidated financial statements for issuance to the shareholders
and management's assessment of the internal control over financial reporting.

Management's Report on Internal Control over Financial Reporting

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

Management
has assessed the effectiveness of the company's internal control over financial reporting as of December 31, 2014 using criteria established inInternal
Control  Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on
this assessment, management concluded that the company's internal control over financial reporting was effective as of December 31, 2014.

The
effectiveness of the company's internal control over financial reporting as of December 31, 2014 has been audited by PricewaterhouseCoopers LLP, an independent auditor, as stated in
its report which appears herein.

March 6,
2015

|GRAPHIC                                            |  | GRAPHIC                                                
|-------------------------------------------------- |  | -------------------------------------------------------
|V. Prem Watsa Chairman and Chief Executive Officer |  | David Bonham Vice President and Chief Financial Officer

25

---



Independent Auditor's Report

To
the Shareholders of Fairfax Financial Holdings Limited

We
have completed integrated audits of Fairfax Financial Holdings Limited (the Company) and its subsidiaries' 2014 and 2013 consolidated financial statements and their internal control over
financial reporting as at December 31, 2014. Our opinions, based on our audits are presented below.

Report on the consolidated financial statements

We have audited the accompanying consolidated financial statements of the Company and its subsidiaries, which comprise the consolidated balance sheets as at December 31,
2014 and December 31, 2013 and the consolidated statements of earnings, comprehensive income, changes in equity and cash flows for each of the two years in the period ended December 31,
2014, and the related notes, which comprise a summary of significant accounting policies and other explanatory information.

Management's responsibility for the consolidated financial statements

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

Auditor's responsibility

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

An
audit involves performing procedures to obtain audit evidence, on a test basis, about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the
auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the
auditor considers internal control relevant to the company's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the
circumstances. An audit also includes evaluating the appropriateness of accounting principles and policies used and the reasonableness of accounting estimates made by management, as well as evaluating
the overall presentation of the consolidated financial statements.

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

Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and its subsidiaries as at
December 31, 2014 and 2013 and their financial performance and their cash flows for each of the two years in the period ended December 31, 2014 in accordance with IFRS as issued by
the IASB.

Report on internal control over financial reporting

We have also audited the Company's internal control over financial reporting as at December 31, 2014, based on criteria established in Internal
Control  Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Management's responsibility for internal control over financial reporting

Management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial
reporting included in Management's Report on Internal Control over Financial Reporting on page 25.

26

---



Auditor's responsibility

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

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

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

Definition of internal control over financial reporting

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

Inherent limitations

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.

Opinion

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as at December 31, 2014, based on criteria
established in Internal Control  Integrated Framework (2013) issued by COSO.

GRAPHIC

Chartered
Professional Accountants, Licensed Public Accountants
Toronto, Ontario

March 6,
2015

27

---





Consolidated Financial Statements

Consolidated Balance Sheetsas at December 31, 2014 and December 31, 2013

|                                                                                                                                               |  | Notes |  | December 31,
2014 |  | December 31,
2013
|---------------------------------------------------------------------------------------------------------------------------------------------- |  | ----- |  | ----------------- |  | -----------------
|
|Assets                                                                                                                                         |  |       |  |                   |  |                  
|Holding company cash and investments (including assets
pledged for short sale and derivative obligations  $109.7;
December 31, 2013  $124.4) |  | 5, 28 |  | 1,244.3           |  | 1,296.7          
|Insurance contract receivables                                                                                                                 |  | 10    |  | 1,931.7           |  | 2,017.0          
|                                                                                                                                               |  |       |  |                   |  |                  
|                                                                                                                                               |  |       |  | 3,176.0           |  | 3,313.7          
|                                                                                                                                               |  |       |  |                   |  |                  
|Portfolio investments                                                                                                                          |  |       |  |                   |  |                  
|Subsidiary cash and short term investments                                                                                                     |  | 5, 28 |  | 5,534.3           |  | 7,445.7          
|Bonds (cost $9,900.1; December 31, 2013  $9,190.0)                                                                                            |  | 5     |  | 11,445.5          |  | 9,550.5          
|Preferred stocks (cost $386.8; December 31, 2013  $565.1)                                                                                     |  | 5     |  | 376.4             |  | 541.8            
|Common stocks (cost $4,531.7; December 31, 2013  $3,305.5)                                                                                    |  | 5     |  | 4,848.5           |  | 3,835.7          
|Investments in associates (fair value $2,070.5; December 31,
2013  $1,815.0)                                                                  |  | 5, 6  |  | 1,617.7           |  | 1,432.5          
|Derivatives and other invested assets (cost $634.0;
December 31, 2013  $667.8)                                                                |  | 5, 7  |  | 426.8             |  | 224.2            
|Assets pledged for short sale and derivative obligations
(cost $757.8; December 31, 2013  $829.3)                                             |  | 5, 7  |  | 860.0             |  | 802.9            
|                                                                                                                                               |  |       |  |                   |  |                  
|                                                                                                                                               |  |       |  | 25,109.2          |  | 23,833.3         
|                                                                                                                                               |  |       |  |                   |  |                  
|Deferred premium acquisition costs                                                                                                             |  | 11    |  | 497.6             |  | 462.4            
|Recoverable from reinsurers (including recoverables on paid losses  $230.7; December 31, 2013  $353.3)                                       |  | 9     |  | 3,982.1           |  | 4,974.7          
|Deferred income taxes                                                                                                                          |  | 18    |  | 460.4             |  | 1,015.0          
|Goodwill and intangible assets                                                                                                                 |  | 12    |  | 1,558.3           |  | 1,311.8          
|Other assets                                                                                                                                   |  | 13    |  | 1,347.6           |  | 1,088.1          
|                                                                                                                                               |  |       |  |                   |  |                  
|                                                                                                                                               |  |       |  | 36,131.2          |  | 35,999.0         
|                                                                                                                                               |  |       |  |                   |  |                  

See accompanying notes.

Signed on behalf of the Board

GRAPHIC

GRAPHICDirector

Director


28

---






|                                                                                                            |  | Notes |  | December 31,
2014 |  | December 31,
2013
|----------------------------------------------------------------------------------------------------------- |  | ----- |  | ----------------- |  | -----------------
|
|Liabilities                                                                                                 |  |       |  |                   |  |                  
|Subsidiary indebtedness                                                                                     |  | 15    |  | 37.6              |  | 25.8             
|Accounts payable and accrued liabilities                                                                    |  | 14    |  | 2,029.1           |  | 1,840.6          
|Income taxes payable                                                                                        |  | 18    |  | 118.3             |  | 80.1             
|Short sale and derivative obligations (including at the holding company  $31.6; December 31, 2013  $55.1) |  | 5, 7  |  | 160.8             |  | 268.4            
|Funds withheld payable to reinsurers                                                                        |  |       |  | 461.5             |  | 461.2            
|                                                                                                            |  |       |  |                   |  |                  
|                                                                                                            |  |       |  | 2,807.3           |  | 2,676.1          
|                                                                                                            |  |       |  |                   |  |                  
|Insurance contract liabilities                                                                              |  | 8     |  | 20,438.7          |  | 21,893.7         
|Long term debt                                                                                              |  | 15    |  | 3,141.4           |  | 2,968.7          
|                                                                                                            |  |       |  |                   |  |                  
|                                                                                                            |  |       |  | 23,580.1          |  | 24,862.4         
|                                                                                                            |  |       |  |                   |  |                  
|Equity                                                                                                      |  | 16    |  |                   |  |                  
|Common shareholders' equity                                                                                 |  |       |  | 8,361.0           |  | 7,186.7          
|Preferred stock                                                                                             |  |       |  | 1,164.7           |  | 1,166.4          
|                                                                                                            |  |       |  |                   |  |                  
|Shareholders' equity attributable to shareholders of Fairfax                                                |  |       |  | 9,525.7           |  | 8,353.1          
|Non-controlling interests                                                                                   |  |       |  | 218.1             |  | 107.4            
|                                                                                                            |  |       |  |                   |  |                  
|Total equity                                                                                                |  |       |  | 9,743.8           |  | 8,460.5          
|                                                                                                            |  |       |  |                   |  |                  
|                                                                                                            |  |       |  | 36,131.2          |  | 35,999.0         
|                                                                                                            |  |       |  |                   |  |                  

See accompanying notes.

29

---



Consolidated Statements of Earningsfor the years ended December 31, 2014 and 2013

|                                            |                                      | Notes |        | 2014 |          | 2013     |  
|------------------------------------------- | ------------------------------------ | ----- | ------ | ---- | -------- | -------- | -
|
|Revenue                                     |                                      |       |        |      |          |          |  
|                                            | Gross premiums written               |       | 10, 25 |      |          | 7,459.9  |  
|                                            |                                      |       |        |      |          |          |  
|                                            | Net premiums written                 |       | 25     |      |          | 6,301.8  |  
|                                            |                                      |       |        |      |          |          |  
|                                            | Gross premiums earned                |       |        |      |          | 7,358.2  |  
|                                            | Premiums ceded to reinsurers         |       |        |      |          | (1,142.0 | )
|                                            |                                      |       |        |      |          |          |  
|                                            | Net premiums earned                  |       | 25     |      |          | 6,216.2  |  
|                                            | Interest and dividends               |       | 5      |      |          | 403.8    |  
|                                            | Share of profit of associates        |       | 6      |      |          | 105.7    |  
|                                            | Net gains (losses) on investments    |       | 5      |      |          | 1,736.2  |  
|                                            | Other revenue                        |       | 25     |      |          | 1,556.0  |  
|                                            |                                      |       |        |      |          |          |  
|                                            |                                      |       |        |      | 10,017.9 |          |  
|                                            |                                      |       |        |      |          |          |  
|Expenses                                    |                                      |       |        |      |          |          |  
|                                            | Losses on claims, gross              |       | 8      |      |          | 4,427.4  |  
|                                            | Losses on claims ceded to reinsurers |       | 9      |      |          | (633.1   | )
|                                            |                                      |       |        |      |          |          |  
|                                            | Losses on claims, net                |       | 26     |      |          | 3,794.3  |  
|                                            | Operating expenses                   |       | 26     |      |          | 1,227.2  |  
|                                            | Commissions, net                     |       | 9      |      |          | 959.9    |  
|                                            | Interest expense                     |       | 15     |      |          | 206.3    |  
|                                            | Other expenses                       |       | 26     |      |          | 1,492.3  |  
|                                            |                                      |       |        |      |          |          |  
|                                            |                                      |       |        |      | 7,680.0  |          |  
|                                            |                                      |       |        |      |          |          |  
|Earnings (loss) before income taxes         |                                      |       |        |      | 2,337.9  |          |  
|Provision for (recovery of) income taxes    |                                      | 18    |        |      | 673.3    |          |  
|                                            |                                      |       |        |      |          |          |  
|Net earnings (loss)                         |                                      |       |        |      | 1,664.6  |          |  
|                                            |                                      |       |        |      |          |          |  
|Attributable to:                            |                                      |       |        |      |          |          |  
|Shareholders of Fairfax                     |                                      |       |        |      | 1,633.2  |          |  
|Non-controlling interests                   |                                      |       |        |      | 31.4     |          |  
|                                            |                                      |       |        |      |          |          |  
|                                            |                                      |       |        |      | 1,664.6  |          |  
|                                            |                                      |       |        |      |          |          |  
|Net earnings (loss) per share               |                                      | 17    |        | $    | 74.43    |          | $
|Net earnings (loss) per diluted share       |                                      | 17    |        | $    | 73.01    |          | $
|Cash dividends paid per share               |                                      | 16    |        | $    | 10.00    |          | $
|Shares outstanding (000) (weighted average) |                                      | 17    |        |      | 21,186   |          |  

See accompanying notes.

30

---



Consolidated Statements of Comprehensive Incomefor the years ended December 31, 2014 and 2013

|                                             |                                                                  | Notes                                                                                              |  | 2014    |   | 2013   |  
|-------------------------------------------- | ---------------------------------------------------------------- | -------------------------------------------------------------------------------------------------- |  | ------- | - | ------ | -
|
|                                             |                                                                  |                                                                                                    |  |         |   |        |  
|Net earnings (loss)                          |                                                                  |                                                                                                    |  | 1,664.6 |   | (564.5 | )
|                                             |                                                                  |                                                                                                    |  |         |   |        |  
|Other comprehensive loss,net of income taxes |                                                                  | 16                                                                                                 |  |         |   |        |  
|                                             | Items that may be subsequently reclassified to net earnings      |                                                                                                    |  |         |   |        |  
|                                             |                                                                  | Change in unrealized foreign currency translation losses on foreign operations                     |  |         |   | (200.7 | )
|                                             |                                                                  | Change in gains on hedge of net investment in Canadian subsidiaries                                |  | 7       |   | 118.7  |  
|                                             |                                                                  | Share of other comprehensive loss of associates, excluding gains (losses) on defined benefit plans |  | 6       |   | (52.7  | )
|                                             |                                                                  |                                                                                                    |  |         |   |        |  
|                                             |                                                                  |                                                                                                    |  | (134.7  | ) | (80.4  | )
|                                             |                                                                  |                                                                                                    |  |         |   |        |  
|                                             | Items that will not be subsequently reclassified to net earnings |                                                                                                    |  |         |   |        |  
|                                             |                                                                  | Share of gains (losses) on defined benefit plans of associates                                     |  | 6       |   | (36.7  | )
|                                             |                                                                  | Change in gains (losses) on defined benefit plans                                                  |  | 21      |   | (32.9  | )
|                                             |                                                                  |                                                                                                    |  |         |   |        |  
|                                             |                                                                  |                                                                                                    |  | (69.6   | ) | 40.2   |  
|                                             |                                                                  |                                                                                                    |  |         |   |        |  
|Other comprehensive loss,net of income taxes |                                                                  |                                                                                                    |  | (204.3  | ) | (40.2  | )
|                                             |                                                                  |                                                                                                    |  |         |   |        |  
|Comprehensive income (loss)                  |                                                                  |                                                                                                    |  | 1,460.3 |   | (604.7 | )
|                                             |                                                                  |                                                                                                    |  |         |   |        |  
|Attributable to:                             |                                                                  |                                                                                                    |  |         |   |        |  
|Shareholders of Fairfax                      |                                                                  |                                                                                                    |  | 1,436.7 |   | (607.1 | )
|Non-controlling interests                    |                                                                  |                                                                                                    |  | 23.6    |   | 2.4    |  
|                                             |                                                                  |                                                                                                    |  |         |   |        |  
|                                             |                                                                  |                                                                                                    |  | 1,460.3 |   | (604.7 | )
|                                             |                                                                  |                                                                                                    |  |         |   |        |  

See accompanying notes.

31

---



Consolidated Statements of Changes in Equityfor the years ended December 31, 2014 and 2013
(US$ millions)

|                                                                                       |                                                                                                    | Subordinate
voting
shares |   | Multiple
voting
shares |   | Treasury
shares
(at cost) |   | Share-
based
payments
and other
reserves |   | Retained
earnings |   | Accumulated
other
comprehensive
income |        | Common
shareholders'
equity |        | Preferred
shares |   | Equity
attributable
to
shareholders
of Fairfax |        | Non-
controlling
interests |      | Total
equity |       
|-------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------- | ------------------------- | - | ---------------------- | - | ------------------------- | - | ---------------------------------------- | - | ----------------- | - | -------------------------------------- | ------ | --------------------------- | ------ | ---------------- | - | ---------------------------------------------- | ------ | -------------------------- | ---- | ------------ | ------
|Balance as of January 1, 2014                                                          |                                                                                                    | 3,642.8                   |   | 3.8                    |   | (140.0                    | ) | 50.5                                     |   | 3,551.2           |   | 78.4                                   |        | 7,186.7                     |        | 1,166.4          |   | 8,353.1                                        |        | 107.4                      |      | 8,460.5      |       
|Net earnings for the year                                                              |                                                                                                    |                          |   |                       |   |                          |   |                                         |   | 1,633.2           |   |                                       |        | 1,633.2                     |        |                 |   | 1,633.2                                        |        | 31.4                       |      | 1,664.6      |       
|Other comprehensive loss, net of income taxes:                                         |                                                                                                    |                           |   |                        |   |                           |   |                                          |   |                   |   |                                        |        |                             |        |                  |   |                                                |        |                            |      |              |       
|                                                                                       | Change in unrealized foreign currency translation losses on foreign operations                     |                           |  |                        |  |                           |  |                                          |  |                   |  |                                        | (193.3 | )                           | (193.3 | )                |  |                                                | (193.3 | )                          | (7.4 | )            | (200.7
|                                                                                       | Change in gains on hedge of net investment in Canadian subsidiaries                                |                           |  |                        |  |                           |  |                                          |  |                   |  |                                        | 118.7  |                             | 118.7  |                  |  |                                                | 118.7  |                            |     |              | 118.7 
|                                                                                       | Share of other comprehensive loss of associates, excluding gains (losses) on defined benefit plans |                           |  |                        |  |                           |  |                                          |  |                   |  |                                        | (52.7  | )                           | (52.7  | )                |  |                                                | (52.7  | )                          |     |              | (52.7 
|                                                                                       | Share of losses on defined benefit plans of associates                                             |                           |  |                        |  |                           |  |                                          |  |                   |  |                                        | (36.7  | )                           | (36.7  | )                |  |                                                | (36.7  | )                          |     |              | (36.7 
|                                                                                       | Change in losses on defined benefit plans                                                          |                           |  |                        |  |                           |  |                                          |  |                   |  |                                        | (32.5  | )                           | (32.5  | )                |  |                                                | (32.5  | )                          | (0.4 | )            | (32.9 
|Issuance of shares                                                                     |                                                                                                    |                          |   |                       |   | 8.8                       |   | (12.2                                    | ) |                  |   |                                       |        | (3.4                        | )      |                 |   | (3.4                                           | )      |                           |      | (3.4         | )     
|Purchases and amortization                                                             |                                                                                                    |                          |   |                       |   | (24.6                     | ) | 36.8                                     |   |                  |   |                                       |        | 12.2                        |        | (1.7             | ) | 10.5                                           |        |                           |      | 10.5         |       
|Excess of book value over consideration of preferred shares purchased for cancellation |                                                                                                    |                          |   |                       |   |                          |   |                                         |   | 0.5               |   |                                       |        | 0.5                         |        |                 |   | 0.5                                            |        |                           |      | 0.5          |       
|Common share dividends                                                                 |                                                                                                    |                          |   |                       |   |                          |   |                                         |   | (215.7            | ) |                                       |        | (215.7                      | )      |                 |   | (215.7                                         | )      | (6.6                       | )    | (222.3       | )     
|Preferred share dividends                                                              |                                                                                                    |                          |   |                       |   |                          |   |                                         |   | (56.9             | ) |                                       |        | (56.9                       | )      |                 |   | (56.9                                          | )      |                           |      | (56.9        | )     
|Net changes in capitalization and other (note 23)                                      |                                                                                                    |                          |   |                       |   |                          |   | 3.3                                      |   | (2.4              | ) |                                       |        | 0.9                         |        |                 |   | 0.9                                            |        | 93.7                       |      | 94.6         |       
|                                                                                       |                                                                                                    |                           |   |                        |   |                           |   |                                          |   |                   |   |                                        |        |                             |        |                  |   |                                                |        |                            |      |              |       
|Balance as of December 31, 2014                                                        |                                                                                                    | 3,642.8                   |   | 3.8                    |   | (155.8                    | ) | 78.4                                     |   | 4,909.9           |   | (118.1                                 | )      | 8,361.0                     |        | 1,164.7          |   | 9,525.7                                        |        | 218.1                      |      | 9,743.8      |       
|                                                                                       |                                                                                                    |                           |   |                        |   |                           |   |                                          |   |                   |   |                                        |        |                             |        |                  |   |                                                |        |                            |      |              |       
|Balance as of January 1, 2013                                                          |                                                                                                    | 3,243.3                   |   | 3.8                    |   | (121.1                    | ) | 26.8                                     |   | 4,389.8           |   | 112.1                                  |        | 7,654.7                     |        | 1,166.4          |   | 8,821.1                                        |        | 73.4                       |      | 8,894.5      |       
|Net earnings (loss) for the year                                                       |                                                                                                    |                          |   |                       |   |                          |   |                                         |   | (573.4            | ) |                                       |        | (573.4                      | )      |                 |   | (573.4                                         | )      | 8.9                        |      | (564.5       | )     
|Other comprehensive loss, net of income taxes:                                         |                                                                                                    |                           |   |                        |   |                           |   |                                          |   |                   |   |                                        |        |                             |        |                  |   |                                                |        |                            |      |              |       
|                                                                                       | Change in unrealized foreign currency translation losses on foreign operations                     |                           |  |                        |  |                           |  |                                          |  |                   |  |                                        | (157.7 | )                           | (157.7 | )                |  |                                                | (157.7 | )                          | (6.7 | )            | (164.4
|                                                                                       | Change in gains on hedge of net investment in Canadian subsidiaries                                |                           |  |                        |  |                           |  |                                          |  |                   |  |                                        | 96.9   |                             | 96.9   |                  |  |                                                | 96.9   |                            |     |              | 96.9  
|                                                                                       | Share of other comprehensive loss of associates, excluding gains (losses) on defined benefit plans |                           |  |                        |  |                           |  |                                          |  |                   |  |                                        | (12.9  | )                           | (12.9  | )                |  |                                                | (12.9  | )                          |     |              | (12.9 
|                                                                                       | Share of gains on defined benefit plans of associates                                              |                           |  |                        |  |                           |  |                                          |  |                   |  |                                        | 8.9    |                             | 8.9    |                  |  |                                                | 8.9    |                            |     |              | 8.9   
|                                                                                       | Change in gains on defined benefit plans                                                           |                           |  |                        |  |                           |  |                                          |  |                   |  |                                        | 31.1   |                             | 31.1   |                  |  |                                                | 31.1   |                            | 0.2  |              | 31.3  
|Issuance of shares                                                                     |                                                                                                    | 399.5                     |   |                       |   | 6.8                       |   | (7.1                                     | ) |                  |   |                                       |        | 399.2                       |        |                 |   | 399.2                                          |        |                           |      | 399.2        |       
|Purchases and amortization                                                             |                                                                                                    |                          |   |                       |   | (25.7                     | ) | 21.9                                     |   |                  |   |                                       |        | (3.8                        | )      |                 |   | (3.8                                           | )      |                           |      | (3.8         | )     
|Common share dividends                                                                 |                                                                                                    |                          |   |                       |   |                          |   |                                         |   | (205.5            | ) |                                       |        | (205.5                      | )      |                 |   | (205.5                                         | )      | (6.4                       | )    | (211.9       | )     
|Preferred share dividends                                                              |                                                                                                    |                          |   |                       |   |                          |   |                                         |   | (60.8             | ) |                                       |        | (60.8                       | )      |                 |   | (60.8                                          | )      |                           |      | (60.8        | )     
|Net changes in capitalization and other (notes 6 and 23)                               |                                                                                                    |                          |   |                       |   |                          |   | 8.9                                      |   | 1.1               |   |                                       |        | 10.0                        |        |                 |   | 10.0                                           |        | 38.0                       |      | 48.0         |       
|                                                                                       |                                                                                                    |                           |   |                        |   |                           |   |                                          |   |                   |   |                                        |        |                             |        |                  |   |                                                |        |                            |      |              |       
|Balance as of December 31, 2013                                                        |                                                                                                    | 3,642.8                   |   | 3.8                    |   | (140.0                    | ) | 50.5                                     |   | 3,551.2           |   | 78.4                                   |        | 7,186.7                     |        | 1,166.4          |   | 8,353.1                                        |        | 107.4                      |      | 8,460.5      |       
|                                                                                       |                                                                                                    |                           |   |                        |   |                           |   |                                          |   |                   |   |                                        |        |                             |        |                  |   |                                                |        |                            |      |              |       

See accompanying notes.

32

---



Consolidated Statements of Cash Flowsfor the years ended December 31, 2014 and 2013

|                                                                  |                                                                | Notes                                  |       | 2014    |          | 2013    |        
|----------------------------------------------------------------- | -------------------------------------------------------------- | -------------------------------------- | ----- | ------- | -------- | ------- | -------
|
|Operating activities                                              |                                                                |                                        |       |         |          |         |        
|                                                                  | Net earnings (loss)                                            |                                        |       |         | 1,664.6  |         | (564.5 
|                                                                  | Depreciation, amortization and impairment charges              |                                        | 25    |         | 94.2     |         | 104.3  
|                                                                  | Net bond discount amortization                                 |                                        |       |         | (30.0    | )       | (22.1  
|                                                                  | Amortization of share-based payment awards                     |                                        |       |         | 36.8     |         | 21.9   
|                                                                  | Share of profit of associates                                  |                                        | 6     |         | (105.7   | )       | (96.7  
|                                                                  | Deferred income taxes                                          |                                        | 18    |         | 521.7    |         | (431.8 
|                                                                  | Net (gains) losses on investments                              |                                        | 5     |         | (1,736.2 | )       | 1,564.0
|                                                                  | Loss on repurchase of long term debt                           |                                        | 15    |         | 3.6      |         | 3.4    
|                                                                  | Net (purchases) sales of securities classified as at FVTPL     |                                        | 28    |         | (590.0   | )       | 895.7  
|                                                                  | Changes in operating assets and liabilities                    |                                        | 28    |         | 70.8     |         | (766.9 
|                                                                  |                                                                |                                        |       |         |          |         |        
|Cash provided by (used in) operating activities                   |                                                                |                                        |       | (70.2   | )        | 707.3   |        
|                                                                  |                                                                |                                        |       |         |          |         |        
|Investing activities                                              |                                                                |                                        |       |         |          |         |        
|                                                                  | Sales of investments in associates and joint ventures          |                                        | 6, 23 |         | 252.1    |         | 211.9  
|                                                                  | Purchases of investments in associates and joint ventures      |                                        | 6, 23 |         | (390.2   | )       | (86.1  
|                                                                  | Net purchases of premises and equipment and intangible assets  |                                        |       |         | (67.1    | )       | (48.1  
|                                                                  | Net purchases of subsidiaries, net of cash acquired            |                                        | 23    |         | (189.9   |         | 136.3  
|                                                                  |                                                                |                                        |       |         |          |         |        
|Cash provided by (used in) investing activities                   |                                                                |                                        |       | (395.1  | )        | 214.0   |        
|                                                                  |                                                                |                                        |       |         |          |         |        
|Financing activities                                              |                                                                |                                        |       |         |          |         |        
|                                                                  | Subsidiary indebtedness:                                       |                                        | 15    |         |          |         |        
|                                                                  |                                                                | Issuances                              |       |         |          | 102.9   |        
|                                                                  |                                                                | Repayment                              |       |         |          | (85.5   | )      
|                                                                  | Long term debt:                                                |                                        | 15    |         |          |         |        
|                                                                  |                                                                | Issuances                              |       |         |          | 297.1   |        
|                                                                  |                                                                | Issuance costs                         |       |         |          | (2.9    | )      
|                                                                  |                                                                | Repayment                              |       |         |          | (90.1   | )      
|                                                                  | Subordinate voting shares:                                     |                                        | 16    |         |          |         |        
|                                                                  |                                                                | Issuances                              |       |         |          |        |        
|                                                                  |                                                                | Issuance costs                         |       |         |          |        |        
|                                                                  | Preferred shares:                                              |                                        | 16    |         |          |         |        
|                                                                  |                                                                | Repurchases                            |       |         |          | (1.2    | )      
|                                                                  | Purchase of subordinate voting shares for treasury             |                                        | 16    |         | (24.6    | )       | (25.7  
|                                                                  | Subsidiary common shares:                                      |                                        |       |         |          |         |        
|                                                                  |                                                                | Issuances to non-controlling interests |       |         |          |        |        
|                                                                  |                                                                | Issuance costs                         |       |         |          |        |        
|                                                                  | Common share dividends                                         |                                        | 16    |         | (215.7   | )       | (205.5 
|                                                                  | Preferred share dividends                                      |                                        | 16    |         | (56.9    | )       | (60.8  
|                                                                  | Dividends paid to non-controlling interests                    |                                        |       |         | (6.6     | )       | (6.4   
|                                                                  |                                                                |                                        |       |         |          |         |        
|Cash provided by (used in) financing activities                   |                                                                |                                        |       | (83.5   | )        | 129.9   |        
|                                                                  |                                                                |                                        |       |         |          |         |        
|Increase (decrease) in cash, cash equivalents and bank overdrafts |                                                                |                                        |       | (548.8  | )        | 1,051.2 |        
|                                                                  | Cash, cash equivalents and bank overdrafts  beginning of year |                                        |       |         | 3,758.2  |         | 2,815.3
|                                                                  | Foreign currency translation                                   |                                        |       |         | (190.7   | )       | (108.3 
|                                                                  |                                                                |                                        |       |         |          |         |        
|Cash, cash equivalents and bank overdrafts  end of year          |                                                                | 28                                     |       | 3,018.7 |          | 3,758.2 |        
|                                                                  |                                                                |                                        |       |         |          |         |        

See accompanying notes.

33

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Index to Notes to Consolidated Financial Statements

|    |  |                                                               |  |    
|--- |  | ------------------------------------------------------------- |  | ---
|1.  |  | Business Operations                                           |  | 35 
|2.  |  | Basis of Presentation                                         |  | 35 
|3.  |  | Summary of Significant Accounting Policies                    |  | 35 
|4.  |  | Critical Accounting Estimates and Judgments                   |  | 50 
|5.  |  | Cash and Investments                                          |  | 52 
|6.  |  | Investments in Associates                                     |  | 57 
|7.  |  | Short Sales and Derivatives                                   |  | 59 
|8.  |  | Insurance Contract Liabilities                                |  | 61 
|9.  |  | Reinsurance                                                   |  | 64 
|10. |  | Insurance Contract Receivables                                |  | 66 
|11. |  | Deferred Premium Acquisition Costs                            |  | 66 
|12. |  | Goodwill and Intangible Assets                                |  | 67 
|13. |  | Other Assets                                                  |  | 69 
|14. |  | Accounts Payable and Accrued Liabilities                      |  | 69 
|15. |  | Subsidiary Indebtedness, Long Term Debt and Credit Facilities |  | 70 
|16. |  | Total Equity                                                  |  | 73 
|17. |  | Earnings per Share                                            |  | 77 
|18. |  | Income Taxes                                                  |  | 77 
|19. |  | Statutory Requirements                                        |  | 80 
|20. |  | Contingencies and Commitments                                 |  | 80 
|21. |  | Pensions and Post Retirement Benefits                         |  | 81 
|22. |  | Operating Leases                                              |  | 83 
|23. |  | Acquisitions and Divestitures                                 |  | 84 
|24. |  | Financial Risk Management                                     |  | 88 
|25. |  | Segmented Information                                         |  | 105
|26. |  | Expenses                                                      |  | 110
|27. |  | Salaries and Employee Benefits Expense                        |  | 111
|28. |  | Supplementary Cash Flow Information                           |  | 111
|29. |  | Related Party Transactions                                    |  | 112

34

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Notes to Consolidated Financial Statementsfor the years ended December 31, 2014 and 2013
(in US$ and $ millions except per share amounts and as otherwise indicated)

1.    Business Operations

Fairfax Financial Holdings Limited ("the company" or "Fairfax") is a holding company which, through its subsidiaries, is principally engaged in property and casualty
insurance and reinsurance and the associated investment management. The holding company is federally incorporated and domiciled in Ontario, Canada.

2.    Basis of Presentation

The consolidated financial statements of the company for the year ended December 31, 2014 are prepared in accordance with International Financial Reporting Standards
("IFRS") as issued by the International Accounting Standards Board ("IASB"). The accounting policies used to prepare the consolidated financial statements comply with IFRS effective as at
December 31, 2014 (except IFRS 9 (2010)Financial Instrumentswhich was early adopted). Where IFRS does not contain clear guidance governing
the accounting treatment of certain transactions including those that are specific to insurance products, IFRS requires judgment in developing and applying an accounting policy, which may include
reference to another comprehensive body of accounting principles. In these cases, the company considers the hierarchy of guidance in International Accounting Standard 8 Accounting Policies, Changes in Accounting Estimates and
Errors. The consolidated financial statements have been prepared on a historical cost basis,
except for derivative financial instruments and as at fair value through profit and loss ("FVTPL") financial assets and liabilities that have been measured at fair value.

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

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

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

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

These
consolidated financial statements were approved for issue by the company's Board of Directors on March 6, 2015.

3.    Summary of Significant Accounting Policies

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

Principles of consolidation

Subsidiaries The company's consolidated financial statements include the assets,
liabilities, equity, revenue, expenses and cash flows of the holding company and its subsidiaries. A subsidiary is an entity over which the company has control. The company controls an entity when the
company has power over the entity, is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity.
Assessment of control is based on the substance of the relationship between the company and the entity and includes consideration of both existing voting rights and, if applicable, potential voting
rights that are currently exercisable and convertible. The operating results of subsidiaries acquired are included in the

35

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consolidated
financial statements from the date of acquisition. The operating results of subsidiaries that have been divested during the year are included up to the date control ceased and any
difference between the fair value of the consideration received and the carrying value of the subsidiary are recognized in the consolidated statement of earnings. All intercompany balances, profits
and transactions are eliminated in full.

The
consolidated financial statements are prepared as of December 31, based on individual company financial statements at the same date. Accounting policies of subsidiaries have been aligned
where necessary to ensure consistency with those of Fairfax. The consolidated financial statements include the accounts of the company and all of its subsidiaries at December 31, 2014. The
principal subsidiaries are:

Canadian Insurance

Northbridge Financial Corporation (Northbridge)

U.S. Insurance

Crum & Forster Holdings Corp. (Crum & Forster)

Zenith
National Insurance Corp. (Zenith National)

Reinsurance and Insurance

Odyssey Re Holdings Corp. (OdysseyRe)

Hudson
Insurance Company (Hudson Insurance)

Advent
Capital (Holdings) Ltd. (Advent)

Polskie
Towarzystwo Reasekuracji Spólka Akcyjna (Polish Re)

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

Group Re,which underwrites business in:

CRC
Reinsurance Limited (CRC Re)

Wentworth
Insurance Company Ltd. (Wentworth)

Runoff

TIG Insurance Company (TIG Insurance)

Fairmont
Specialty Group Inc. (Fairmont)

General
Fidelity Insurance Company (General Fidelity)

American
Safety Holdings Corp. (American Safety)

Clearwater
Insurance Company (Clearwater)

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

RiverStone
Insurance Limited (RiverStone Insurance)

RiverStone
Managing Agency Limited

Asian Insurance

Fairfax Asia consists of:

Falcon Insurance (Hong Kong) Company Ltd. (Falcon)

First
Capital Insurance Limited (First Capital)

The
Pacific Insurance Berhad (Pacific Insurance)

PT
Fairfax Insurance Indonesia (Fairfax Indonesia)

ICICI
Lombard General Insurance Company Limited
    (26% equity accounted interest) (ICICI Lombard)

Other

Hamblin Watsa Investment Counsel Ltd.

(Hamblin
Watsa) (investment management)

Ridley Inc.
(Ridley) (animal nutrition)

Keg
Restaurants Limited (The Keg) (owner and
operator of premium dining restaurants)

Pethealth Inc.
(Pethealth) (pet medical insurance
    and database services)

Praktiker
Hellas Commercial Societe Anonyme
    (Praktiker) (retailer of home improvement goods)

Sporting
Life Inc. (Sporting Life) (retailer of sporting
    goods and sports apparel)

William
Ashley China Corporation (William Ashley)
    (retailer of tableware and gifts)

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

IKYA
Human Capital Solutions Private Limited (IKYA)
    (provider of specialized human resources services)

Sterling
Holiday Resorts (India) Limited (Sterling
    Resorts) (owner and operator of holiday resorts)

All
subsidiaries are wholly-owned at December 31, 2014 except for First Capital (97.7%), Fairfax Indonesia (80.0%), Ridley (73.6%), The Keg (51.0%), Sporting Life (75.0%), Thomas Cook India
(73.0%), IKYA (56.4%) and Sterling Resorts (40.2%) (December 31, 2013  97.7%, nil, 73.6%, nil, 75.0%, 75.0%, 58.0% and nil respectively).

Pursuant
to the transactions described in note 23, during 2014 the company acquired 100% ownership interests in Pethealth and Praktiker, and 80.0%, 51.0% and 40.2% ownership interests in
Fairfax Indonesia, The Keg and Sterling Resorts respectively. During 2013 the company acquired 100.0% and 58.0% ownership interests in American Safety

36

---



and
IKYA respectively, and divested its 81.7% ownership interest in Prime Restaurants Inc. The company has a number of wholly-owned subsidiaries not presented in the table above, that are
intermediate holding companies of investments in subsidiaries and intercompany balances, all of which are eliminated on consolidation.

The
holding company has significant liquid resources that are generally not restricted by insurance regulators. The operating subsidiaries are primarily insurers and reinsurers that are often subject
to a wide variety of insurance and other laws and regulations that vary by jurisdiction and are intended to protect policyholders rather than investors. These laws and regulations may limit the
ability of operating subsidiaries to pay dividends or make distributions to parent companies. The company's consolidated balance sheet and consolidated statement of cash flows therefore make a
distinction in classification between the holding company and the operating subsidiaries for cash and short term investments to provide additional insight into the company's liquidity, financial
leverage and capital structure.

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

Investments in associates Investments in associates are accounted for using the equity method and are comprised of
investments in corporations, limited partnerships and trusts where the company has the ability to exercise significant influence but not control. Significant influence is generally presumed to exist
when the company owns, directly or indirectly, between 20% and 50% of the outstanding voting rights of the investee. Assessment of significant influence is based on the substance of the relationship
between the company and the investee and includes consideration of existing voting rights, potential voting rights that are currently exercisable and convertible (if applicable), voting power
of other shareholders, corporate governance arrangements and participation in policy-making processes. These investments are reported in investments in associates on the consolidated balance sheet,
with the company's share of profit (loss) and other comprehensive income (loss) of the associate reported in the corresponding line in the consolidated statement of earnings and consolidated statement
of comprehensive income, respectively. Foreign associates are translated in the same manner as foreign subsidiaries. When the company's share of losses in an associate equals or exceeds its investment
in the associate, the company does not record further losses unless it has incurred obligations on behalf of the associate.

Under
the equity method of accounting, an investment in associate is initially recognized at cost and adjusted thereafter for the post-acquisition change in the company's share of net assets of the
associate. Any excess of the cost of acquisition over the net fair value of the company's share of the identifiable assets, liabilities and contingent liabilities at the date of acquisition is
recognized as goodwill, and is included in the carrying value of the associate. To the extent that the cost of acquisition is less than the fair value of the company's share of the associate's
identifiable net assets, the excess is recognized in the consolidated statement of earnings. Any pre-existing interest in an associate is re-measured to fair value at the date significant influence is
obtained and any resulting gain or loss is recognized in the consolidated statement of earnings. In such instances the cost of the associate is measured as the sum of the fair value of the
pre-existing interest and any additional consideration transferred at that date.

In
determining the fair value of the company's share of an associate's identifiable net assets at the acquisition date, considerable judgment may be required in interpreting market data used to
develop such estimates. The company makes assumptions primarily based on market conditions and applies valuation techniques such as discounted cash flow analysis, market capitalization and comparable
company multiples and other methods commonly used by market participants to determine fair value. Where the company is only able to identify the principal factors resulting in divergence between the
fair value and reported carrying value of an associate's net assets, the use of different assumptions and/or valuation methodologies by the company may have a significant effect on the estimated fair
value. At each reporting date, the fair value of associates is estimated and disclosed using valuation techniques consistent with those applied to the company's other investments in equity
instruments. See 'Determination of fair value' under the heading of 'Investments' for further details.

At
each balance sheet date, and more frequently when conditions warrant, management assesses investments in associates for potential impairment. If management's assessment indicates that there is
objective evidence of impairment, the associate is written down to its recoverable amount, which is determined as the higher of its fair value less costs of disposal and its value in use. Previously
recognized impairment losses are reversed when there is evidence that there has been a change in the estimates used to determine the associate's recoverable amount since the recognition of the last
impairment loss. The reversal is recognized in the consolidated statement of earnings to the extent that the carrying value of the associate after reversal does not exceed the carrying value that
would have

37

---



been
determined had no impairment loss been recognized in previous periods. Gains and losses realized on dispositions, impairment losses and reversal of impairments are recognized in net gains
(losses) on investments in the consolidated statement of earnings.

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

Business combinations

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

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

Goodwill and intangible assets

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

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

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

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

38

---



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

Customer and broker relationships

8 to 20 yearsBrand names

IndefiniteComputer software

3 to 15 years


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

Foreign currency translation

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

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

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

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

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

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

Comprehensive income (loss)

Comprehensive income (loss) consists of net earnings (loss) and other comprehensive income (loss) and includes all changes in total equity during a period, except for those
resulting from investments by owners and distributions to owners. Unrealized foreign currency translation amounts arising from foreign subsidiaries and associates that do not have U.S. dollar
functional currencies and changes in the fair value of the effective portion of cash flow hedging instruments on hedges of net investments in foreign subsidiaries are recognized in other comprehensive
income (loss) and included in accumulated other comprehensive income (loss) until recycled to the consolidated statement of earnings in the future. Actuarial gains and losses and changes in asset
limitation amounts on defined benefit pension and post retirement plans are recorded in other comprehensive income (loss) and subsequently included in accumulated other comprehensive income (loss)
without recycling. Upon settlement of the defined benefit plan or disposal of the related associate or subsidiary those amounts are reclassified directly to retained earnings. Accumulated other
comprehensive income (loss) (net of income taxes) is included on the consolidated balance sheet as a component of common shareholders' equity.

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Consolidated statement of cash flows

The company's consolidated statements of cash flows are prepared in accordance with the indirect method, classifying cash flows as cash flows from operating, investing and
financing activities.

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

Investments

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

Classification of non-derivative financial assets Investments in equity instruments and those debt instruments
that do not meet the criteria for amortized cost (see below) are classified as at fair value through profit or loss ("FVTPL"). Financial assets classified as at FVTPL are carried
at fair value on the consolidated balance sheet with realized and unrealized gains and losses recorded in net gains (losses) on investments in the consolidated statement of earnings and as an
operating activity in the consolidated statement of cash flows. Dividends and interest earned, net of interest incurred are included in the consolidated
statement of earnings in interest and dividends and as an operating activity in the consolidated statement of cash flows.

A
debt instrument is measured at amortized cost if (i) the objective of the company's business model is to hold the instrument in order to collect contractual cash flows and (ii) the
contractual terms of the instrument give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Alternatively, debt instruments
that meet the criteria for amortized cost may be designated as at FVTPL on initial recognition if doing so eliminates or significantly reduces an accounting mismatch. The company's business model
currently does not permit any of its investments in debt instruments to be measured at amortized cost.

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

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

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

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

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



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

Valuation
techniques used by the company's independent pricing service providers and third party broker-dealers include comparisons with similar instruments where observable market prices exist,
discounted cash flow analysis, option pricing models, and other valuation techniques commonly used by market participants. The company assesses the reasonableness of pricing received from these third
party sources by comparing the fair values received to recent transaction prices for similar assets where available, to industry accepted discounted cash flow models (that incorporate estimates of the
amount and timing of future cash flows and market observable inputs such as credit spreads and discount rates) and to option pricing models (that incorporate market observable inputs including the
quoted price, volatility and dividend yield of the underlying security and the risk free rate).

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

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

Accounts receivable and accounts payable

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

Securities sold short and derivative financial instruments

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

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

The
company uses derivatives principally to mitigate financial risks arising from its investment holdings and reinsurance recoverables. Derivatives that are not specifically designated or that do not
meet the requirements for hedge accounting are carried at fair value on the consolidated balance sheet with changes in fair value recorded in

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net
gains (losses) on investments in the consolidated statement of earnings and as an operating activity in the consolidated statement of cash flows. Derivatives are monitored by the company for
effectiveness in achieving their risk management objectives. The fair value of the company's derivative financial instruments where quoted market prices in active markets are unavailable is determined
in the same manner as other investments described above. The company has not designated any financial assets or liabilities (including derivatives) as accounting hedges except for the hedge of its net
investment in Canadian subsidiaries as described in note 7.

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

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

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

Equity contracts The company's long equity total return swaps allow the company to receive the total return on a
notional amount of an equity index or individual equity security (including dividends and capital gains or losses) in exchange for the payment of a floating rate of interest on the notional amount.
Conversely, short equity total return swaps allow the company to pay the total return on a notional amount of an equity index or individual equity security in exchange for the receipt of a floating
rate of interest on the notional amount. The company classifies dividends and interest paid or received related to its long and short equity and equity index total return swaps on a net basis as
derivatives and other within interest and dividends in the consolidated statement of earnings. The company's equity and equity index total return swaps contain contractual reset provisions requiring
counterparties to cash-settle on a monthly or quarterly basis any market value movements arising subsequent to the prior settlement. Any cash amounts paid to settle unfavourable market value changes
and, conversely, any cash amounts received in settlement of favourable market value changes, are recorded as net gains (losses) on investments in the consolidated statement of earnings. To the extent
that a contractual reset date of a contract does not correspond to the balance sheet date, the company records net gains (losses) on investments in the consolidated statement of earnings to adjust the
carrying value of the derivative asset or liability associated with each total return swap contract to reflect its fair value at the balance sheet date. Final cash settlements of total return swaps
are recognized as net gains (losses) on investments net of any previously recorded unrealized market value changes since the last quarterly reset date. Total return swaps require no initial net
investment, and at inception, their fair value is zero.

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

CPI-linked derivative contracts The initial premium paid for a CPI-linked derivative contract is recorded as a
derivative asset. Subsequent changes in the unrealized fair value of a contract is recorded as net gains (losses) on investments in the consolidated statement of earnings at each balance sheet date,
with a corresponding adjustment to the carrying value of the derivative asset. As the average remaining life of a contract declines, the fair value of the contract (excluding the impact of changes in
the underlying CPI) will generally decline. The reasonableness of the fair values of CPI-linked derivative contracts are assessed by comparing the fair values received from third party broker-dealers
to recent market transactions where available and values determined using third party pricing

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software
based on the Black-Scholes option pricing model for European-style options that incorporates market observable and unobservable inputs such as the current value of the relevant CPI underlying
the derivative, the inflation swap rate, nominal swap rate and inflation volatility. The fair values of CPI-linked derivative contracts are sensitive to assumptions such as market expectations of
future rates of inflation and related inflation volatilities.

Insurance contracts

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

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

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

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

The
company's reserves for reported losses and loss adjustment expenses are based on estimates of future payments to settle reported general insurance and reinsurance claims and claims from its runoff
operations. The company bases case reserve estimates on the facts available at the time the reserves are established and for reinsurance, based on reports and individual case reserve estimates
received from ceding companies. The company establishes these reserves on an undiscounted basis to recognize the estimated costs of bringing pending claims to final settlement, taking into account
inflation, as well as other factors that can influence the amount of reserves required, some of which are subjective and some of which are dependent on future events. In determining the level of
reserves, the company considers historical trends and patterns of loss payments, pending levels of unpaid claims and types of coverage. In addition, court decisions, economic conditions and public
attitudes may affect the ultimate cost of settlement and, as a result, the company's estimation of reserves. Between the reporting and final settlement of a claim, circumstances may change, which
would result in changes to established reserves. Items such as changes in law and interpretations of relevant case law, results of litigation, changes in medical costs, as well as costs of vehicle and
building repair materials and labour rates can substantially impact ultimate settlement costs. Accordingly, the company reviews and re-evaluates case reserves on a regular basis. Any resulting
adjustments are included in the

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consolidated
statement of earnings in the period the adjustment is made. Amounts ultimately paid for losses and loss adjustment expenses can vary significantly from the level of reserves originally
set or currently recorded.

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

The
time required to learn of and settle claims is often referred to as the "tail" and is an important consideration in establishing the company's reserves. Short-tail claims are those for which
losses are normally reported soon after the incident and are generally settled within months following the reported incident. This would include, for example, most property, automobile and marine and
aerospace damage. Long-tail claims are considered by the company to be those that often take three years or more to develop and settle, such as asbestos, workers' compensation and product liability.
In the extreme cases of long tail claims like those involving asbestos, it may take upwards of 40 years to settle. In addition, information concerning the loss event and ultimate cost of a
long-tail claim may not be readily available. Accordingly, the reserving analysis of long-tail lines of business is generally more difficult and subject to greater uncertainties than for short-tail
lines of business.

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

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

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



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

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

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

The
provisions for losses and loss adjustment expenses are subject to review at the subsidiary level, the corporate level by the company's Chief Risk Officer and by independent third party actuaries.
In addition, for major classes where the risks and uncertainties inherent in the provisions are greatest, ad hoc detailed reviews are undertaken by internal and external advisers who are able to draw
upon their specialist expertise and a broader knowledge of

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current
industry trends in claims development. The results of these reviews are considered when establishing the appropriate levels of provisions for losses and loss adjustment expenses and unexpired
risks.

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



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

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

The
establishment of provisions for losses and loss adjustment expenses is an inherently uncertain process and, as a consequence of this uncertainty, the eventual cost of settlement of outstanding
claims and unexpired risks can vary substantially from the initial estimates in the short term, particularly for the company's long-tail lines of business. Provisioning considerations include:
uncertainty around loss trends, claims inflation and underlying economic conditions; the inherent risk in estimating loss development patterns based on historical data that may not be representative
of future loss payment patterns; assumptions built on industry loss ratios or industry benchmark development patterns that may not reflect actual experience; and the intrinsic risk as to the
homogeneity of the underlying data used in carrying out the reserve analyses. Long tail claims are more susceptible to these uncertainties given the length of time between the issuance of the original
policy and ultimate settlement of any claims. The company seeks to set appropriate levels of provisions for losses and loss adjustment expenses and provisions for unexpired risks taking the known
facts and experience into account.

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

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

Factors
contributing to this higher degree of uncertainty include:



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Reinsurance

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

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

In
order to protect capital and control the company's exposure to loss from adverse development of reserves or reinsurance recoverables on pre-acquisition reserves of companies acquired or from future
adverse development on long-tail latent or other potentially volatile claims, the company has for certain acquisitions obtained vendor indemnities or purchased excess of loss reinsurance protection
from reinsurers.

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

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

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

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

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

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

The
company's credit risk on reinsurance recoverables is analyzed by its reinsurance security department which is responsible for setting appropriate provisions for reinsurers suffering financial
difficulties. The process for determining the provision involves quantitative and qualitative assessments using current and historical credit information and current market information. The process
inherently requires the use of certain assumptions and

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judgments
including: (i) assessing the probability of impairment; (ii) estimating ultimate recovery rates of impaired reinsurers; and (iii) determining the effects from potential
offsets or collateral arrangements. Changes to these assumptions or using other reasonable judgments can materially affect the provision level and the company's net earnings.

Income taxes

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

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

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

Deferred
income tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. Carry forwards of
unused losses or unused tax credits are tax effected and recognized as deferred tax assets when it is probable that future taxable profits will be available against which these losses or tax credits
can be utilized.

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

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

Other assets

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

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

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

Other Revenue from the sale of animal nutrition, hospitality, travel and other non-insurance products and services
are recognized when the price is fixed or determinable, collection is reasonably assured and the product or service has been delivered to the customer. The revenue and related cost of inventories sold
or services provided are recorded in other revenue and other expenses respectively, in the consolidated statement of earnings.

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

Long term debt

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

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

Contingencies and commitments

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

Equity

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

Treasury
shares are equity instruments reacquired by the company which have not been cancelled and are deducted from equity on the consolidated balance sheet, regardless of the objective of the
transaction. The company acquires its own subordinate voting shares on the open market for its share-based payment awards. No gain or loss is recognized in the consolidated statement of earnings on
the purchase, sale, issue or cancellation of treasury shares. Consideration paid or received is recognized directly in equity.

Dividends
and other distributions to holders of the company's equity instruments are recognized directly in equity.

Share-based payments

The company has restricted share plans or equivalent for management of the holding company and its subsidiaries with vesting periods of up to ten years from the date of grant.
The fair value of restricted share awards is estimated on the date of grant based on the market price of the company's stock and is amortized to compensation expense over the related vesting period,
with a corresponding increase in the share-based payments equity reserve. When a restricted share award vests in instalments over the vesting period (graded vesting), each instalment is accounted for
as a separate award and amortized to compensation expense accordingly. At each balance sheet date, the company reviews its estimates of the number of restricted share awards expected to vest.

Net earnings per share attributable to shareholders of Fairfax

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

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

48

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Pensions and post retirement benefits

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

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

Defined benefit plan A defined benefit plan is a plan that defines an amount of pension or other post retirement
benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and salary. The company's policies for its defined benefit plans are
described below:



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

Operating leases

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

49

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New accounting pronouncements adopted in 2014

The company adopted the following new and revised standards, along with any consequential amendments, effective January 1, 2014. These changes were retrospectively
adopted in accordance with the applicable transitional provisions of each new or revised standard, and did not have a significant impact on the consolidated financial statements.

IFRIC 21 Levies ("IFRIC 21")

IFRIC 21 provides guidance on when to recognize a liability for a levy imposed by a government.

IAS 32 Financial Instruments: Presentation ("IAS 32")

The IASB amended IAS 32 to clarify the meaning of when an entity has a current legally enforceable right to offset a financial asset and a financial liability in its
consolidated balance sheet.

IAS 36 Impairment of Assets ("IAS 36")

The IASB amended IAS 36 to clarify the disclosure requirements when an impairment loss is recognized or reversed in respect of an asset or cash-generating unit.

New accounting pronouncements issued but not yet effective

The following new standards have been issued by the IASB and were not yet effective for the fiscal year beginning January 1, 2014.

IFRS 9 Financial Instruments ("IFRS 9")

In July 2014 the IASB published the complete version of IFRS 9 which supersedes the 2010 version of IFRS 9 currently applied by the company. This complete
version is effective for annual periods beginning on or after January 1, 2018, with retrospective application, and includes: requirements on the classification and measurement of financial
assets and liabilities; an expected credit loss model that replaces the existing incurred loss impairment model; and new hedge accounting guidance. The company is currently evaluating the impact of
the complete version of IFRS 9 on its consolidated financial statements.

IFRS 15 Revenue from Contracts with Customers ("IFRS 15")

In May 2014 the IASB published IFRS 15 which introduces a single model for recognizing revenue from contracts with customers. IFRS 15 excludes insurance
contracts from its scope and is primarily applicable to the company's non-insurance entities. The standard is effective for annual periods beginning on or after January 1, 2017, with
retrospective application. The company is currently evaluating the impact of IFRS 15 on its consolidated financial statements.

4.    Critical Accounting Estimates and Judgments

In the preparation of the company's consolidated financial statements, management has made a number of estimates and judgments, the more critical of which are discussed below,
with the exception of the determination of fair value for financial instruments and associates, fair value disclosures, and contingencies, which are discussed in notes 3, 5 and 20
respectively. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable
under the circumstances.

Provision for losses and loss adjustment expenses

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

50

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Provision for uncollectible reinsurance recoverables

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

Recoverability of deferred income tax assets

In determining the recoverability of deferred income tax assets, the company primarily considers current and expected profitability of applicable operating companies and their
ability to utilize any recorded tax assets. The company reviews its deferred income tax assets on a quarterly basis, taking into consideration the availability of sufficient current and projected
taxable profits, reversals of taxable temporary differences and tax planning strategies.

Assessment of goodwill for potential impairment

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

Determination of subsidiaries, associates and joint ventures

There could be significant judgment involved in assessing whether control, significant influence, or joint control exists in accordance with the requirements of IFRS 10,
IAS 28 and IFRS 11 respectively, particularly where the facts and circumstances include indicators that could reasonably point to more than one potential outcome. In situations where
voting rights alone are not sufficient to clearly assess control, significant influence or joint control, additional factors that may be considered include potential voting rights that are currently
exercisable or convertible, contractual arrangements, relative shareholdings and the allocation of decision-making rights. An initial assessment of control, significant influence or joint control is
reconsidered at a later date if warranted by changes in facts and circumstances, particularly in situations where the company acquires additional interests or reduces its existing interest.

51

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5.    Cash and Investments

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

|                                                                         |  | December 31,
2014 |   | December 31,
2013 |  
|------------------------------------------------------------------------ |  | ----------------- | - | ----------------- | -
|Holding company:                                                         |  |                   |   |                   |  
|Cash and cash equivalents (note 28)                                      |  | 317.7             |   | 214.4             |  
|Short term investments                                                   |  | 121.6             |   | 185.9             |  
|Short term investments pledged for short sale and derivative obligations |  | 92.0              |   | 107.8             |  
|Bonds                                                                    |  | 323.8             |   | 240.4             |  
|Bonds pledged for short sale and derivative obligations                  |  | 17.7              |   | 16.6              |  
|Preferred stocks                                                         |  | 144.2             |   | 223.0             |  
|Common stocks                                                            |  | 89.8              |   | 264.9             |  
|Derivatives (note 7)                                                     |  | 137.5             |   | 43.7              |  
|                                                                         |  |                   |   |                   |  
|                                                                         |  | 1,244.3           |   | 1,296.7           |  
|Short sale and derivative obligations (note 7)                           |  | (31.6             | ) | (55.1             | )
|                                                                         |  |                   |   |                   |  
|                                                                         |  | 1,212.7           |   | 1,241.6           |  
|                                                                         |  |                   |   |                   |  
|Portfolio investments:                                                   |  |                   |   |                   |  
|Cash and cash equivalents (note 28)                                      |  | 3,034.5           |   | 3,878.4           |  
|Short term investments                                                   |  | 2,499.8           |   | 3,567.3           |  
|Bonds                                                                    |  | 11,445.5          |   | 9,550.5           |  
|Preferred stocks                                                         |  | 376.4             |   | 541.8             |  
|Common stocks                                                            |  | 4,848.5           |   | 3,835.7           |  
|Investments in associates (note 6)                                       |  | 1,617.7           |   | 1,432.5           |  
|Derivatives (note 7)                                                     |  | 412.6             |   | 193.1             |  
|Other invested assets                                                    |  | 14.2              |   | 31.1              |  
|                                                                         |  |                   |   |                   |  
|                                                                         |  | 24,249.2          |   | 23,030.4          |  
|                                                                         |  |                   |   |                   |  
|Assets pledged for short sale and derivative obligations:                |  |                   |   |                   |  
|Cash and cash equivalents (note 28)                                      |  |                  |   | 11.8              |  
|Short term investments                                                   |  | 227.7             |   | 45.8              |  
|Bonds                                                                    |  | 632.3             |   | 745.3             |  
|                                                                         |  |                   |   |                   |  
|                                                                         |  | 860.0             |   | 802.9             |  
|                                                                         |  |                   |   |                   |  
|                                                                         |  | 25,109.2          |   | 23,833.3          |  
|Short sale and derivative obligations (note 7)                           |  | (129.2            | ) | (213.3            | )
|                                                                         |  |                   |   |                   |  
|                                                                         |  | 24,980.0          |   | 23,620.0          |  
|                                                                         |  |                   |   |                   |  

Common stocks included investments in limited partnerships with a carrying value of $1,004.4 at December 31, 2014 (December 31,
2013  $816.4).

Restricted
cash and cash equivalents at December 31, 2014 of $333.5 (December 31, 2013  $340.4) were comprised primarily of amounts required to be
maintained on deposit with various regulatory authorities to support the subsidiaries' insurance and reinsurance operations. Restricted cash and cash equivalents are included on the consolidated
balance sheet in holding company cash and investments, or in subsidiary cash and short term investments and assets pledged for short sale and derivative obligations in portfolio investments.

52

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

The
table that follows summarizes pledged assets (excluding assets pledged in favour of Lloyd's (note 20) and assets pledged for short sale and derivative obligations) by the nature of
the pledge requirement. Pledged assets primarily consist of bonds within portfolio investments on the consolidated balance sheet.

December 31,
2014

December 31,
2013Regulatory deposits

2,717.0

2,182.1Security for reinsurance and other

903.8

543.83,620.8

2,725.9


Fixed Income Maturity Profile

Bonds are summarized by the earliest contractual maturity date in the table below. Actual maturities may differ from maturities shown below due to the existence of call and put
features. At December 31, 2014 bonds containing call and put features represented approximately $6,880.2 and $56.4 respectively (December 31,
2013  $5,990.1 and $60.3 respectively) of the total fair value of bonds.

|                                   |  | December 31, 2014 |  | December 31, 2013 |  
|---------------------------------- |  | ----------------- |  | ----------------- | -
|
|Due in 1 year or less              |  | 653.9             |  | 664.2             |  
|Due after 1 year through 5 years   |  | 4,714.1           |  | 5,708.3           |  
|Due after 5 years through 10 years |  | 341.6             |  | 355.0             |  
|Due after 10 years                 |  | 5,067.4           |  | 5,691.8           |  
|                                   |  |                   |  |                   |  
|                                   |  | 10,777.0          |  | 12,419.3          |  
|                                   |  |                   |  |                   |  
|Effective interest rate            |  |                   |  | 5.0               | %
|                                   |  |                   |  |                   |  

The calculation of the effective interest rate of 5.0% (December 31, 2013  4.6%) is on a pre-tax basis and does not give effect to
the favourable tax treatment which the company expects to receive with respect to its tax advantaged bond investments of approximately $5.2 billion (December 31,
2013  $4.8 billion) included in U.S. states and municipalities.

53

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Fair Value Disclosures

The company's use of quoted market prices (Level 1), valuation models using observable market information as inputs (Level 2) and valuation models without
observable market information as inputs (Level 3) in the valuation of securities and derivative contracts by type of issuer was as follows:

|                                                                                      |                                | December 31, 2014 |         | December 31, 2013
|------------------------------------------------------------------------------------- | ------------------------------ | ----------------- | ------- | -----------------
|
|Cash and cash equivalents                                                             |                                | 3,352.2           |         | 3,352.2          
|                                                                                      |                                |                   |         |                  
|Short term investments:                                                               |                                |                   |         |                  
|                                                                                      | Canadian provincials           |                   | 334.0   |                  
|                                                                                      | U.S. treasury                  |                   | 2,170.7 |                  
|                                                                                      | Other government               |                   | 361.1   |                  
|                                                                                      | Corporate and other            |                   | 75.3    |                  
|                                                                                      |                                |                   |         |                  
|                                                                                      |                                | 2,941.1           |         | 2,817.5          
|                                                                                      |                                |                   |         |                  
|Bonds:                                                                                |                                |                   |         |                  
|                                                                                      | Canadian government            |                   | 16.0    |                  
|                                                                                      | Canadian provincials           |                   | 217.1   |                  
|                                                                                      | U.S. treasury                  |                   | 2,094.2 |                  
|                                                                                      | U.S. states and municipalities |                   | 6,998.2 |                  
|                                                                                      | Other government               |                   | 1,559.0 |                  
|                                                                                      | Corporate and other            |                   | 1,534.8 |                  
|                                                                                      |                                |                   |         |                  
|                                                                                      |                                | 12,419.3          |         |                 
|                                                                                      |                                |                   |         |                  
|Preferred stocks:                                                                     |                                |                   |         |                  
|                                                                                      | Canadian                       |                   | 173.9   |                  
|                                                                                      | U.S.                           |                   | 322.4   |                  
|                                                                                      | Other                          |                   | 24.3    |                  
|                                                                                      |                                |                   |         |                  
|                                                                                      |                                | 520.6             |         |                 
|                                                                                      |                                |                   |         |                  
|Common stocks:                                                                        |                                |                   |         |                  
|                                                                                      | Canadian                       |                   | 918.2   |                  
|                                                                                      | U.S.                           |                   | 907.3   |                  
|                                                                                      | Other                          |                   | 3,112.8 |                  
|                                                                                      |                                |                   |         |                  
|                                                                                      |                                | 4,938.3           |         | 3,186.8          
|                                                                                      |                                |                   |         |                  
|Derivatives and other invested assets(1)                                              |                                | 558.1             |         |                 
|                                                                                      |                                |                   |         |                  
|Short sale and derivative obligations                                                 |                                | (160.8            | )       |                 
|                                                                                      |                                |                   |         |                  
|Holding company cash and investments and portfolio investments measured at fair value |                                | 24,568.8          |         | 9,356.5          
|                                                                                      |                                |                   |         |                  
|                                                                                      |                                | 100.0%            |         | 38.1%            
|                                                                                      |                                |                   |         |                  
|Investments in associates (note 6)(2)                                                 |                                | 2,070.5           |         | 1,046.4          
|                                                                                      |                                |                   |         |                  

54

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Transfers
between fair value hierarchy levels are considered effective from the beginning of the reporting period in which the transfer is identified. During 2014 and 2013 there were no significant
transfers of financial
instruments between Level 1 and Level 2 and there were no transfers of financial instruments in or out of Level 3 as a result of changes in the observability of valuation
inputs.

Included
in Level 3 are investments in CPI-linked derivatives, certain private placement debt securities and equity warrants, and common and preferred shares of private companies. CPI-linked
derivatives are classified within holding company cash and investments, or in derivatives and other invested assets in portfolio investments on the consolidated balance sheet and are valued using
broker-dealer quotes which management has determined utilize market observable inputs except for the inflation volatility input which is not market observable. Private placement debt securities are
classified within holding company cash and investments and bonds on the consolidated balance sheet and are valued using industry accepted discounted cash flow models that incorporate the credit
spreads of the issuers, an input which is not market observable. Limited partnerships, private equity funds and private company common shares are classified within holding company cash and investments
and common stocks on the consolidated balance sheet. These investments are primarily valued using net asset value statements provided by the respective third party fund managers and general partners.
The fair values in those statements are determined using quoted prices of the underlying assets, and to a lesser extent, observable inputs where available and unobservable inputs, in conjunction with
industry accepted valuation models, where required. In some instances, private equity funds and limited partnerships are classified as Level 3 because they may require at least three months of
notice to liquidate. Reasonably possible changes in the value of unobservable inputs for any of these individual investments would not significantly change the fair value of investments classified as
Level 3 in the fair value hierarchy.

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

|                                                                                               |  | 2014  |  
|---------------------------------------------------------------------------------------------- |  | ----- | -
|
|Balance  January 1                                                                            |  | 437.6 |  
|Total net realized and unrealized gains (losses) included in net gains (losses) on investments |  | 151.7 |  
|Purchases                                                                                      |  | 249.2 |  
|Transfer into category due to change in accounting treatment                                   |  |      |  
|Sales                                                                                          |  | (5.5  | )
|                                                                                               |  |       |  
|Balance  December 31                                                                          |  | 833.0 |  
|                                                                                               |  |       |  

|
|

|                                                                                               |  | 2013  |  
|---------------------------------------------------------------------------------------------- |  | ----- | -
|
|Balance  January 1                                                                            |  | 119.1 |  
|Total net realized and unrealized gains (losses) included in net gains (losses) on investments |  | 4.0   |  
|Purchases                                                                                      |  | 356.2 |  
|Sales                                                                                          |  | (41.7 | )
|                                                                                               |  |       |  
|Balance  December 31                                                                          |  | 437.6 |  
|                                                                                               |  |       |  

55

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Investment Income

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

Interest and dividends and share of profit of associates

|                                       |                                 | 2014  |        | 2013  |       
|-------------------------------------- | ------------------------------- | ----- | ------ | ----- | ------
|Interest income:                       |                                 |       |        |       |       
|                                       | Cash and short term investments |       | 27.8   |       | 33.2  
|                                       | Bonds                           |       | 474.1  |       | 435.1 
|                                       | Derivatives and other           |       | (151.6 | )     | (161.5
|                                       |                                 |       |        |       |       
|                                       |                                 | 350.3 |        | 306.8 |       
|                                       |                                 |       |        |       |       
|Dividends:                             |                                 |       |        |       |       
|                                       | Preferred stocks                |       | 38.1   |       | 39.6  
|                                       | Common stocks                   |       | 42.1   |       | 55.7  
|                                       |                                 |       |        |       |       
|                                       |                                 | 80.2  |        | 95.3  |       
|                                       |                                 |       |        |       |       
|Investment expenses                    |                                 | (26.7 | )      | (25.2 | )     
|                                       |                                 |       |        |       |       
|Interest and dividends                 |                                 | 403.8 |        | 376.9 |       
|                                       |                                 |       |        |       |       
|Share of profit of associates (note 6) |                                 | 105.7 |        | 96.7  |       
|                                       |                                 |       |        |       |       

Net gains (losses) on investments

|                                    |                                               | 2014   |         | 2013    |        
|----------------------------------- | --------------------------------------------- | ------ | ------- | ------- | -------
|
|Net gains (losses) on investments:  |                                               |        |         |         |        
|                                    | Bonds                                         |        | 139.7   |         | 1,300.9
|                                    | Preferred stocks                              |        | (161.8  | )(1)    | 20.0   
|                                    | Common stocks                                 |        | 483.5   |         | (216.6 
|                                    |                                               |        |         |         |        
|                                    |                                               | 461.4  |         | 1,104.3 |        
|                                    |                                               |        |         |         |        
|Derivatives:                        |                                               |        |         |         |        
|                                    | Common stock and equity index short positions |        | (377.9) | (2)     | 183.4  
|                                    | Common stock and equity index long positions  |        | 70.3    | (2)     | (23.8  
|                                    | Credit default swaps                          |        | (8.5    | )       | 8.4    
|                                    | Equity warrants and call options              |        | 66.6    |         | 19.2   
|                                    | CPI-linked derivatives                        |        |        |         | 17.7   
|                                    | Other                                         |        | 21.0    |         | (10.7  
|                                    |                                               |        |         |         |        
|                                    |                                               | (228.5 | )       | 194.2   |        
|                                    |                                               |        |         |         |        
|Foreign currency gains (losses) on: |                                               |        |         |         |        
|                                    | Investing activities                          |        | (55.8   | )       | (98.7  
|                                    | Underwriting activities                       |        | 53.5    |         |       
|                                    | Foreign currency contracts                    |        | 61.3    |         | 143.1  
|                                    |                                               |        |         |         |        
|                                    |                                               | 59.0   |         | 44.4    |        
|                                    |                                               |        |         |         |        
|Gain on disposition of associates   |                                               | 54.0   | (3)     | 41.2    | (4)    
|                                    |                                               |        |         |         |        
|Other                               |                                               | 6.1    |         | 0.1     |        
|                                    |                                               |        |         |         |        
|Net gains (losses) on investments   |                                               | 352.0  |         | 1,384.2 |        
|                                    |                                               |        |         |         |        

56

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6.    Investments in Associates

The following summarizes the company's investments in associates:

|                                      |                                                                      | December 31, 2014 |       | Year ended
December 31,
2014 |       | December 31, 2013 |       | Year ended
December 31,
2013 |      
|------------------------------------- | -------------------------------------------------------------------- | ----------------- | ----- | ---------------------------- | ----- | ----------------- | ----- | ---------------------------- | -----
|
|Insurance and reinsurance associates: |                                                                      |                   |       |                              |       |                   |       |                              |      
|                                      | ICICI Lombard General Insurance Company Limited ("ICICI Lombard")(7) |                   | 26.0% |                              | 268.5 |                   | 107.5 |                              | 33.0 
|                                      | Gulf Insurance Company ("Gulf Insurance")                            |                   | 41.4% |                              | 235.9 |                   | 208.3 |                              | 14.1 
|                                      | Thai Re Public Company Limited ("Thai Re")(1)                        |                   | 30.0% |                              | 120.6 |                   | 76.4  |                              | (13.7
|                                      | Singapore Reinsurance Corporation Limited ("Singapore Re")           |                   | 27.3% |                              | 39.3  |                   | 38.4  |                              | 4.8  
|                                      | Falcon Insurance PLC ("Falcon Thailand")                             |                   | 40.5% |                              | 9.0   |                   | 9.0   |                              | 1.6  
|                                      |                                                                      |                   |       |                              |       |                   |       |                              |      
|                                      |                                                                      |                   |       | 673.3                        |       | 439.6             |       | 39.8                         |      
|                                      |                                                                      |                   |       |                              |       |                   |       |                              |      
|Non-insurance associates:             |                                                                      |                   |       |                              |       |                   |       |                              |      
|Real estate                           |                                                                      |                   |       |                              |       |                   |       |                              |      
|                                      | KWF Real Estate Ventures Limited Partnerships ("KWF LPs")(4)         |                   |      |                              | 274.9 |                   | 274.9 |                              | 13.5 
|                                      | Grivalia Properties REIC ("Grivalia Properties")(2)                  |                   | 40.6% |                              | 376.3 |                   | 334.1 |                              | 18.9 
|                                      |                                                                      |                   |       |                              |       |                   |       |                              |      
|                                      |                                                                      |                   |       | 651.2                        |       | 609.0             |       | 32.4                         |      
|                                      |                                                                      |                   |       |                              |       |                   |       |                              |      
|Other(8)(9)(11)                       |                                                                      |                   |       |                              |       |                   |       |                              |      
|                                      | Resolute Forest Products Inc. ("Resolute")                           |                   | 30.5% |                              | 507.7 |                   | 353.7 |                              | 15.7 
|                                      | Arbor Memorial Services Inc. ("Arbor Memorial")                      |                   | 41.8% |                              | 78.4  |                   | 54.8  |                              | 9.7  
|                                      | Partnerships, trusts and other(5)(6)(10)                             |                   |      |                              | 159.9 |                   | 160.6 |                              | 8.1  
|                                      | MEGA Brands Inc. ("MEGA Brands")(3)                                  |                   |      |                              |      |                   |      |                              |     
|                                      |                                                                      |                   |       |                              |       |                   |       |                              |      
|                                      |                                                                      |                   |       | 746.0                        |       | 569.1             |       | 33.5                         |      
|                                      |                                                                      |                   |       |                              |       |                   |       |                              |      
|                                      |                                                                      |                   |       | 1,397.2                      |       | 1,178.1           |       | 65.9                         |      
|                                      |                                                                      |                   |       |                              |       |                   |       |                              |      
|Investments in associates             |                                                                      |                   |       | 2,070.5                      |       | 1,617.7           |       | 105.7                        |      
|                                      |                                                                      |                   |       |                              |       |                   |       |                              |      

57

---





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

|
|

2014

2013Balance  January 1

1,432.5

1,355.3Share of pre-tax comprehensive income (loss) of associates:Share of profit of associates

105.7

96.7Share of other comprehensive loss, excluding gains (losses) on defined benefit plans

(67.5
)
(15.3
)Share of gains (losses) on defined benefit plans

(50.8
)
12.5(12.6
)
93.9Dividends received

(29.1
)
(9.1
)Acquisitions, divestitures and net changes in capitalization

309.4

(8.4
)Change in status from associate to subsidiary (note 23)

(61.5
)
Foreign exchange effect and other

(21.0
)
0.8Balance  December 31

1,617.7

1,432.5


58

---



The company's strategic investment of $97.5 at December 31, 2014 (December 31, 2013  $108.6) in 15.0% of Alltrust Insurance
Company of China Ltd. ("Alltrust") is classified as at FVTPL within common stocks on the consolidated balance sheet.

7.    Short Sales and Derivatives

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

|                                   |                                                    | December 31, 2014 |         | December 31, 2013
|---------------------------------- | -------------------------------------------------- | ----------------- | ------- | -----------------
|
|
|
|Equity derivatives:                |                                                    |                   |         |                  
|                                   | Equity index total return swaps  short positions |                   | 4,891.8 |                  
|                                   | Equity total return swaps  short positions        |                   |        |                  
|                                   | Equity total return swaps  long positions         |                   |        |                  
|                                   | Equity call options                                |                   |        |                  
|                                   | Warrants                                           |                   | 15.6    |                  
|CPI-linked derivative contracts    |                                                    | 655.4             |         | 111,797.9        
|Foreign exchange forward contracts |                                                    |                  |         |                 
|Other derivative contracts         |                                                    |                  |         |                 
|                                   |                                                    |                   |         |                  
|Total                              |                                                    |                   |         |                  
|                                   |                                                    |                   |         |                  

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

Equity contracts

The company has economically hedged its equity and equity-related holdings (comprised of common stocks, convertible preferred stocks, convertible bonds, non-insurance
investments in associates and equity-related derivatives) against a potential decline in equity markets by way of short positions effected through equity and equity index total return swaps, including
short positions in certain equity indexes and individual equities as set out in the table below. The company's equity hedges are structured to provide a return which is inverse to changes in the fair
values of the equity indexes and certain individual equities. At December 31, 2014 equity hedges with a notional amount of $6,856.9 (December 31,
2013  $6,327.4) represented 89.6% (December 31, 2013  98.2%) of the company's equity and equity-related holdings of
$7,651.7 (December 31, 2013  $6,442.6). The decrease in the hedge ratio resulted from appreciation and net purchases of equity and equity-related
holdings, which exceeded the performance of the equity hedges and net purchases of equity hedges, during the year. During 2014 the company's equity and equity-related holdings after equity
hedges produced net gains of $347.4 (2013  net losses of $536.9).

During
2014 the company paid net cash of $377.9 (2013  $1,956.2) in connection with the reset provisions of its short equity and equity index total return swaps
(excluding the impact of collateral requirements). In the future, the company may manage its net exposure to its equity and equity-related holdings by adjusting the notional amounts of its equity
hedges upwards or downwards. Refer to note 24 for a tabular analysis followed by a discussion of the company's hedges of equity price risk and the related basis risk.

|                     |  | December 31, 2014 |  | December 31, 2013
|-------------------- |  | ----------------- |  | -----------------
|
|Russell 2000         |  | 37,424,319        |  | 2,477.2          
|S&P/TSX 60           |  | 13,044,000        |  | 206.1            
|Other equity indices |  |                  |  | 140.0            
|Individual equities  |  |                  |  | 1,701.9          

59

---



As
at December 31, 2014 the company had entered into long equity total return swaps on individual equities for investment purposes with an original notional amount of $243.5
(December 31, 2013  $267.8). During 2014 the company received net cash of $70.3 (2013  $273.0) in connection with
the reset provisions of its long equity total return swaps (excluding the impact of collateral requirements).

At
December 31, 2014 the fair value of the collateral deposited for the benefit of derivative counterparties included in holding company cash and investments, or in assets pledged for short
sale and derivative obligations, was $969.7 (December 31, 2013  $927.3), comprised of collateral of $788.6 (December 31,
2013  $723.2) required to be deposited to enter into such derivative contracts (principally related to total return swaps) and $181.1 (December 31,
2013  $204.1) securing amounts owed to counterparties to the company's derivative contracts arising in respect of changes in the fair values of those derivative
contracts since the most recent reset date.

Equity
warrants were acquired in conjunction with the company's investment in debt securities of various Canadian companies. At December 31, 2014 the warrants have expiration dates ranging from
1 year to 8 years (December 31, 2013  2 years to 9 years).

CPI-linked derivative contracts

The company has purchased derivative contracts referenced to consumer price indexes ("CPI") in the geographic regions in which it operates which serve as an economic hedge
against the potential adverse financial impact on the company of decreasing price levels. At December 31, 2014 these contracts have a remaining weighted average life of 7.4 years
(December 31, 2013  7.5 years) and a notional amount and fair value as shown in the table below. In the event of a sale, expiration or early
settlement of any of these contracts, the company would receive the fair value of that contract on the date of the transaction. The company's maximum potential loss on any contract is limited to the
original cost of that contract. The following table summarizes the notional amounts and weighted average strike prices of CPI indexes underlying the company's CPI-linked derivative contracts:

|               |  |      |  | December 31, 2014 |  | December 31, 2013
|-------------- |  | ---- |  | ----------------- |  | -----------------
|
|
|United States  |  | 0.0% |  | 46,225.0          |  | 46,225.0         
|United States  |  | 0.5% |  | 12,600.0          |  | 12,600.0         
|United Kingdom |  | 0.0% |  | 3,300.0           |  | 5,145.6          
|European Union |  | 0.0% |  | 36,775.0          |  | 44,499.7         
|France         |  | 0.0% |  | 2,750.0           |  | 3,327.6          
|               |  |      |  |                   |  |                  
|               |  |      |  |                   |  | 111,797.9        
|               |  |      |  |                   |  |                  

During
2014 the company purchased $35,954.2 (2013  $32,327.7) notional amount of CPI-linked derivative contracts at a cost of $120.6
(2013  $99.8). Additional premiums of $24.0 were paid in 2013 to increase the strike price of certain CPI-linked derivative contracts (primarily the
U.S. CPI-linked derivatives). The company's CPI-linked derivative contracts produced net unrealized gains of $17.7 in 2014 (2013  net unrealized losses
of $126.9).

Foreign exchange forward contracts

Long and short foreign exchange forward contracts primarily denominated in the euro, the British pound sterling and the Canadian dollar are used to manage certain foreign
currency exposures arising from foreign currency denominated transactions. The contracts have an average term to maturity of less than one year and may be renewed at market rates.

60

---



Counterparty risk

The company endeavours to limit counterparty risk through the terms of agreements negotiated with the counterparties to its derivative contracts. The fair value of the
collateral deposited for the benefit of the company at December 31, 2014 consisted of cash of $27.8 and government securities of $164.5 (December 31,
2013  $25.3 and $25.1 respectively). The company has recognized the cash collateral within subsidiary cash and short term investments and recognized a
corresponding liability within accounts payable and accrued liabilities. The company had not exercised its right to sell or repledge collateral at December 31,
2014. The company's exposure to counterparty risk and the manner in which the company manages counterparty risk are discussed further in note 24.

Hedge of net investment in Canadian subsidiaries

The company has designated the carrying value of Cdn$1,525.0 principal amount of its Canadian dollar denominated unsecured senior notes with a fair value of $1,488.7
(December 31, 2013  principal amount of Cdn$1,525.0 with a fair value of $1,544.4) as a hedge of its net investment in its Canadian subsidiaries for
financial reporting purposes. In 2014 the company recognized pre-tax gains of $118.7 (2013  $96.9) related to foreign currency movements on the unsecured senior
notes in change in gains on hedge of net investment in Canadian subsidiaries in the consolidated statement of comprehensive income.

8.    Insurance Contract Liabilities

|                                                  |  | December 31, 2014 |  | December 31, 2013
|------------------------------------------------- |  | ----------------- |  | -----------------
|
|Provision for unearned premiums                   |  | 2,689.6           |  | 395.7            
|Provision for losses and loss adjustment expenses |  | 17,749.1          |  | 3,355.7          
|                                                  |  |                   |  |                  
|Total insurance contract liabilities              |  | 20,438.7          |  | 3,751.4          
|                                                  |  |                   |  |                  
|Current                                           |  | 6,985.2           |  | 1,894.0          
|Non-current                                       |  | 13,453.5          |  | 1,857.4          
|                                                  |  |                   |  |                  
|                                                  |  | 20,438.7          |  | 3,751.4          
|                                                  |  |                   |  |                  

At December 31, 2014 the company's net loss reserves of $14,393.4 (December 31, 2013  $14,999.5) were comprised of case
reserves of $7,285.0 and IBNR of $7,108.4 respectively (December 31, 2013  $7,811.3 and $7,188.2 respectively).

Provision for unearned premiums

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

2014

2013Provision for unearned premiums  January 1

2,680.9

2,727.4Gross premiums written

7,459.9

7,227.1Less: premiums earned

(7,358.2
)
(7,294.0
)Acquisitions of subsidiaries

2.6

83.2Foreign exchange effect and other

(95.6
)
(62.8
)Provision for unearned premiums  December 31

2,689.6

2,680.9


61

---



Provision for losses and loss adjustment expenses

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

2014

2013Provision for losses and loss adjustment expenses  January 1

19,212.8

19,648.8Decrease in estimated losses and expenses for claims occurring in the prior years

(473.9
)
(470.3
)Losses and expenses for claims occurring in the current year

4,901.3

5,085.9Paid on claims occurring during:the current year

(1,201.4
)
(1,212.8
)the prior years

(4,081.0
)
(4,358.7
)Acquisitions of subsidiaries

0.4

690.3Foreign exchange effect and other

(609.1
)
(170.4
)Provision for losses and loss adjustment expenses  December 31

17,749.1

19,212.8


Development of insurance losses, gross

The development of insurance liabilities provides a measure of the company's ability to estimate the ultimate value of claims. The loss development table which follows shows the
provision for losses and loss adjustment expenses at the end of each calendar year, the cumulative payments made in respect of those reserves in subsequent years and the re-estimated amount of each
calendar years' provision for losses and loss adjustment expenses as at December 31, 2014.

|                                                  |                                        | Calendar year
|------------------------------------------------- | -------------------------------------- | -------------
|
|Provision for losses and loss adjustment expenses |                                        | 14,843.2     
|Less: CTR Life(1)                                 |                                        | 21.5         
|                                                  |                                        |              
|                                                  |                                        | 14,821.7     
|Cumulative payments as of:                        |                                        |              
|One year later                                    |                                        | 3,167.8      
|Two years later                                   |                                        | 5,130.8      
|Three years later                                 |                                        | 6,784.9      
|Four years later                                  |                                        | 8,124.6      
|Five years later                                  |                                        | 9,079.0      
|Six years later                                   |                                        | 9,730.6      
|Seven years later                                 |                                        | 10,458.1     
|Reserves re-estimated as of:                      |                                        |              
|One year later                                    |                                        | 14,420.4     
|Two years later                                   |                                        | 14,493.8     
|Three years later                                 |                                        | 14,579.9     
|Four years later                                  |                                        | 14,679.5     
|Five years later                                  |                                        | 14,908.6     
|Six years later                                   |                                        | 14,947.2     
|Seven years later                                 |                                        | 14,964.2     
|Favourable (unfavourable) development             |                                        | (142.5       
|Comprised of  favourable (unfavourable):         |                                        |              
|                                                  | Effect of foreign currency translation |              
|                                                  | Loss reserve development               |              
|                                                  |                                        |              
|                                                  |                                        | (142.5       
|                                                  |                                        |              

62

---



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

Loss
reserve development in the table above excludes the loss reserve development of a subsidiary in the year it is acquired whereas the consolidated statement of earnings includes the loss reserve
development of a subsidiary from its acquisition date.

Favourable
loss reserve development in calendar year 2014 of $473.9 in the table preceding this paragraph was principally comprised of favourable loss emergence on the more recent accident years,
partially offset by adverse development primarily relating to asbestos and other latent reserves.

Development of losses and loss adjustment expenses for asbestos

A number of the company's subsidiaries wrote general insurance policies and reinsurance prior to their acquisition by the company under which policyholders continue to present
asbestos-related injury claims. The vast majority of these claims are presented under policies written many years ago and reside primarily within the runoff group.

There
is a great deal of uncertainty surrounding these types of claims, which impacts the ability of insurers and reinsurers to estimate the ultimate amount of unpaid claims and related settlement
expenses. The majority of these claims differ from most other types of claims because there is inconsistent precedent, if any at all, to determine what, if any, coverage exists or which, if any,
policy years and insurers/reinsurers may be liable. These uncertainties are exacerbated by judicial and legislative interpretations of coverage that in some cases have eroded the clear and express
intent of the parties to the insurance contracts, and in others have expanded theories of liability.

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

|                            |                                              | 2014    |        | 2013 
|--------------------------- | -------------------------------------------- | ------- | ------ | -----
|
|Asbestos                    |                                              |         |        |      
|Balance  beginning of year |                                              | 1,353.1 |        | 981.8
|                            | Losses and loss adjustment expenses incurred |         | 49.3   |      
|                            | Losses and loss adjustment expenses paid     |         | (178.1 | )    
|                            |                                              |         |        |      
|Balance  end of year       |                                              | 1,224.3 |        | 896.7
|                            |                                              |         |        |      

Fair Value

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

|                            |  | December 31, 2014 |  | December 31, 2013
|--------------------------- |  | ----------------- |  | -----------------
|
|Insurance contracts         |  | 20,383.6          |  | 20,438.7         
|Ceded reinsurance contracts |  | 3,641.4           |  | 3,751.4          

The fair value of insurance contracts is comprised of the fair value of unpaid claim liabilities and the fair value of the unearned premiums. The fair value of ceded reinsurance
contracts is comprised of the fair value of reinsurers' share of unpaid claim liabilities and the unearned premium. Both reflect the time value of money whereas the carrying values (including the
reinsurers' share thereof) do not reflect discounting. The calculation of the fair value of the unearned premium includes acquisition expenses to reflect the deferral of these expenses at the
inception of the insurance contract. The estimated value of insurance and ceded reinsurance contracts is determined by projecting the expected future cash flows of the contracts, selecting the
appropriate interest rates, and applying the resulting discount factors to expected future cash flows. The difference between the sum of the undiscounted expected future cash flows and discounted
future cash flows represent the time value of money. A margin for risk and uncertainty is added to the

63

---



discounted
cash flows to reflect the volatility of the lines of business written, quantity of reinsurance purchased, credit quality of reinsurers and a risk margin for future changes in
interest rates.

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

|                        |  | December 31, 2014 |  | December 31, 2013
|----------------------- |  | ----------------- |  | -----------------
|
|100 basis point rise    |  | 19,808.9          |  | 3,552.6          
|100 basis point decline |  | 21,004.5          |  | 3,737.0          

9.    Reinsurance

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

|                                                  |  | December 31, 2014 |  | December 31, 2013
|------------------------------------------------- |  | ----------------- |  | -----------------
|
|Provision for losses and loss adjustment expenses |  | 3,410.0           |  | (54.3            
|Reinsurers' share of paid losses                  |  | 380.7             |  | (150.0           
|Provision for unearned premiums                   |  | 395.7             |  |                 
|                                                  |  |                   |  |                  
|                                                  |  | 4,186.4           |  | (204.3           
|                                                  |  |                   |  |                  
|Current                                           |  |                   |  |                  
|Non-current                                       |  |                   |  |                  
|                                                  |  |                   |  |                  
|                                                  |  |                   |  |                  
|                                                  |  |                   |  |                  

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

The
majority of reinsurance contracts purchased by the company provide coverage for a one year term and are negotiated annually. The ability of the company to obtain reinsurance on terms and prices
consistent with historical results reflects, among other factors, recent loss experience of the company and of the industry in general. Currently there exists excess capital within the reinsurance
market due to favourable operating results of reinsurers and alternative forms of reinsurance capacity entering the market. As a result, the market has become very competitive with pricing remaining
flat and in some cases decreasing. Further compounding these effects has been the relatively benign level of catastrophe losses for reinsurers in the United States over the last number of
years. The company will remain opportunistic in its use of reinsurance, balancing capital requirements and the cost of reinsurance.

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

The
company makes specific provisions against reinsurance recoverables from reinsurers considered to be in financial difficulty. In addition, the company records an allowance based upon its analysis
of historical recoveries, the level of allowance already in place and management's judgment on future collectability.

64

---



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

|                            |                                                                 | 2014  |         
|--------------------------- | --------------------------------------------------------------- | ----- | --------
|
|Balance  January 1, 2014   |                                                                 | 518.6 |         
|                            | Reinsurers' share of losses paid to insureds                    |       | 1,380.2 
|                            | Reinsurance recoveries received                                 |       | (1,507.6
|                            | Reinsurers' share of losses or premiums earned                  |       |        
|                            | Premiums ceded to reinsurers                                    |       |        
|                            | Change in provision, recovery or write-off of impaired balances |       | (3.0    
|                            | Acquisitions of subsidiaries                                    |       |        
|                            | Foreign exchange effect and other                               |       | (7.5    
|                            |                                                                 |       |         
|Balance  December 31, 2014 |                                                                 | 380.7 |         
|                            |                                                                 |       |         

|
|

|                            |                                                                 | 2013  |         
|--------------------------- | --------------------------------------------------------------- | ----- | --------
|
|Balance  January 1, 2013   |                                                                 | 469.6 |         
|                            | Reinsurers' share of losses paid to insureds                    |       | 1,444.1 
|                            | Reinsurance recoveries received                                 |       | (1,421.4
|                            | Reinsurers' share of losses or premiums earned                  |       |        
|                            | Premiums ceded to reinsurers                                    |       |        
|                            | Change in provision, recovery or write-off of impaired balances |       | 5.6     
|                            | Acquisitions of subsidiaries                                    |       | 37.6    
|                            | Foreign exchange effect and other                               |       | (16.9   
|                            |                                                                 |       |         
|Balance  December 31, 2013 |                                                                 | 518.6 |         
|                            |                                                                 |       |         

Included in commissions, net in the consolidated statement of earnings is commission income earned on premiums ceded to reinsurers in 2014 of $261.0
(2013  $243.7).

On
August 18, 2014 Runoff commuted a $312.7 reinsurance recoverable from Brit Group for proceeds of $310.2, comprised of cash and investments.

On
March 29, 2013 TIG Insurance commuted a recoverable from a reinsurer with a carrying value of $85.4 for total consideration of $118.5 (principally cash consideration of $115.8). The gain of
$33.1 on the commutation is recorded in ceded losses on claims in the consolidated statement of earnings.

65

---



10.  Insurance Contract Receivables

Insurance contract receivables were comprised as follows:

|                                     |  | December 31,
2014 |   | December 31,
2013 |  
|------------------------------------ |  | ----------------- | - | ----------------- | -
|Insurance premiums receivable        |  | 1,262.7           |   | 1,192.1           |  
|Reinsurance premiums receivable      |  | 427.0             |   | 527.4             |  
|Funds withheld receivable            |  | 223.3             |   | 228.3             |  
|Other                                |  | 50.6              |   | 101.3             |  
|Provision for uncollectible balances |  | (31.9             | ) | (32.1             | )
|                                     |  |                   |   |                   |  
|                                     |  | 1,931.7           |   | 2,017.0           |  
|                                     |  |                   |   |                   |  

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

|                      |                                   | Insurance
premiums receivable |          | Reinsurance
premiums receivable |         
|--------------------- | --------------------------------- | ----------------------------- | -------- | ------------------------------- | --------
|
|Balance  January 1   |                                   | 1,192.1                       |          | 1,151.1                         |         
|                      | Gross premiums written            |                               | 5,322.9  |                                 | 5,078.9 
|                      | Premiums collected                |                               | (4,825.5 | )                               | (4,677.1
|                      | Impairments                       |                               | (1.0     | )                               | (0.1    
|                      | Amounts due to brokers and agents |                               | (387.2   | )                               | (340.6  
|                      | Acquisitions of subsidiaries      |                               | 0.2      |                                 | 21.5    
|                      | Foreign exchange effect and other |                               | (38.8    | )                               | (41.6   
|                      |                                   |                               |          |                                 |         
|Balance  December 31 |                                   | 1,262.7                       |          | 1,192.1                         |         
|                      |                                   |                               |          |                                 |         

11.  Deferred Premium Acquisition Costs

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

|                      |                                   | 2014  |          | 2013  |         
|--------------------- | --------------------------------- | ----- | -------- | ----- | --------
|Balance  January 1   |                                   | 462.4 |          | 463.1 |         
|                      | Acquisition costs deferred        |       | 1,360.0  |       | 1,305.3 
|                      | Amortization of deferred costs    |       | (1,312.6 | )     | (1,300.2
|                      | Foreign exchange effect and other |       | (12.2    | )     | (5.8    
|                      |                                   |       |          |       |         
|Balance  December 31 |                                   | 497.6 |          | 462.4 |         
|                      |                                   |       |          |       |         

66

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12.  Goodwill and Intangible Assets

Goodwill and intangible assets were comprised as follows:

|                            |                                                  | Goodwill |       | Intangible assets
subject to
amortization |       | Intangible assets
not subject to
amortization |       | Total |     
|--------------------------- | ------------------------------------------------ | -------- | ----- | ----------------------------------------- | ----- | --------------------------------------------- | ----- | ----- | ----
|
|Balance  January 1, 2014   |                                                  | 851.3    |       | 243.0                                     |       | 59.2                                          |       | 35.0  |     
|                            | Additions                                        |          | 220.9 |                                           | 55.3  |                                               | 33.3  |       | 15.9
|                            | Disposals                                        |          |      |                                           |      |                                               | (0.5  | )     | (0.5
|                            | Amortization and impairment of intangible assets |          |      |                                           | (19.3 | )                                             | (22.1 | )     | (7.7
|                            | Foreign exchange effect                          |          | (23.5 | )                                         | (5.3  | )                                             | (0.8  | )     |    
|                            |                                                  |          |       |                                           |       |                                               |       |       |     
|Balance  December 31, 2014 |                                                  | 1,048.7  |       | 273.7                                     |       | 69.1                                          |       | 42.7  |     
|                            |                                                  |          |       |                                           |       |                                               |       |       |     
|Gross carrying amount       |                                                  | 1,048.7  |       | 362.1                                     |       | 192.9                                         |       | 56.8  |     
|Accumulated amortization    |                                                  |         |       | (88.4                                     | )     | (115.2                                        | )     | (14.1 | )   
|Accumulated impairment      |                                                  |         |       |                                          |       | (8.6                                          | )     |      |     
|                            |                                                  |          |       |                                           |       |                                               |       |       |     
|                            |                                                  | 1,048.7  |       | 273.7                                     |       | 69.1                                          |       | 42.7  |     
|                            |                                                  |          |       |                                           |       |                                               |       |       |     

|
|

|                            |                                                  | Goodwill |       | Intangible assets
subject to
amortization |       | Intangible assets
not subject to
amortization |       | Total |     
|--------------------------- | ------------------------------------------------ | -------- | ----- | ----------------------------------------- | ----- | --------------------------------------------- | ----- | ----- | ----
|
|Balance  January 1, 2013   |                                                  | 791.1    |       | 254.5                                     |       | 82.5                                          |       | 4.2   |     
|                            | Additions                                        |          | 83.2  |                                           | 14.2  |                                               | 27.2  |       | 32.1
|                            | Disposals                                        |          |      |                                           |      |                                               | (0.9  | )     |    
|                            | Amortization and impairment of intangible assets |          |      |                                           | (19.6 | )                                             | (48.5 | )     | (1.3
|                            | Foreign exchange effect                          |          | (23.0 | )                                         | (6.1  | )                                             | (1.1  | )     |    
|                            |                                                  |          |       |                                           |       |                                               |       |       |     
|Balance  December 31, 2013 |                                                  | 851.3    |       | 243.0                                     |       | 59.2                                          |       | 35.0  |     
|                            |                                                  |          |       |                                           |       |                                               |       |       |     
|Gross carrying amount       |                                                  | 851.3    |       | 314.9                                     |       | 161.8                                         |       | 41.6  |     
|Accumulated amortization    |                                                  |         |       | (71.9                                     | )     | (94.0                                         | )     | (6.6  | )   
|Accumulated impairment      |                                                  |         |       |                                          |       | (8.6                                          | )     |      |     
|                            |                                                  |          |       |                                           |       |                                               |       |       |     
|                            |                                                  | 851.3    |       | 243.0                                     |       | 59.2                                          |       | 35.0  |     
|                            |                                                  |          |       |                                           |       |                                               |       |       |     

67

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

|                  |  | December 31, 2014 |  | December 31, 2013
|----------------- |  | ----------------- |  | -----------------
|
|Zenith National   |  | 317.6             |  | 136.3            
|Crum & Forster    |  | 153.1             |  | 141.7            
|OdysseyRe         |  | 116.0             |  | 66.7             
|Northbridge       |  | 102.3             |  | 74.6             
|U.S. Runoff       |  | 34.4              |  | 9.0              
|Thomas Cook India |  | 77.0              |  | 44.2             
|Sterling Resorts  |  | 66.3              |  | 0.4              
|The Keg           |  | 62.6              |  |                 
|IKYA              |  | 31.2              |  | 20.6             
|All other         |  | 88.2              |  | 16.1             
|                  |  |                   |  |                  
|                  |  | 1,048.7           |  | 509.6            
|                  |  |                   |  |                  

At December 31, 2014 consolidated goodwill of $1,048.7 and intangible assets of $509.6 (principally related to the value of customer and broker relationships and brand
names) was comprised primarily of amounts arising on the acquisitions of Pethealth, Sterling Resorts and The Keg during 2014, American Safety, Hartville and IKYA during 2013, Thomas Cook India during
2012, First Mercury, Pacific Insurance and Sporting Life during 2011, Zenith National during 2010 and the privatizations of Northbridge and OdysseyRe during 2009. Impairment tests for goodwill and
intangible assets not subject to amortization were completed in 2014 and it was concluded that no impairment had occurred.

When
testing for impairment, the recoverable amount of a CGU is calculated as the higher of value in use and fair value less costs of disposal. The recoverable amount of each CGU was based on fair
value less costs of disposal, determined on the basis of market prices, where available, or discounted cash flow models. Cash flow projections covering a five year period were derived from financial
budgets approved by management. Cash flows beyond the five year period were extrapolated using estimated growth rates which do not exceed the long term average past growth rate for the business in
which each CGU operates.

A
number of other assumptions and estimates including forecasts of operating cash flows, premium volumes, expenses and working capital requirements were required to be incorporated into the discounted
cash flow models. Forecasts of future cash flows are based on the best estimates of future premiums or revenue, operating expenses using historical trends, general geographical market conditions,
industry trends and forecasts and other available information. These assumptions are subject to review by management. The cash flow forecasts are adjusted by applying appropriate discount rates within
a range of 8.4% to 12.9% for insurance business and 10.5% to 18.7% for non-insurance business. The weighted average growth rate used to extrapolate cash flows beyond five years was 3.0%. A reasonably
possible change in any key assumption is not expected to cause the carrying value of any CGU to exceed its recoverable amount.

68

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13.  Other Assets

Other assets were comprised as follows:

|                                                    |  | December 31, 2014 |  | December 31, 2013
|--------------------------------------------------- |  | ----------------- |  | -----------------
|
|Premises and equipment                              |  | 123.7             |  | 327.9            
|Accrued interest and dividends                      |  | 128.5             |  | 0.1              
|Income taxes refundable                             |  | 40.7              |  | 10.4             
|Receivables for securities sold but not yet settled |  | 16.9              |  |                 
|Deferred compensation plans                         |  | 48.4              |  |                 
|Pension assets (note 21)                            |  | 33.1              |  |                 
|Prepaid expenses                                    |  | 37.9              |  | 10.2             
|Other reporting segment sales receivables           |  |                  |  | 185.5            
|Other reporting segment inventories                 |  |                  |  | 129.0            
|Other                                               |  | 172.0             |  | 83.3             
|                                                    |  |                   |  |                  
|                                                    |  | 601.2             |  | 746.4            
|                                                    |  |                   |  |                  
|Current                                             |  | 330.6             |  | 379.0            
|Non-current                                         |  | 270.6             |  | 367.4            
|                                                    |  |                   |  |                  
|                                                    |  | 601.2             |  | 746.4            
|                                                    |  |                   |  |                  

14.  Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities were comprised as follows:

|                                                              |  | December 31, 2014 |  | December 31, 2013
|------------------------------------------------------------- |  | ----------------- |  | -----------------
|
|Payable to reinsurers                                         |  | 391.6             |  |                 
|Salaries and employee benefit liabilities                     |  | 173.0             |  | 31.4             
|Pension and post retirement liabilities (note 21)             |  | 175.2             |  | 23.4             
|Amounts withheld and accrued taxes                            |  | 87.5              |  | 38.2             
|Ceded deferred premium acquisition costs                      |  | 91.3              |  |                 
|Accrued commissions                                           |  | 69.0              |  | 0.3              
|Accrued premium taxes                                         |  | 55.9              |  |                 
|Amounts payable to agents and brokers                         |  | 16.7              |  |                 
|Accrued interest expense                                      |  | 40.6              |  | 0.7              
|Accrued legal and professional fees                           |  | 24.3              |  | 3.0              
|Accounts payable for securities purchased but not yet settled |  | 14.8              |  |                 
|Deferred gift card revenue                                    |  |                  |  | 64.0             
|Other reporting segment payables related to cost of sales     |  |                  |  | 177.0            
|Administrative and other                                      |  | 409.7             |  | 141.5            
|                                                              |  |                   |  |                  
|                                                              |  | 1,549.6           |  | 479.5            
|                                                              |  |                   |  |                  
|Current                                                       |  | 969.9             |  | 347.4            
|Non-current                                                   |  | 579.7             |  | 132.1            
|                                                              |  |                   |  |                  
|                                                              |  | 1,549.6           |  | 479.5            
|                                                              |  |                   |  |                  

69

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15.  Subsidiary Indebtedness, Long Term Debt and Credit Facilities

|                                                                                     |                                                   | December 31, 2014 |       | December 31, 2013
|------------------------------------------------------------------------------------ | ------------------------------------------------- | ----------------- | ----- | -----------------
|
|Subsidiary indebtedness  non-insurance companies(c)                                 |                                                   |                   |       |                  
|Ridley secured revolving facility at floating rate                                   |                                                   | 2.4               |       | 2.4              
|Thomas Cook India short term loans and bank overdraft primarily at fixed rates       |                                                   | 4.6               |       | 4.6              
|IKYA credit facilities and bank overdraft at floating rates                          |                                                   | 27.6              |       | 27.6             
|Other loans and bank overdraft primarily at floating rates                           |                                                   | 3.0               |       | 3.0              
|                                                                                     |                                                   |                   |       |                  
|                                                                                     |                                                   | 37.6              |       | 37.6             
|                                                                                     |                                                   |                   |       |                  
|Long term debt  non-insurance companies(c)                                          |                                                   |                   |       |                  
|The Keg Cdn$57.0 million note at 7.5% due May 31, 2042(1)                            |                                                   | 49.2              |       | 49.2             
|The Keg term loan at floating rate due July 1, 2016(1)                               |                                                   | 31.1              |       | 30.7             
|Thomas Cook India debentures (INR 1.0 billion) at 10.52% due April 15, 2018(2)       |                                                   | 15.8              |       | 15.8             
|Other loans                                                                          |                                                   | 3.3               |       | 3.3              
|                                                                                     |                                                   |                   |       |                  
|                                                                                     |                                                   | 99.4              |       | 99.0             
|                                                                                     |                                                   |                   |       |                  
|Long term debt  holding company borrowings                                          |                                                   |                   |       |                  
|Fairfax unsecured notes:                                                             |                                                   |                   |       |                  
|                                                                                     | 8.25% due October 1, 2015(3)                      |                   | 82.4  |                  
|                                                                                     | 7.375% due April 15, 2018(3)                      |                   | 144.2 |                  
|                                                                                     | 7.50% due August 19, 2019 (Cdn$400.0)(4)          |                   | 345.3 |                  
|                                                                                     | 7.25% due June 22, 2020 (Cdn$275.0)(4)            |                   | 237.4 |                  
|                                                                                     | 5.80% due May 15, 2021(5)                         |                   | 500.0 |                  
|                                                                                     | 6.40% due May 25, 2021 (Cdn$400.0)(4)             |                   | 345.3 |                  
|                                                                                     | 5.84% due October 14, 2022 (Cdn$450.0)(2)(4)      |                   | 388.5 |                  
|                                                                                     | 4.875% due August 13, 2024(1)                     |                   | 300.0 |                  
|                                                                                     | 8.30% due April 15, 2026(3)                       |                   | 91.8  |                  
|                                                                                     | 7.75% due July 15, 2037(3)                        |                   | 91.3  |                  
|Trust preferred securities of subsidiaries(1)(6)                                     |                                                   | 2.1               |       | 2.1              
|Purchase consideration payable(7)                                                    |                                                   | 139.7             |       | 139.7            
|                                                                                     |                                                   |                   |       |                  
|                                                                                     |                                                   | 2,668.0           |       | 2,656.5          
|                                                                                     |                                                   |                   |       |                  
|Long term debt  insurance and reinsurance companies                                 |                                                   |                   |       |                  
|OdysseyRe unsecured senior notes:                                                    |                                                   |                   |       |                  
|                                                                                     | 6.875% due May 1, 2015(8)                         |                   | 125.0 |                  
|                                                                                     | Series A, floating rate due March 15, 2021(9)     |                   | 50.0  |                  
|                                                                                     | Series B, floating rate due March 15, 2016(1)(9)  |                   |      |                  
|                                                                                     | Series C, floating rate due December 15, 2021(10) |                   | 40.0  |                  
|First Mercury floating rate trust preferred securities due 2036 and 2037             |                                                   | 41.4              |       | 41.4             
|Zenith National 8.55% redeemable debentures due August 1, 2028                       |                                                   | 38.4              |       | 38.1             
|Advent floating rate subordinated notes due June 3, 2035                             |                                                   | 48.5              |       | 47.1             
|Advent floating rate unsecured senior notes due 2026                                 |                                                   | 46.0              |       | 44.7             
|American Safety floating rate trust preferred securities due December 15, 2035(1)(2) |                                                   |                  |       |                 
|                                                                                     |                                                   |                   |       |                  
|                                                                                     |                                                   | 389.3             |       | 385.9            
|                                                                                     |                                                   |                   |       |                  
|Long term debt                                                                       |                                                   | 3,156.7           |       | 3,141.4          
|                                                                                     |                                                   |                   |       |                  
|Current                                                                              |                                                   | 216.7             |       |                  
|Non-current                                                                          |                                                   | 2,940.0           |       |                  
|                                                                                     |                                                   |                   |       |                  
|                                                                                     |                                                   | 3,156.7           |       |                  
|                                                                                     |                                                   |                   |       |                  

70

---



71

---





Consolidated
interest expense in 2014 of $206.3 (2013  $211.2) was comprised of interest on long term debt and subsidiary indebtedness of $201.2 and $5.1
respectively (2013  $207.9 and $3.3 respectively).

Principal
repayments on long term debt are due as follows:

2015

216.72016

41.12017

134.12018

149.42019

345.3Thereafter

2,270.1


Subsequent to December 31, 2014

On March 3, 2015 the company completed an underwritten public offering of Cdn$350.0 principal amount of 4.95% unsecured senior notes due March 3, 2025 at an issue
price of 99.114 for net proceeds after discount, commissions and expenses of $275.7 (Cdn$343.3). Commissions and expenses of $2.9 (Cdn$3.6) will be included as part of the carrying value of the
debt. The notes are redeemable at the company's option, in whole or in part, at any time at the greater of (a) a specified redemption price based upon the then current yield of a Government of
Canada bond with an equal term to maturity or (b) par. The net proceeds from this offering will form part of the financing for the Brit Offer described in note 23.

On
February 16, 2015, a Canadian chartered bank provided the company with a £1.2 billion commitment for the full amount of the consideration payable pursuant to the Brit
Offer as described in note 23.

72

---



Credit Facilities

On December 18, 2012 Fairfax extended the term of its $300.0 unsecured revolving credit facility (the "credit facility") with a syndicate of lenders to
December 31, 2016. As at December 31, 2014 no amounts had been drawn on the credit facility.

16.  Total Equity

Equity attributable to shareholders of Fairfax

Authorized capital

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

Issued capital

Issued capital at December 31, 2014 included 1,548,000 (December 31, 2013  1,548,000) multiple voting shares and 20,865,645
(December 31, 2013  20,865,653) subordinate voting shares without par value prior to deducting 438,247 (December 31,
2013  414,421) subordinate voting shares reserved in treasury for share-based payment awards. The multiple voting shares are not publicly traded.

Subsequent to December 31, 2014

On March 3, 2015 the company completed an underwritten public offering of 1.15 million subordinate voting shares at a price of Cdn$650.00 per share, resulting in
net proceeds of $575.9 (Cdn$717.1) after commissions and expenses of $24.4 (Cdn$30.4).

On
March 3, 2015 the company completed an underwritten public offering of 9,200,000 cumulative five-year reset preferred shares, Series M for Cdn$25.00 per share, resulting in net
proceeds of $179.0 (Cdn$222.9) after commissions and expenses of $5.7 (Cdn$7.1). Series M preferred shares are redeemable by the company on March 31, 2020 and on each subsequent
five-year anniversary date at Cdn$25.00 per share. Holders of the unredeemed Series M preferred shares will have the right, at their option, to convert their shares into floating rate
cumulative preferred shares Series N on March 31, 2020 and on each subsequent five-year anniversary date. The Series N preferred shares (of which none are currently issued)
will have a dividend rate, calculated quarterly, equal to the three-month Government of Canada treasury bill yield plus 3.98%.

The
net proceeds from the above offerings will form part of the financing for the Brit Offer described in note 23.

Common stock

The number of shares outstanding was as follows:

|                                                                                              |                              | 2014       |         | 2013       |          
|--------------------------------------------------------------------------------------------- | ---------------------------- | ---------- | ------- | ---------- | ---------
|Subordinate voting shares  January 1                                                         |                              | 20,451,232 |         | 19,496,641 |          
|                                                                                              | Issuances during the year    |            |        |            | 1,000,000
|                                                                                              | Purchases for cancellation   |            | (8      | )          | (36      
|                                                                                              | Net treasury shares acquired |            | (23,826 | )          | (45,373  
|                                                                                              |                              |            |         |            |          
|Subordinate voting shares  December 31                                                       |                              | 20,427,398 |         | 20,451,232 |          
|Multiple voting shares  beginning and end of year                                            |                              | 1,548,000  |         | 1,548,000  |          
|Interest in shares held through ownership interest in shareholder  beginning and end of year |                              | (799,230   | )       | (799,230   | )        
|                                                                                              |                              |            |         |            |          
|Common stock effectively outstanding  December 31                                            |                              | 21,176,168 |         | 21,200,002 |          
|                                                                                              |                              |            |         |            |          

During 2014 and 2013 the company did not repurchase for cancellation any subordinate voting shares under the terms of normal course issuer bids. During 2014 the company
repurchased 8 shares (2013  36) for cancellation from former employees. The company also acquires its own subordinate voting shares on the open market for
its share-based payment awards. During 2014 the company repurchased for treasury 23,826 subordinate voting shares (2013  45,373) for use in its
share-based payment awards.

73

---



On
November 15, 2013 the company issued 1 million subordinate voting shares at a price of Cdn$431.00 per share, resulting in net proceeds of $399.5 (Cdn$417.1) after commissions and
expenses of $13.3 (Cdn$13.9).

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

Date of declaration

Date of record

Date of payment

Dividend
per share

Total cash
paymentJanuary 5, 2015

January 20, 2015

January 27, 2015

$
10.00

$
216.1January 3, 2014

January 21, 2014

January 28, 2014

$
10.00

$
215.7January 4, 2013

January 22, 2013

January 29, 2013

$
10.00

$
205.5


Preferred Stock

The number of preferred shares outstanding was as follows:

|                                          |             | Series C   |            | Series D  |           | Series E  |         | Series G   |   | Series I   |   | Series K  |   | Total      |        
|----------------------------------------- | ----------- | ---------- | ---------- | --------- | --------- | --------- | ------- | ---------- | - | ---------- | - | --------- | - | ---------- | -------
|Balance  January 1 and December 31, 2013 |             | 10,000,000 |            |          |           | 8,000,000 |         | 10,000,000 |   | 12,000,000 |   | 9,500,000 |   | 49,500,000 |        
|                                          | Repurchases |            |           |           |          |           | (75,326 | )          |  |            |  |           |  |            | (75,326
|                                          | Conversions |            | (3,983,616 | )         | 3,983,616 |           |        |            |  |            |  |           |  |            |       
|                                          |             |            |            |           |           |           |         |            |   |            |   |           |   |            |        
|Balance  December 31, 2014               |             | 6,016,384  |            | 3,983,616 |           | 7,924,674 |         | 10,000,000 |   | 12,000,000 |   | 9,500,000 |   | 49,424,674 |        
|                                          |             |            |            |           |           |           |         |            |   |            |   |           |   |            |        

The carrying value of preferred shares outstanding was as follows:

|                                          |             | Series C |       | Series D |      | Series E |      | Series G |   | Series I |   | Series K |   | Total   |     
|----------------------------------------- | ----------- | -------- | ----- | -------- | ---- | -------- | ---- | -------- | - | -------- | - | -------- | - | ------- | ----
|Balance  January 1 and December 31, 2013 |             | 227.2    |       |         |      | 183.1    |      | 235.9    |   | 288.5    |   | 231.7    |   | 1,166.4 |     
|                                          | Repurchases |          |      |          |     |          | (1.7 | )        |  |          |  |          |  |         | (1.7
|                                          | Conversions |          | (90.5 | )        | 90.5 |          |     |          |  |          |  |          |  |         |    
|                                          |             |          |       |          |      |          |      |          |   |          |   |          |   |         |     
|Balance  December 31, 2014               |             | 136.7    |       | 90.5     |      | 181.4    |      | 235.9    |   | 288.5    |   | 231.7    |   | 1,164.7 |     
|                                          |             |          |       |          |      |          |      |          |   |          |   |          |   |         |     

On December 31, 2014 holders of Series C preferred shares converted 3,983,616 shares into Series D preferred shares.

During
2014, under the terms of its normal course issuer bid, the company repurchased for cancellation 75,326 Series E preferred shares (2013  nil)
with a carrying value of $1.7 for a net cost of $1.2.

74

---



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

|               |  | Next
redemption date |  | Number of
shares
outstanding |  | Stated capital |  | Liquidation
preference
per share |  | Fixed
dividend rate
per annum
|-------------- |  | -------------------- |  | ---------------------------- |  | -------------- |  | -------------------------------- |  | -----------------------------
|Series C(1)    |  | December 31, 2019    |  | 6,016,384                    |  | Cdn $150.4     |  | Cdn $25.00                       |  | 4.58%                        
|Series D(1)(3) |  | December 31, 2019    |  | 3,983,616                    |  | Cdn    $99.6   |  | Cdn $25.00                       |  |                             
|Series E(2)    |  | March 31, 2015       |  | 7,924,674                    |  | Cdn $198.1     |  | Cdn $25.00                       |  | 4.75%                        
|Series G(2)    |  | September 30, 2015   |  | 10,000,000                   |  | Cdn $250.0     |  | Cdn $25.00                       |  | 5.00%                        
|Series I(2)    |  | December 31, 2015    |  | 12,000,000                   |  | Cdn $300.0     |  | Cdn $25.00                       |  | 5.00%                        
|Series K(2)    |  | March 31, 2017       |  | 9,500,000                    |  | Cdn $237.5     |  | Cdn $25.00                       |  | 5.00%                        

Accumulated other comprehensive income (loss)

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

|                                                                                      |                                                                                                                         | December 31, 2014 |       | December 31, 2013 |      
|------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------- | ----------------- | ----- | ----------------- | -----
|
|Items that may be subsequently reclassified to net earnings:                          |                                                                                                                         |                   |       |                   |      
|                                                                                      | Currency translation account                                                                                            |                   | 5.5   |                   | (21.3
|                                                                                      | Share of accumulated other comprehensive income (loss) of associates, excluding gains (losses) on defined benefit plans |                   | (83.3 | )                 | 12.9 
|                                                                                      |                                                                                                                         |                   |       |                   |      
|                                                                                      |                                                                                                                         | (77.8             | )     | (8.4              | )    
|                                                                                      |                                                                                                                         |                   |       |                   |      
|Items that will not be subsequently reclassified to net earnings:                     |                                                                                                                         |                   |       |                   |      
|                                                                                      | Share of gains (losses) on defined benefit plans of associates                                                          |                   | (38.3 | )                 | 10.5 
|                                                                                      | Gains (losses) on defined benefit plans                                                                                 |                   | (7.8  | )                 | 3.7  
|                                                                                      |                                                                                                                         |                   |       |                   |      
|                                                                                      |                                                                                                                         | (46.1             | )     | 14.2              |      
|                                                                                      |                                                                                                                         |                   |       |                   |      
|Accumulated other comprehensive income (loss) attributable to shareholders of Fairfax |                                                                                                                         | (123.9            | )     | 5.8               |      
|                                                                                      |                                                                                                                         |                   |       |                   |      

75

---



Other comprehensive income (loss)

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

|                                                                  |                                                                                                             | 2014   |        | 2013 |      
|----------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------- | ------ | ------ | ---- | -----
|
|Items that may be subsequently reclassified to net earnings:      |                                                                                                             |        |        |      |      
|                                                                  | Change in unrealized foreign currency translation gains (losses) on foreign operations                      |        | (186.6 | )    | (14.1
|                                                                  | Change in gains on hedge of net investment in Canadian subsidiaries                                         |        | 118.7  |      |     
|                                                                  | Share of other comprehensive income (loss) of associates, excluding gains (losses) on defined benefit plans |        | (67.5  | )    | 14.8 
|                                                                  |                                                                                                             |        |        |      |      
|                                                                  |                                                                                                             | (135.4 | )      | 0.7  |      
|                                                                  |                                                                                                             |        |        |      |      
|Items that will not be subsequently reclassified to net earnings: |                                                                                                             |        |        |      |      
|                                                                  | Share of gains (losses) on defined benefit plans of associates                                              |        | (50.8  | )    | 14.1 
|                                                                  | Change in gains (losses) on defined benefit plans                                                           |        | (44.6  | )    | 11.7 
|                                                                  |                                                                                                             |        |        |      |      
|                                                                  |                                                                                                             | (95.4  | )      | 25.8 |      
|                                                                  |                                                                                                             |        |        |      |      
|Other comprehensive income (loss)                                 |                                                                                                             | (230.8 | )      | 26.5 |      
|                                                                  |                                                                                                             |        |        |      |      

Non-controlling interests

Year ended December 31, 2014

On September 3, 2014 Thomas Cook India increased its ownership interest in Sterling Resorts from 41.9% to 55.1%, pursuant to the transaction described in note 23,
and recorded non-controlling interests of $74.1 on its consolidated balance sheet.

On
May 21, 2014 Fairfax Asia acquired an 80.0% interest in Fairfax Indonesia, pursuant to the transaction described in note 23, and recorded non-controlling interests of $1.0 on its
consolidated balance sheet.

On
February 4, 2014 the company acquired a 51.0% interest in The Keg, pursuant to the transaction described in note 23, and recorded non-controlling interests of $10.8 on its
consolidated balance sheet.

Year ended December 31, 2013

In October 2013 the company contributed its 81.7% interest in Prime Restaurants to Cara Operations Limited, pursuant to the transaction described in note 23, and
derecognized non-controlling interests in Prime Restaurants of $13.4 from its consolidated balance sheet.

In
May 2013 the company acquired a 58.0% economic interest in IKYA, pursuant to the transaction described in note 23, and recorded non-controlling interests of $13.9 on its consolidated
balance sheet.

In
May 2013 Thomas Cook India completed a private placement of newly issued common shares to qualified institutional buyers (other than existing shareholders of Thomas Cook India), pursuant to
the transaction described in note 23, which reduced the company's ownership of Thomas Cook India from 87.1% at December 31, 2012 to 75.0% at December 31, 2013. The company
recorded additional non-controlling interests in Thomas Cook India of $31.9 on its consolidated balance sheet as a result of the 12.1% change in the company's ownership.

76

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17.  Earnings per Share

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

2014

2013Net earnings (loss) attributable to shareholders of Fairfax


1,633.2


(573.4
)Preferred share dividends


(56.9
)

(60.8
)Excess of book value over consideration of preferred shares purchased for cancellation


0.5


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


1,576.8


(634.2
)Weighted average common shares outstanding  basic


21,186,325


20,360,251Share-based payment awards(1)


411,814


Weighted average common shares outstanding  diluted


21,598,139


20,360,251Net earnings (loss) per common share  basic

$
74.43

$
(31.15
)Net earnings (loss) per common share  diluted

$
73.01

$
(31.15
)


18.  Income Taxes

The company's provision for (recovery of) income taxes for the years ended December 31 was as follows:

2014

2013Current income taxCurrent year expense

184.8

30.2Adjustments to prior years' income taxes

(33.2
)
(35.0
)151.6

(4.8
)Deferred income taxOrigination and reversal of temporary differences

514.2

(512.4
)Adjustments to prior years' deferred income taxes

8.8

77.2Other

(1.3
)
3.4521.7

(431.8
)Provision for (recovery of) income taxes

673.3

(436.6
)


A significant portion of the company's earnings (loss) before income taxes is incurred outside of Canada. The statutory income tax rates for jurisdictions outside of Canada
generally differs from the Canadian statutory income tax rate (and may be significantly higher or lower). The company's earnings (loss) before income taxes by jurisdiction and the associated
provision for (recovery of) income taxes for the years ended December 31, 2014 and 2013 are summarized in the following table:

|                                         |  | 2014  |  | 2013    | 
|---------------------------------------- |  | ----- |  | ------- | 
|
|Earnings (loss) before income taxes      |  | 133.1 |  | 1,755.7 | 
|Provision for (recovery of) income taxes |  | 48.7  |  | 570.1   | 
|                                         |  |       |  |         | 
|Net earnings (loss)                      |  | 84.4  |  | 1,185.6 | 
|                                         |  |       |  |         | 

77

---



The
increase in pre-tax profitability in the Canada, U.S. and Other in 2014 compared to 2013, primarily reflected realized and unrealized net investment gains and an improvement in underwriting
results.

Reconciliations
of the provision for (recovery of) income taxes calculated at the Canadian statutory income tax rate to the provision for (recovery of) income taxes at the effective tax rate in the
consolidated financial statements for the years ended December 31, 2014 and 2013 are summarized in the following table:

2014

2013Canadian statutory income tax rate

26.5
%
26.5
%Provision for (recovery of) income taxes at the Canadian statutory income tax rate

619.5

(265.3
)Non-taxable investment income

(109.2
)
(166.4
)Tax rate differential on income and losses incurred outside Canada

121.8

(125.0
)Recovery relating to prior years

(17.4
)
(25.2
)Change in unrecorded tax benefit of losses and temporary differences

24.4

107.7Foreign exchange

22.7

18.9Change in tax rate for deferred income taxes

(10.9
)
2.6Other including permanent differences

22.4

16.1Provision for (recovery of) income taxes

673.3

(436.6
)


Non-taxable investment income is principally comprised of dividend income, non-taxable interest income and the 50% of net capital gains which are not taxable in Canada. In 2014
it also included a provision for income taxes of $38.0 following an internal reorganization of the U.S. shareholders of OdysseyRe (see note 25) that triggered the release of taxable
gains on intercompany transactions within the U.S. consolidated tax group that had been deferred in prior years.

The
tax rate differential on income and losses incurred outside Canada of $121.8 in 2014 principally reflected significant pre-tax net unrealized investment gains, combined with improved underwriting
results in the U.S. The tax rate differential on income and losses incurred outside Canada of $125.0 in 2013 principally reflected significant pre-tax net unrealized investment losses on bonds
and equity hedges in the U.S. The statutory income tax rate in the U.S. is significantly higher than the Canadian statutory income tax rate.

The
recovery relating to prior years of $17.4 in 2014 and $25.2 in 2013 was primarily due to the release of provisions following the completion of prior year income tax audits.

The
change in unrecorded tax benefit of losses and temporary differences in 2014 was primarily comprised of deferred tax assets in Canada of $28.1 (2013  $45.8)
that were not recorded by the company because the related pre-tax losses did not meet the applicable recognition criteria under IFRS, and the de-recognition of $9.0
(2013  $50.0) of U.S. foreign tax credits which had been recorded as deferred tax assets in prior years after determining that it was no longer probable
that those tax credits could be utilized prior to expiration.

Income
taxes refundable and payable were as follows:

December 31,
2014

December 31,
2013Income taxes refundable

51.1

114.1Income taxes payable

(118.3
)
(80.1
)Net income taxes (payable) refundable

(67.2
)
34.0


78

---



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

2014

2013Balance  January 1

34.0

39.4Amounts recorded in the consolidated statements of earnings

(151.6
)
4.8Payments made (refunds received) during the year

52.3

(19.9
)Acquisition of subsidiaries

(5.1
)
10.3Foreign exchange effect and other

3.2

(0.6
)Balance  December 31

(67.2
)
34.0


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

|                            |                                                            | 2014  |       
|--------------------------- | ---------------------------------------------------------- | ----- | ------
|
|Balance  January 1, 2014   |                                                            | 690.9 |       
|                            | Amounts recorded in the consolidated statement of earnings |       | (213.3
|                            | Amounts recorded in total equity                           |       |      
|                            | Acquisition of subsidiary (note 23)                        |       | 9.8   
|                            | Foreign exchange effect and other                          |       | (7.7  
|                            |                                                            |       |       
|Balance  December 31, 2014 |                                                            | 479.7 |       
|                            |                                                            |       |       

|
|

|                            |                                                            | 2013  |      
|--------------------------- | ---------------------------------------------------------- | ----- | -----
|
|Balance  January 1, 2013   |                                                            | 397.2 |      
|                            | Amounts recorded in the consolidated statement of earnings |       | 304.9
|                            | Amounts recorded in total equity                           |       |     
|                            | Acquisition of subsidiary (note 23)                        |       | 1.2  
|                            | Foreign exchange effect and other                          |       | (12.4
|                            |                                                            |       |      
|Balance  December 31, 2013 |                                                            | 690.9 |      
|                            |                                                            |       |      

Management expects that the recorded deferred income tax asset will be realized in the normal course of operations. The most significant temporary differences included in the
deferred income tax asset at December 31, 2014 related to operating and capital losses and provision for losses and loss adjustment expenses. The provision for losses and loss adjustment
expenses is recorded on an undiscounted basis in these consolidated financial statements but is recorded on a discounted basis in certain jurisdictions for tax purposes.

Management
reviews the recoverability of the deferred income tax asset on an ongoing basis and adjusts, as necessary, to reflect its anticipated realization. As at December 31, 2014 management
has not recorded deferred income tax assets of $464.8 (December 31, 2013  $449.5) related primarily to operating and capital losses and

79

---



U.S. foreign
tax credits. The losses for which deferred income tax assets have not been recorded are comprised of $933.6 of losses in Canada (December 31,
2013  $741.7), $412.6 of losses in Europe (December 31, 2013  $485.9), $58.2 of losses in the U.S.
(December 31, 2013  $100.9), and $59.0 of foreign tax credits in the U.S. (December 31, 2013  $50.0).
The losses in Canada expire between 2015 and 2034. The losses and foreign tax credits in the U.S. expire between 2020 and 2033. The losses in Europe do not have an expiry date.

Deferred
income tax has not been recognized for the withholding tax and other taxes that could be payable on the unremitted earnings of certain subsidiaries. Unremitted earnings amounted to
approximately $3.0 billion at December 31, 2014 (December 31, 2013  $1.1 billion) and are not likely to be repatriated in the
foreseeable future.

19.  Statutory Requirements

The retained earnings of the company are largely represented by retained earnings at the insurance and reinsurance subsidiaries. The insurance and reinsurance subsidiaries are
subject to certain requirements and restrictions under their respective insurance company Acts including minimum capital requirements and dividend restrictions. The company's capital requirements and
management thereof are discussed in note 24. The company's share of dividends paid in 2014 by the subsidiaries, comprised of cash and marketable securities, which are eliminated on
consolidation was $605.8 (2013  $361.4), inclusive of $250.0 of dividends received in connection with the OdysseyRe reorganization described in note 25.
Based on the surplus and net income of the subsidiaries at December 31, 2014 the company has access to dividend capacity for dividend payment during 2015 at each of its primary operating
companies as follows:

December 31, 2014Northbridge(1)

191.3Crum & Forster

68.3Zenith National

110.7OdysseyRe

324.9695.2


20.  Contingencies and Commitments

Lawsuits

On July 26, 2006 Fairfax filed a lawsuit seeking $6 billion in damages from a number of defendants who, the complaint (as subsequently amended) alleges,
participated in a stock market manipulation scheme involving Fairfax shares. The complaint, filed in Superior Court, Morris County, New Jersey, alleges violations of various state laws,
including the New Jersey Racketeer Influenced and Corrupt Organizations Act, pursuant to which treble damages may be available. On September 12, 2012, before trial, and consequently
without having heard or made any determination on the facts, the Court dismissed the lawsuit on legal grounds. In October 2012 Fairfax filed an appeal of this dismissal, as it believes that the
legal basis for the dismissal is incorrect. By the end of 2013, the briefs of all parties in connection with this appeal had been filed. The ultimate outcome of any litigation is uncertain. The
financial effects, if any, of this lawsuit cannot be practicably determined at this time, and the company's consolidated financial statements include no anticipated recovery from the lawsuit.

Other

The Autorité des marchés financiers, the securities regulatory authority in the Province of Quebec (the "AMF"), is conducting an
investigation of Fairfax, its CEO, Prem Watsa, and its President, Paul Rivett. The investigation concerns the possibility of illegal insider trading and/or tipping (not involving any personal
trading by the individuals) in connection with a Quebec transaction. Further details concerning the investigation are, by law, not permitted to be disclosed. Fairfax and these officers are fully
cooperating with the investigation and they are not aware of any reasonable basis for any legal proceedings against them. However, if the AMF commences legal proceedings, no assurance can be given at
this time by Fairfax as to the outcome.

80

---



Subsidiaries
of the company are defendants in several damage suits and have been named as third party in other suits. The uninsured exposure to the company is not considered to be material to the
company's financial position, financial performance or cash flows.

OdysseyRe,
Advent and RiverStone (UK) ("the Lloyd's participants") participate in Lloyd's through their 100% ownership of certain Lloyd's syndicates. The Lloyd's participants have pledged
securities and cash, with a fair value of $591.9 and $10.7 respectively as at December 31, 2014, in deposit trust accounts in favour of Lloyd's based on certain minimum amounts required to
support the liabilities of the syndicates as determined under the risk-based capital models and on approval by Lloyd's. Pledged securities and restricted cash consist primarily of bonds and subsidiary
cash and short term investments respectively, included within portfolio investments on the consolidated balance sheet. The Lloyd's participants have the ability to substitute other securities for
these securities subject to certain admissibility criteria. These pledged assets effectively secure the contingent obligations of the Lloyd's syndicates should they not meet their obligations. The
Lloyd's participants' contingent liability to Lloyd's is limited to the aggregate amount of the pledged assets and their obligation to support these liabilities will continue until such liabilities
are settled or are reinsured by a third party approved by Lloyd's. The company believes that the syndicates for which the Lloyd's participants are capital providers maintain sufficient liquidity and
financial resources to support their ultimate liabilities and does not anticipate that the pledged assets will be utilized.

The
company's maximum capital commitments for potential investments in common stocks, limited partnerships and associates at December 31, 2014 totaled $474.3.

21.  Pensions and Post Retirement Benefits

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

In
addition to actuarial valuations for accounting purposes, subsidiaries of the company are required to prepare funding valuations to determine the amount of their pension contributions. All of the
defined benefit pension plans have had funding valuations performed within the past two years.

The
investment policy for the defined benefit pension plans is to invest prudently in order to 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, 2014 and 2013 were invested principally in high quality fixed income securities and cash and short term investments.

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

|                                |  | December 31, 2014 |  | December 31, 2013
|------------------------------- |  | ----------------- |  | -----------------
|
|Equity instruments              |  | 198.5             |  | 183.2            
|Fixed income securities         |  | 246.1             |  | 97.8             
|Cash and short term investments |  | 122.2             |  | 122.2            
|                                |  |                   |  |                  
|                                |  | 566.8             |  | 403.2            
|                                |  |                   |  |                  

81

---



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

|                                                                    |                                                         | Defined benefit
pension plans |       | Post retirement
benefit plans |      
|------------------------------------------------------------------- | ------------------------------------------------------- | ----------------------------- | ----- | ----------------------------- | -----
|
|Change in benefit obligation                                        |                                                         |                               |       |                               |      
|Balance  January 1                                                 |                                                         | 579.4                         |       | 580.0                         |      
|                                                                    | Cost of benefits earned in the year                     |                               | 18.2  |                               | 21.3 
|                                                                    | Interest cost on benefit obligation                     |                               | 25.7  |                               | 23.2 
|                                                                    | Actuarial (gain) loss  participant experience          |                               | 1.3   |                               | 11.8 
|                                                                    | Actuarial loss  change in demographic assumptions      |                               | 18.6  |                               | 9.7  
|                                                                    | Actuarial (gain) loss  change in financial assumptions |                               | 49.9  |                               | (33.0
|                                                                    | Benefits paid                                           |                               | (21.6 | )                             | (18.7
|                                                                    | Plan amendments                                         |                               | 0.2   |                               | 0.1  
|                                                                    | Curtailment                                             |                               |      |                               |     
|                                                                    | Business acquisition                                    |                               |      |                               |     
|                                                                    | Change in foreign currency exchange rates               |                               | (31.7 | )                             | (15.0
|                                                                    |                                                         |                               |       |                               |      
|Balance  December 31                                               |                                                         | 640.0                         |       | 579.4                         |      
|                                                                    |                                                         |                               |       |                               |      
|Change in fair value of plan assets                                 |                                                         |                               |       |                               |      
|Balance  January 1                                                 |                                                         | 535.0                         |       | 502.4                         |      
|                                                                    | Interest income on plan assets                          |                               | 24.1  |                               | 20.3 
|                                                                    | Actuarial gain                                          |                               | 33.0  |                               | 25.7 
|                                                                    | Plan administration expense                             |                               | (0.7  | )                             | (0.6 
|                                                                    | Company contributions                                   |                               | 29.4  |                               | 20.7 
|                                                                    | Plan participant contributions                          |                               |      |                               |     
|                                                                    | Benefits paid                                           |                               | (21.6 | )                             | (18.7
|                                                                    | Change in foreign currency exchange rates               |                               | (32.4 | )                             | (14.8
|                                                                    |                                                         |                               |       |                               |      
|Balance  December 31                                               |                                                         | 566.8                         |       | 535.0                         |      
|                                                                    |                                                         |                               |       |                               |      
|Funded status of plans  deficit                                    |                                                         | (73.2                         | )     | (44.4                         | )    
|Impact of asset ceiling                                             |                                                         | (1.4                          | )     | (1.3                          | )    
|                                                                    |                                                         |                               |       |                               |      
|Net accrued liability                                               |                                                         | (74.6                         | )     | (45.7                         | )    
|                                                                    |                                                         |                               |       |                               |      
|Amounts recognized in the consolidated balance sheet at December 31 |                                                         |                               |       |                               |      
|Other assets                                                        |                                                         | 33.1                          |       | 45.2                          |      
|Accounts payable and accrued liabilities                            |                                                         | (107.7                        | )     | (90.9                         | )    
|                                                                    |                                                         |                               |       |                               |      
|Net accrued liability                                               |                                                         | (74.6                         | )     | (45.7                         | )    
|                                                                    |                                                         |                               |       |                               |      
|Weighted average assumptions used to determine benefit obligations  |                                                         |                               |       |                               |      
|Discount rate                                                       |                                                         | 4.1                           | %     | 4.6                           | %    
|Rate of compensation increase                                       |                                                         | 3.5                           | %     | 3.6                           | %    
|Assumed overall health care cost trend                              |                                                         |                              |       |                              |      

82

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The company's pension and post retirement expense for the years ended December 31 is comprised of the following:

|                                                                           |                                                                    | Defined benefit
pension plans |      | Post retirement
benefit plans
|-------------------------------------------------------------------------- | ------------------------------------------------------------------ | ----------------------------- | ---- | -----------------------------
|
|Defined benefit pension and post retirement expense:                       |                                                                    |                               |      |                              
|                                                                           | Cost of benefits earned in the year, net of employee contributions |                               | 18.2 |                              
|                                                                           | Net interest expense                                               |                               | 1.6  |                              
|                                                                           | Plan administration expense                                        |                               | 0.7  |                              
|                                                                           | Plan amendments                                                    |                               | 0.2  |                              
|                                                                           | Curtailment and settlement                                         |                               |     |                              
|                                                                           |                                                                    |                               |      |                              
|Total benefit expense recognized in the consolidated statement of earnings |                                                                    | 20.7                          |      | 24.9                         
|Defined contribution benefit expense                                       |                                                                    | 24.1                          |      | 21.9                         
|                                                                           |                                                                    |                               |      |                              
|                                                                           |                                                                    | 44.8                          |      | 46.8                         
|                                                                           |                                                                    |                               |      |                              

The sensitivity of the defined benefit obligations to changes in key assumptions at December 31, 2014 are presented below on a weighted average basis. This analysis was
performed on each individual defined benefit plan using the same methodology that was applied to determine the benefit obligation recognized in the consolidated balance sheet, while holding all other
assumptions constant.

|                              |  |      |  | Impact on accumulated
benefit obligation
increase (decrease) |  
|----------------------------- |  | ---- |  | ------------------------------------------------------------ | -
|
|
|Defined benefit pension plans |  |      |  |                                                              |  
|Discount rate                 |  | 0.5% |  | (55.2                                                        | )
|Rate of compensation increase |  | 0.5% |  | 11.4                                                         |  
|Post retirement benefit plans |  |      |  |                                                              |  
|Discount rate                 |  | 0.5% |  | (6.8                                                         | )
|Health care cost trend rate   |  | 1.0% |  | 14.9                                                         |  

The assumed annual rate of increase in the per capita cost of covered benefits (i.e. health care cost trend rate) is 7.2% in 2015, decreasing to 4.6% by 2025 calculated
on a weighted average basis.

During
2014 the company contributed $34.1 (2013  $23.4) to its defined benefit pension and post retirement benefit plans. Based on the company's current
expectations, the 2015 contributions to its defined benefit pension plans and post retirement benefit plans will be approximately $22.9 and $2.9 respectively.

22.  Operating Leases

Aggregate future minimum commitments at December 31, 2014 under operating leases relating to premises, automobiles and equipment for various terms up to ten years were
as follows:

2015

98.62016

86.82017

75.72018

69.22019

62.8Thereafter

195.0


83

---



23.  Acquisitions and Divestitures

Subsequent to December 31, 2014

Acquisition of Brit PLC

On February 16, 2015 the company announced that it had reached an agreement with the board of directors of Brit PLC ("Brit") regarding the terms of a recommended
cash offer to acquire all of the outstanding shares of Brit (the "Brit Offer") for a total price of 305 pence per share, comprising 280 pence in cash to be paid by the company and
Brit's announced 2014 final and special dividends of 25 pence (the "Brit Offer Price"). The aggregate purchase price for the Brit Offer is approximately $1.88 billion
(£1.22 billion). The Brit Offer is subject to customary closing conditions, including customary competition and merger conditions and other regulatory approvals as required. Brit is
a market-leading global Lloyd's of London specialty insurer and reinsurer.

The
net proceeds from underwritten public offerings (described in more detail in notes 15 and 16) of 1.15 million subordinate voting shares ($575.9), 9.2 million
Series M preferred shares ($179.0) and Cdn$350.0 of 4.95% Fairfax senior notes due 2025 ($275.7), all of which closed on March 3, 2015, will be used to finance the Brit Offer.

Investment in Fairfax India Holdings Corporation

On January 30, 2015 the company, through subsidiaries, acquired 30,000,000 multiple voting shares of Fairfax India Holdings Corporation ("Fairfax India") for
$300.0 through a private placement. These multiple voting shares represented approximately 95.2% of the voting rights and 28.3% of the equity interest in Fairfax India upon the closing of its
offerings (inclusive of the over-allotment of subordinate voting shares that closed on February 10, 2015). Fairfax India was established, with the support of Fairfax, to invest in public and
private equity securities and debt instruments in India and Indian businesses or other businesses primarily conducted in or dependent on India. Hamblin Watsa is the portfolio advisor to Fairfax India
and its subsidiaries. Fairfax India will be included in the company's consolidated financial reporting commencing in the first quarter of 2015.

Acquisition of Union Assurance General Limited

On January 1, 2015 the company acquired 78% of Union Assurance General Limited ("Union Assurance") for cash consideration of $26.8 (3.5 billion Sri Lankan rupees).
Union Assurance is headquartered in Colombo, Sri Lanka and underwrites general insurance in Sri Lanka, specializing in automobile and personal accident lines of business and writing approximately $41
of gross premiums written in 2013.

Acquisition of Eastern European Insurers

On December 16, 2014 the company entered into an agreement with QBE Insurance (Europe) Limited ("QBE") to acquire QBE's insurance operations in the Czech Republic,
Hungary and Slovakia. The existing businesses and renewal rights of QBE's operations in the Czech Republic, Hungary and Slovakia are expected to be transferred to Fairfax by the third quarter of 2015,
subject to customary closing conditions, including various regulatory approvals. In QBE's most recent fiscal year, its operations in the Czech Republic, Hungary and Slovakia generated over $40 in
gross premiums written across a range of general insurance classes, including property, travel, general liability and product protection. On February 3, 2015 the company also entered into an
agreement to acquire QBE's general insurance operations in Ukraine, which generated over $5 of gross premiums written in 2014.

Acquisition of MCIS Insurance Berhad

On December 1, 2014 the company entered into an agreement to acquire the general insurance business of MCIS Insurance Berhad (formerly known as MCIS Zurich Insurance
Berhad) ("MCIS") through its wholly-owned subsidiary Pacific Insurance. The transaction is subject to customary closing conditions, including Malaysian court approval, and is expected to close in the
first quarter of 2015. MCIS is an established general insurer in Malaysia with over $55 of gross premiums written in 2013 in its general insurance business.

84

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Year ended December 31, 2014

Acquisition of Pethealth Inc.

On November 14, 2014 the company acquired all of the outstanding common shares, preferred shares and employee share options of Pethealth Inc. ("Pethealth") for
cash consideration of $88.7 (Cdn$100.4). The goodwill and intangible assets associated with Pethealth's marketing of pet medical insurance were allocated to the Crum & Forster ($90.9, comprised
of $39.4 of goodwill, $47.3 of customer relationships and $4.2 of computer software) and Northbridge ($17.3, comprised of $8.3 of goodwill, $8.0 of customer relationships and $1.0 of computer
software) reporting segments since Crum & Forster and Northbridge were to become Pethealth's ongoing insurance carriers. Pethealth's residual assets and liabilities and results of operations
were consolidated in the Other reporting segment. Pethealth is headquartered in Canada and provides pet medical insurance, related management software and pet-related database management services in
North America and the United Kingdom.

Acquisition of Sterling Holiday Resorts (India) Limited

During the first half of 2014 Thomas Cook India acquired a 41.9% ownership interest in Sterling Holiday Resorts (India) Limited ("Sterling Resorts") for cash purchase
consideration of $57.4 (3,534.6 million Indian rupees), and classified its investment as an associate. On September 3, 2014 Thomas Cook India increased its ownership interest to 55.1% by
acquiring additional common shares of Sterling Resorts for cash consideration of $19.2 (1,162.6 million Indian rupees). Having obtained control, Thomas Cook India was required to re-measure its
existing ownership interest in Sterling Resorts at fair value as of September 3, 2014, resulting in the recognition of a one-time non-cash gain of $41.2 in net gains on investments in the
consolidated statement of earnings, representing the difference between the fair value of the previously held interest in Sterling Resorts and its carrying value under the equity method of accounting.
The acquisition of Sterling Resorts was financed internally by subsidiaries of Fairfax. The assets and liabilities and results of operations of Sterling Resorts were consolidated within the Other
reporting segment. Goodwill and intangible assets was comprised of $69.2 of goodwill and $0.4 of computer software. Sterling Resorts is engaged in vacation ownership and leisure
hospitality and operates a network of resorts in India. Fairfax's economic interest in Sterling Resorts at December 31, 2014 was 40.2% since that interest is held through 73.0%-owned Thomas
Cook India.

Acquisition of Praktiker Hellas Commercial Societe Anonyme

On June 5, 2014 Fairfax completed the acquisition of a 100% interest in Praktiker Hellas Commercial Societe Anonyme ("Praktiker") for cash purchase consideration of $28.6
(€21.0 million). The assets and liabilities and results of operations of Praktiker were consolidated in the Other reporting segment. Praktiker is one of the largest home
improvement and do-it-yourself goods retailers in Greece, operating 14 stores.

Acquisition of PT Batavia Mitratama Insurance

On May 21, 2014 Fairfax Asia completed the acquisition of an 80.0% interest in PT Batavia Mitratama Insurance (subsequently renamed PT Fairfax Insurance Indonesia
("Fairfax Indonesia")) for cash purchase consideration of $8.5 (98.2 billion Indonesian rupees). Subsequent to the acquisition, Fairfax Asia contributed an additional $12.9 to Fairfax Indonesia
(maintaining its 80.0% interest) to support business expansion. The assets and liabilities and results of operations of Fairfax Indonesia were consolidated in the
Insurance  Fairfax Asia reporting segment. Fairfax Indonesia is headquartered in Jakarta, Indonesia and underwrites general insurance, specializing in automobile
coverage in Indonesia.

Acquisition of Keg Restaurants Limited

On February 4, 2014 the company completed the acquisition of 51.0% of the outstanding common shares of Keg Restaurants Limited ("The Keg") for cash purchase
consideration of $76.7 (Cdn$85.0). The assets and liabilities and results of operations of The Keg were consolidated in the Other reporting segment. Goodwill and intangible assets was comprised of
$65.4 of goodwill and $0.1 of computer software The Keg franchises, owns and operates a network of premium dining restaurants across Canada and in select locations in the United States.

85

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

|                                     |                                          | Pethealth         |       | Sterling Resorts  |       | The Keg         
|------------------------------------ | ---------------------------------------- | ----------------- | ----- | ----------------- | ----- | ----------------
|Acquisition date                     |                                          | November 14, 2014 |       | September 3, 2014 |       | February 4, 2014
|Percentage of common shares acquired |                                          | 100.0%            |       | 40.2%             | (3)   | 51.0%           
|Assets:                              |                                          |                   |       |                   |       |                 
|                                     | Portfolio investments(1)                 |                   | 10.7  |                   | 19.1  |                 
|                                     | Goodwill and intangible assets           |                   | 108.2 | (2)               | 69.6  | (4)             
|                                     | Other assets                             |                   | 7.7   |                   | 176.3 |                 
|                                     |                                          |                   |       |                   |       |                 
|                                     |                                          | 126.6             |       | 265.0             |       | 270.4           
|                                     |                                          |                   |       |                   |       |                 
|Liabilities:                         |                                          |                   |       |                   |       |                 
|                                     | Accounts payable and accrued liabilities |                   | 19.9  |                   | 52.8  |                 
|                                     | Deferred income taxes                    |                   | 18.0  | (2)               | 17.0  |                 
|                                     | Long term debt                           |                   |      |                   | 2.1   |                 
|                                     |                                          |                   |       |                   |       |                 
|                                     |                                          | 37.9              |       | 71.9              |       | 182.9           
|Non-controlling interests            |                                          |                  |       | 74.1              |       | 10.8            
|Purchase consideration               |                                          | 88.7              |       | 119.0             |       | 76.7            
|                                     |                                          |                   |       |                   |       |                 
|                                     |                                          | 126.6             |       | 265.0             |       | 270.4           
|                                     |                                          |                   |       |                   |       |                 

The
determination of the fair value of assets and liabilities of the acquired subsidiaries described in the paragraphs above are preliminary and may be revised when estimates and assumptions and the
valuations of assets and liabilities are finalized within twelve months of the respective acquisition dates.

Year ended December 31, 2013

Disposition of Prime Restaurants Inc.

On October 31, 2013 the company contributed its 81.7% interest in Prime Restaurants Inc. ("Prime Restaurants") to Cara Operations Limited ("Cara") in exchange for
Cara preferred shares and equity warrants with a combined fair value of $54.5 (Cdn$56.9). Subsequently, the company determined that it no longer controlled Prime Restaurants and de-consolidated Prime
Restaurants from its consolidated financial reporting effective October 31, 2013, resulting in the recognition of a loss on disposition of $4.2 (Cdn$4.4) in 2013. In addition, the company made
a cash contribution of $95.9 (Cdn$100.0) to Cara in exchange for Cara preferred shares, subordinated debt and equity warrants. The company's investment in Cara equity warrants represents potential
voting interests of approximately 39.4% (equity warrants currently exercisable) and 48.5% (inclusive of equity warrants exercisable in two years) assuming all holders of Cara convertible securities
(including those owned by the company) exercised their options to convert. The company determined that it had obtained significant influence over Cara effective October 31, 2013 but as the
company did not hold any Cara common shares, the equity method of accounting could not be applied. The Cara preferred shares, subordinated debt and equity warrants are recorded as at FVTPL investments
in holding company cash and investments and portfolio investments on the consolidated balance sheet.

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Acquisition of American Safety Insurance Holdings, Ltd.

On October 3, 2013 the company acquired all of the outstanding common shares of American Safety Insurance Holdings, Ltd. ("American Safety") for $30.25 per share
in cash, representing aggregate purchase consideration of $317.1. On October 8, 2013 the company sold American Safety's Bermuda-based reinsurance subsidiary ("AS Re") to an unrelated
third party for net proceeds of $52.5. The renewal rights to certain lines of business formerly written by American Safety were assumed by Crum & Forster and Hudson Insurance representing
estimated annual gross premiums written of $103. The remainder of American Safety's lines of business which did not meet Fairfax's underwriting criteria were placed into runoff under the supervision
of the RiverStone group. The purchase consideration for this acquisition was financed internally by the company's runoff subsidiaries, Crum & Forster and Hudson Insurance and was partially
defrayed by the proceeds received on the sale of AS Re ($52.5) and the receipt of a post-acquisition dividend of excess capital paid by American Safety ($123.7). Goodwill and intangible assets
was comprised of $34.4 of goodwill and $24.5 of renewal rights. American Safety, a Bermuda-based holding company, underwrote specialty risks through its U.S.-based program administrator, American
Safety Insurance Services, Inc., and its U.S. insurance and Bermuda reinsurance companies.

Acquisition of Hartville Group, Inc.

On July 3, 2013 Crum & Forster acquired a 100% interest in Hartville Group, Inc. ("Hartville") for cash purchase consideration of $34.0. The assets and
liabilities and results of operations of Hartville were consolidated in the U.S. Insurance reporting segment. Goodwill and intangible assets was comprised of $21.2 of goodwill and $7.0 related
to an operating license. Hartville markets and administers pet health insurance plans (including
enrollment, claims, billing and customer service) and produces approximately $40 of gross premiums written annually.

Acquisition of IKYA Human Capital Solutions Private Limited

On May 14, 2013 Thomas Cook India acquired a 77.3% interest in IKYA Human Capital Solutions Private Limited ("IKYA") for purchase consideration of $46.8
(2,563.2 million Indian rupees). The assets and liabilities and results of operations of IKYA were consolidated in the Other reporting segment. Goodwill and intangible assets was comprised of
$27.6 of goodwill, $14.2 of customer relationships, $10.6 of brand names and $0.2 of computer software. The identifiable assets acquired and liabilities assumed represented Fairfax's 58.0% economic
interest in IKYA as a result of acquiring IKYA through 75.0%-owned Thomas Cook India. IKYA provides specialized human resources services to leading corporate clients in India.

Private Placement of Thomas Cook India Common Shares

On May 7, 2013 Thomas Cook India completed a private placement of 34,379,606 newly issued common shares at 53.50 Indian rupees per share to qualified
institutional buyers (other than existing shareholders of Thomas Cook India) and received net proceeds of $32.9 (1,780.5 million Indian rupees) after expenses. The proceeds were used to
partially finance the acquisition of IKYA as described in the preceding paragraph. This transaction reduced the company's ownership of Thomas Cook India from 87.1% at December 31, 2012 to
75.0%, thereby satisfying securities regulations in India stipulating that the company reduce its ownership interest in Thomas Cook India to 75.0% or less by August 2013.

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

|                                     |                                          | American Safety |       | Hartville    |      | IKYA         |     
|------------------------------------ | ---------------------------------------- | --------------- | ----- | ------------ | ---- | ------------ | ----
|Acquisition date                     |                                          | October 3, 2013 |       | July 3, 2013 |      | May 14, 2013 |     
|Percentage of common shares acquired |                                          | 100.0%          |       | 100.0%       |      | 58.0%        | (1) 
|Assets:                              |                                          |                 |       |              |      |              |     
|                                     | Insurance contract receivables           |                 | 21.5  |              | 11.9 |              |    
|                                     | Portfolio investments(2)                 |                 | 765.9 |              | 4.9  |              | 2.1 
|                                     | Recoverable from reinsurers              |                 | 220.0 |              |     |              |    
|                                     | Deferred income taxes                    |                 | 3.8   |              |     |              |    
|                                     | Goodwill and intangible assets           |                 | 58.9  |              | 28.2 |              | 52.6
|                                     | Asset held for sale(3)                   |                 | 52.5  |              |     |              |    
|                                     | Other assets                             |                 | 10.8  |              | 0.9  |              | 52.5
|                                     |                                          |                 |       |              |      |              |     
|                                     |                                          | 1,133.4         |       | 45.9         |      | 107.2        |     
|                                     |                                          |                 |       |              |      |              |     
|Liabilities:                         |                                          |                 |       |              |      |              |     
|                                     | Subsidiary indebtedness                  |                 |      |              |     |              | 8.0 
|                                     | Accounts payable and accrued liabilities |                 | 69.7  |              | 3.8  |              | 31.0
|                                     | Deferred income taxes                    |                 |      |              |     |              | 7.5 
|                                     | Funds withheld payable to reinsurers     |                 | 58.9  |              |     |              |    
|                                     | Insurance contract liabilities           |                 | 652.2 |              | 8.1  |              |    
|                                     | Long term debt(4)                        |                 | 35.5  |              |     |              |    
|                                     |                                          |                 |       |              |      |              |     
|                                     |                                          | 816.3           |       | 11.9         |      | 46.5         |     
|Non-controlling interests            |                                          |                |       |             |      | 13.9         |     
|Purchase consideration               |                                          | 317.1           |       | 34.0         |      | 46.8         |     
|                                     |                                          |                 |       |              |      |              |     
|                                     |                                          | 1,133.4         |       | 45.9         |      | 107.2        |     
|                                     |                                          |                 |       |              |      |              |     

24.  Financial Risk Management

Overview

The primary goals of the company's financial risk management are to ensure that the outcomes of activities involving elements of risk are consistent with the company's
objectives and risk tolerance, while maintaining an appropriate balance between risk and reward and protecting the company's consolidated balance sheet from events that have the potential to
materially impair its financial strength. The company's exposure to potential loss from its insurance and reinsurance operations and investment activities primarily relates to underwriting risk,
credit risk, liquidity risk and various market risks. Balancing risk and reward is achieved through identifying risk appropriately, aligning risk tolerances with business strategy, diversifying risk,
pricing appropriately for risk, mitigating risk through preventive controls and transferring risk to third parties. There were no significant changes in the types of the company's risk exposures or
the processes used by the company for managing those risk exposures at December 31, 2014 compared to those identified at December 31, 2013, except as discussed below.

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Financial
risk management objectives are achieved through a two tiered system, with detailed risk management processes and procedures at the company's primary operating subsidiaries and its investment
management subsidiary combined with the analysis of the company-wide aggregation and accumulation of risks at the holding company level. In addition, although the company and its operating
subsidiaries have designated Chief Risk Officers, the company regards each Chief Executive Officer as the chief risk officer of his or her company: each Chief Executive Officer is the individual
ultimately responsible for risk management for his or her company and its subsidiaries.

The
company's designated Chief Risk Officer reports on risk considerations to Fairfax's Executive Committee and provides a quarterly report to the Board of Directors on the key risk exposures.
Management of Fairfax in consultation with the designated Chief Risk Officer approves certain policies for overall risk management, as well as policies addressing specific areas such as investments,
underwriting, catastrophe risk and reinsurance. The Investment Committee approves policies for the management of market risk (including currency risk, interest rate risk and other price risk) and the
use of derivative and non-derivative financial instruments, and monitors to ensure compliance with relevant regulatory guidelines and requirements. A discussion of the risks of the business
(the risk factors and the management of those risks) is an agenda item for every regularly scheduled meeting of the Board of Directors.

Underwriting Risk

Underwriting risk is the risk that the total cost of claims, claims adjustment expenses and premium acquisition expenses will exceed premiums received and can arise as a result
of numerous factors, including pricing risk, reserving risk and catastrophe risk. There were no significant changes to the company's exposure to underwriting risk or the framework used to monitor,
evaluate and manage underwriting risk at December 31, 2014 compared to December 31, 2013.

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

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

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

Catastrophe
risk arises because property and casualty insurance companies may be exposed to large losses arising from man-made or natural catastrophes that could result in significant underwriting
losses. The company evaluates potential catastrophic events and assesses the probability of occurrence and magnitude of these events predominantly through probable maximum loss ("PML")
modeling techniques and through the aggregation of limits exposed. A wide range of events are simulated using the company's proprietary and commercial models, including single large events and
multiple events spanning the numerous geographic regions in which the company operates.

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

To
manage its exposure to underwriting risk, and the pricing, reserving and catastrophe risks contained therein, the company's operating companies have established limits for underwriting authority
and the requirement for specific approvals for transactions involving new products or for transactions involving existing products which exceed certain limits of size or complexity. The company's
objective of operating with a prudent and stable underwriting philosophy with sound reserving is also achieved through establishment of goals, delegation of authorities, financial monitoring,
underwriting reviews and remedial actions to facilitate continuous improvement. The company purchases reinsurance protection for risks assumed when it is considered prudent and cost effective to do
so, at the operating company level for specific exposures and, if needed, at the holding company level for aggregate exposures. The company also actively takes steps to reduce the volume of insurance
and reinsurance underwritten on particular types of risks when it desires to reduce its direct exposure due to inadequate pricing.

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

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



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

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The
table below shows the company's concentration of risk by region and line of business based on gross premiums written prior to giving effect to ceded reinsurance premiums. The company's exposure to
general insurance risk varies by geographic region and may change over time. Premiums ceded to reinsurers (including retrocessions) by line of business amounted to $400.1 for property
(2013  $427.3), $539.1 for casualty (2013  $575.9) and $218.9 for specialty
(2013  $187.7) for the year ended December 31, 2014.

|            |  | Canada  |  | United States |  | Asia(1) |  | International(2) |  | Total
|----------- |  | ------- |  | ------------- |  | ------- |  | ---------------- |  | -----
|
|Property    |  | 560.9   |  | 573.3         |  | 1,173.5 |  | 1,238.9          |  | 405.7
|Casualty    |  | 516.0   |  | 552.3         |  | 2,805.9 |  | 2,548.3          |  | 268.0
|Specialty   |  | 113.1   |  | 118.2         |  | 211.0   |  | 197.3            |  | 247.8
|            |  |         |  |               |  |         |  |                  |  |      
|Total       |  | 1,190.0 |  | 1,243.8       |  | 4,190.4 |  | 3,984.5          |  | 921.5
|            |  |         |  |               |  |         |  |                  |  |      
|Insurance   |  | 1,120.7 |  | 1,164.7       |  | 3,426.0 |  | 3,148.0          |  | 404.3
|Reinsurance |  | 69.3    |  | 79.1          |  | 764.4   |  | 836.5            |  | 517.2
|            |  |         |  |               |  |         |  |                  |  |      
|            |  | 1,190.0 |  | 1,243.8       |  | 4,190.4 |  | 3,984.5          |  | 921.5
|            |  |         |  |               |  |         |  |                  |  |      

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

|                                         |                                              | Insurance |     | Reinsurance |     | Insurance and
Reinsurance
|---------------------------------------- | -------------------------------------------- | --------- | --- | ----------- | --- | -------------------------
|
|
|Impact of +1% increase in loss ratio on: |                                              |           |     |             |     |                          
|                                         | Earnings from operations before income taxes |           | 9.4 |             | 9.9 |                          
|                                         | Total equity                                 |           | 6.9 |             | 7.3 |                          

Credit Risk

Credit risk is the risk of loss resulting from the failure of a counterparty to honour its financial obligations to the company. Credit risk arises predominantly with respect to
cash and short term investments, investments in debt instruments, insurance contract receivables, recoverable from reinsurers and receivable from counterparties to derivative contracts (primarily
total return swaps and CPI-linked derivatives). There were no significant changes to the company's exposure to credit risk (except as set out in the discussion which follows) or the framework
used to monitor, evaluate and manage credit risk at December 31, 2014 compared to December 31, 2013.

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The
company's aggregate gross credit risk exposure at December 31, 2014 (without taking into account amounts held by the company as collateral) was comprised as follows:

December 31,
2014

December 31,
2013Cash and short term investments

6,293.3

8,011.4Bonds:U.S., U.K., German, and Canadian sovereign government

2,408.2

2,134.7Other sovereign government

1,261.0

620.5Canadian provincials

217.1

164.7U.S. states and municipalities

6,998.2

6,227.7Corporate and other

1,534.8

1,405.2Receivable from counterparties to derivative contracts

514.9

219.6Insurance contract receivables

1,931.7

2,017.0Recoverable from reinsurers

3,982.1

4,974.7Other assets

664.9

561.4Total gross credit risk exposure

25,806.2

26,336.9


At December 31, 2014, the company had income taxes refundable of $51.1 (December 31, 2013  $114.1).

Cash and Short Term Investments

The company's cash and short term investments (including at the holding company) are held at major financial institutions in the jurisdictions in which the operations are
located. At December 31, 2014, 89.0% of these balances were held in Canadian and U.S. financial institutions, 3.4% in European financial institutions and 7.6% in other foreign financial
institutions (December 31, 2013  93.0%, 2.3% and 4.7% respectively). The company monitors risks associated with cash and short term investments by
regularly reviewing the financial strength and creditworthiness of these financial institutions and more frequently during periods of economic volatility. As a result of these reviews, the company may
transfer balances from financial institutions where it perceives heightened credit risk to other institutions considered by management to be more stable.

Investments in Debt Instruments

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

As
at December 31, 2014 the company had investments with a fair value of $9,978.9 (December 31, 2013  $8,298.0) in bonds exposed to credit risk
representing in the aggregate 38.1% (December 31, 2013  33.4%) of the total investment portfolio (all bonds included in Canadian provincials,
U.S. states and municipalities, corporate and other, and other sovereign government bonds). Other sovereign government bonds included Greek bonds purchased at deep discounts to par of $178.6
(December 31, 2013  $248.9) that were rated below investment grade. As at December 31, 2014 and 2013, the company did not have any investments in
bonds issued by Ireland, Italy, Portugal or Spain. The company considers its investment in sovereign bonds rated AA/Aa or higher (primarily sovereign bonds issued by the U.S., U.K., German and
Canadian governments, including $2,094.2 (December 31, 2013  $1,669.6) of U.S. treasury bonds), representing 9.3% (December 31,
2013  9.1%) of the total investment portfolio, to present only a nominal risk of default. The company's exposure to credit risk from its investment in debt
securities remained substantially unchanged at December 31, 2014 compared to December 31, 2013 notwithstanding purchases of higher yielding Canadian corporate bonds during 2014. There
were no other significant changes to the company's framework used to monitor, evaluate and manage credit risk at December 31, 2014 compared to December 31, 2013 with respect to the
company's investments in debt securities.

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

December 31, 2014

December 31, 2013Issuer Credit Rating

Amortized
cost

Carrying
value

%

Amortized
cost

Carrying
value

%AAA/Aaa

2,402.4

2,636.2

21.2

2,693.0

2,533.8

24.0AA/Aa

5,266.0

6,419.2

51.8

3,994.5

4,472.8

42.4A/A

839.8

956.4

7.7

2,135.8

2,247.8

21.3BBB/Baa

994.5

1,097.4

8.8

169.9

177.4

1.7BB/Ba

35.1

51.8

0.4

34.9

44.6

0.4B/B

359.7

178.6

1.4

447.3

294.5

2.8Lower than B/B and unrated

879.5

1,079.7

8.7

774.3

781.9

7.4Total

10,777.0

12,419.3

100.0

10,249.7

10,552.8

100.0


There were no significant changes to the composition of the company's fixed income portfolio classified according to the higher of each security's respective S&P and Moody's
issuer credit rating at December 31, 2014 compared to December 31, 2013, notwithstanding the increase in the categories rated AA/Aa and BBB/Baa. The increase in bonds rated AA/Aa and
BBB/Baa reflected an upgrade to the credit rating on certain of the company's taxable U.S. state bonds (in the A/A category on December 31, 2013) and the purchases of other
sovereign government bonds respectively. At December 31, 2014, 89.5% (December 31, 2013  89.4%) of the fixed income portfolio carrying value was
rated investment grade or better, with 73.0% (December 31, 2013  66.4%) being rated AA or better (primarily consisting of government obligations). At
December 31, 2014 holdings of fixed income securities in the ten issuers (excluding U.S., Canadian, U.K. and German sovereign government bonds) to which the company had the greatest exposure
totaled $4,829.7 (December 31, 2013  $3,324.3), which represented approximately 18.4% (December 31,
2013  13.4%) of the total investment portfolio. The exposure to the largest single issuer of corporate bonds held at December 31, 2014 was $653.3
(December 31, 2013  $250.0), which represented approximately 2.5% (December 31, 2013  1.0%) of the total
investment portfolio.

The
consolidated investment portfolio included $7.0 billion (December 31, 2013  $6.2 billion) of U.S. state and municipal bonds
(approximately $5.2 billion tax-exempt, $1.8 billion taxable), a large portion of which were purchased during 2008 and are owned in the subsidiary investment portfolios. A significant
portion of the company's investment in U.S. state and municipal bonds, approximately $3.9 billion at December 31, 2014 (December 31,
2013  $3.7 billion), are insured by Berkshire Hathaway Assurance Corp. for the payment of interest and principal in the event of issuer default; the
company believes that this insurance significantly mitigates the credit risk associated with these bonds.

Counterparties to Derivative Contracts

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

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

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

December 31,
2014

December 31,
2013Total derivative assets(1)

514.9

219.6Impact of net settlement arrangements

(110.0
)
(136.1
)Fair value of collateral deposited for the benefit of the company(2)

(171.1
)
(47.4
)Excess collateral pledged by the company in favour of counterparties

137.1

123.1Initial margin not held in segregated third party custodian accounts

61.8

60.0Net derivative counterparty exposure after net settlement and collateral arrangements

432.7

219.2


The
fair value of the collateral deposited for the benefit of the company at December 31, 2014 consisted of cash of $27.8 and government securities of $164.5 (December 31,
2013  $25.3 and $25.1 respectively). The company had not exercised its right to sell or repledge collateral at December 31, 2014.

Recoverable from Reinsurers

Credit exposure on the company's recoverable from reinsurers balance existed at December 31, 2014 to the extent that any reinsurer may not be able or willing to reimburse
the company under the terms of the relevant reinsurance arrangements. The company has a process to regularly assess the creditworthiness of reinsurers with whom it transacts business. Internal
guidelines generally require reinsurers to have strong A.M. Best ratings and maintain capital and surplus exceeding $500.0. Where contractually provided for, the company has collateral for
outstanding balances in the form of cash, letters of credit, guarantees or assets held in trust accounts. This collateral may be drawn on when amounts remain unpaid beyond contractually specified time
periods on an individual reinsurer basis.

The
company's reinsurance security department conducts ongoing detailed assessments of current and potential reinsurers and annual reviews on impaired reinsurers, and provides recommendations for
uncollectible reinsurance provisions for the group. The reinsurance security department also collects and maintains individual and group reinsurance exposures aggregated across the group. Most of the
reinsurance balances for reinsurers rated B++ and lower or which are not rated were inherited by the company on acquisition of a subsidiary. The company's largest single reinsurer (Swiss Re
America Corp.) represents 4.4% (December 31, 2013  5.6%) of shareholders' equity attributable to shareholders of Fairfax and is rated A+
by A.M. Best.

The
company's gross exposure to credit risk from counterparties to its reinsurance contracts was lower at December 31, 2014 compared to December 31, 2013 principally as a result of
normal cession and collection activity at Runoff including the commutation of a significant reinsurance recoverable balance. Changes that occurred in the provision for uncollectible reinsurance during
the period are disclosed in note 9.

94

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The
following table presents the gross recoverable from reinsurers classified according to the financial strength rating of the reinsurers. Pools and associations, shown separately, are generally
government or similar insurance funds carrying limited credit risk.

|                                        |  | December 31, 2014 |   | December 31, 2013 | 
|--------------------------------------- |  | ----------------- | - | ----------------- | 
|
|A++                                     |  | 463.4             |   | 108.3             | 
|A+                                      |  | 1,425.2           |   | 427.3             | 
|A                                       |  | 1,289.6           |   | 133.6             | 
|A-                                      |  | 346.4             |   | 186.5             | 
|B++                                     |  | 23.3              |   | 12.7              | 
|B+                                      |  | 2.1               |   | 0.7               | 
|B or lower                              |  | 28.7              |   | 23.8              | 
|Not rated                               |  | 539.4             |   | 104.2             | 
|Pools and associations                  |  | 68.3              |   | 22.2              | 
|                                        |  |                   |   |                   | 
|                                        |  | 4,186.4           |   | 1,019.3           | 
|Provision for uncollectible reinsurance |  | (204.3            | ) |                   | 
|                                        |  |                   |   |                   | 
|Recoverable from reinsurers             |  | 3,982.1           |   |                   | 
|                                        |  |                   |   |                   | 

Liquidity Risk

Liquidity risk is the potential for loss if the company is unable to meet financial commitments in a timely manner at reasonable costs as they fall due. It is the company's
policy to ensure that sufficient liquid assets are available to meet financial commitments, including liabilities to policyholders and debt holders, dividends on preferred shares and investment
commitments. Cash flow analysis is performed on an ongoing basis at both the holding company and subsidiary company level to ensure that future cash needs are met or exceeded by cash flows generated
from the ongoing operations.

The
holding company's known significant commitments for 2015 consist of the funding of the Brit Offer ($1.88 billion (£1.22 billion)), payment of the $216.1
($10.00 per share) dividend on common shares (paid January 2015), interest and corporate overhead expenses, preferred share dividends, income tax payments and potential cash outflows
related to derivative contracts (described below). The net proceeds from underwritten public offerings (described in more detail in notes 15 and 16) of 1.15 million subordinate
voting shares ($575.9), 9.2 million Series M preferred shares ($179.0) and Cdn$350.0 of 4.95% Fairfax senior notes due 2025 ($275.7), all of which closed on March 3, 2015, will be
used to finance the Brit Offer.

On
August 13, 2014 the company completed a private debt offering of $300.0 principal amount of 4.875% senior notes due August 13, 2024 for net proceeds of $294.2
(see note 15). The company used a portion of these net proceeds to fund the redemption in the fourth quarter of 2014 of the $50.0 principal amount of OdysseyRe Series B unsecured
senior notes due 2016 and the $25.0 principal amount of American Safety trust preferred securities due 2035 and disclosed that it intends to use the remaining net proceeds to fund the repayment, upon
maturity, of the Fairfax ($82.4) and OdysseyRe ($125.0) unsecured senior notes due in 2015.

The
company believes that holding company cash and investments, net of holding company short sale and derivative obligations at December 31, 2014 of $1,212.7 provides adequate liquidity to meet
the holding company's known obligations in 2015. The holding company expects to continue to receive investment management and administration fees from its insurance and reinsurance subsidiaries,
investment income on its holdings of cash and investments, and dividends from its insurance and reinsurance subsidiaries. To further augment its liquidity, the holding company can draw upon its $300.0
unsecured revolving credit facility. On February 16, 2015, a Canadian chartered bank provided the company with a £1.2 billion commitment for the full amount of the
consideration payable pursuant to the Brit Offer described in note 23. For further details related to the credit facility and the commitment, refer to note 15 (Subsidiary Indebtedness,
Long Term Debt and Credit Facilities).

95

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The
liquidity requirements of the insurance and reinsurance subsidiaries principally relate to the liabilities associated with underwriting, operating costs and expenses, the payment of dividends to
the holding company, contributions to their subsidiaries, payment of principal and interest on their outstanding debt obligations, income tax payments and certain derivative obligations (described
below). Liabilities associated with underwriting include the payment of claims and direct commissions. Historically, the insurance and reinsurance subsidiaries have used cash inflows from operating
activities (primarily the collection of premiums and reinsurance commissions) and investment activities (primarily repayments of principal, sales of investment securities and investment income) to
fund their liquidity requirements. The insurance and reinsurance subsidiaries may also receive cash inflows from financing activities (primarily distributions received from their subsidiaries).

The
company's insurance and reinsurance subsidiaries (and the holding company on a consolidated basis) focus on the stress that could be placed on liquidity requirements as a result of severe
disruption or volatility in the capital markets or extreme catastrophe activity or the combination of both. The insurance and reinsurance subsidiaries maintain investment strategies intended to
provide adequate funds to pay claims or withstand disruption or volatility in the capital markets without forced sales of investments. The insurance and reinsurance subsidiaries hold highly liquid,
high quality short-term investment securities and other liquid investment grade fixed maturity securities to fund anticipated claim payments, operating expenses and commitments related to investments.
At December 31, 2014 portfolio investments net of short sale and derivative obligations totaled $25.0 billion. These portfolio investments may include investments in inactively traded
corporate debentures, preferred stocks, common stocks and limited partnership interests that are relatively illiquid. At December 31, 2014 these asset classes represented approximately 7.6%
(December 31, 2013  7.6%) of the carrying value of the insurance and reinsurance subsidiaries' portfolio investments.

The
insurance and reinsurance subsidiaries and the holding company may experience cash inflows or outflows (which at times could be significant) related to their derivative contracts, including
collateral requirements and cash settlements of market value movements of total return swaps which have occurred since the most recent reset date. During 2014 the insurance and reinsurance
subsidiaries and the holding company paid net cash of $194.2 (2013  $1,615.4) and $113.4 (2013  $67.8) respectively, in
connection with long and short equity and equity index total return swap derivative contracts (excluding the impact of collateral requirements).

The
insurance and reinsurance subsidiaries typically fund such obligations from cash provided by operating activities (and may fund such obligations from sales of equity-related investments,
the market value of which will generally vary inversely with the market value of short equity and equity index total return swaps). The holding company typically funds any such obligations from
holding company cash and investments and its additional sources of liquidity as discussed above.

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The
following tables set out the maturity profile of the company's financial liabilities based on the expected undiscounted cash flows from the end of the year to the contractual maturity date or the
settlement date:

|                                                  |  | December 31, 2014
|------------------------------------------------- |  | -----------------
|
|Subsidiary indebtedness  principal and interest  |  | 7.7              
|Accounts payable and accrued liabilities(1)       |  | 844.6            
|Funds withheld payable to reinsurers(2)           |  | 1.3              
|Provision for losses and loss adjustment expenses |  | 1,064.3          
|Long term debt  principal                        |  | 2.3              
|Long term debt  interest                         |  | 36.4             
|                                                  |  |                  
|                                                  |  | 1,956.6          
|                                                  |  |                  

|
|

|                                                  |  | December 31, 2013
|------------------------------------------------- |  | -----------------
|
|Subsidiary indebtedness  principal and interest  |  | 27.0             
|Accounts payable and accrued liabilities(1)       |  | 789.1            
|Funds withheld payable to reinsurers(2)           |  | 1.4              
|Provision for losses and loss adjustment expenses |  | 1,176.8          
|Long term debt  principal                        |  | 1.3              
|Long term debt  interest                         |  | 33.9             
|                                                  |  |                  
|                                                  |  | 2,029.5          
|                                                  |  |                  

The
timing of loss payments is not fixed and represents the company's best estimate. The payment obligations which are due beyond one year in accounts payable and accrued liabilities primarily relate
to certain payables to brokers and reinsurers not expected to be settled in the short term. At December 31, 2014 the company had income taxes payable of $118.3 (December 31,
2013  $80.1).

The
following table provides a maturity profile of the company's short sale and derivative obligations based on the expected undiscounted cash flows from the end of the year to the contractual
maturity date or the settlement date:

|                                                  |  | December 31, 2014 |  | December 31, 2013
|------------------------------------------------- |  | ----------------- |  | -----------------
|
|Equity index total return swaps  short positions |  | 97.2              |  |                 
|Equity total return swaps  short positions       |  | 36.5              |  |                 
|Equity total return swaps  long positions        |  | 15.9              |  |                 
|Foreign exchange forward contracts                |  | 4.0               |  | 1.3              
|Other derivative contracts                        |  | 5.9               |  |                 
|                                                  |  |                   |  |                  
|                                                  |  | 159.5             |  | 1.3              
|                                                  |  |                   |  |                  

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Market Risk

Market risk (comprised of currency risk, interest rate risk and other price risk) is the risk that the fair value or future cash flows of a financial instrument will fluctuate
because of changes in market prices. The company is exposed to market risk principally in its investing activities but also in its underwriting activities to the extent that those activities expose
the company to foreign currency risk. The company's investment portfolios are managed with a long term, value-oriented investment philosophy emphasizing downside protection. The company has policies
to limit and monitor its individual issuer exposures and aggregate equity exposure. Aggregate exposure to single issuers and total equity positions are monitored at the subsidiary level and in
aggregate at the company level. The following is a discussion of the company's primary market risk exposures and how those exposures are currently managed.

Interest Rate Risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. As interest rates
rise, the fair value of fixed income investments decline and, conversely, as interest rates decline, the fair value of fixed income investments rise. In each case, the longer the maturity of the
financial instrument, the greater the consequence of a change in interest rates. The company's interest rate risk management strategy is to position its fixed income securities portfolio based on its
view of future interest rates and the yield curve, balanced with liquidity requirements. The company may reposition the portfolio in response to changes in the interest rate environment. At
December 31, 2014 the company's investment portfolio included $12.4 billion of fixed income securities (measured at fair value) which are subject to interest rate risk.

In
the portions of the table below involving an increase in interest rates, the company's exposure to interest rate risk at December 31, 2014 as measured by the hypothetical percentage change
in fair value, decreased modestly relative to December 31, 2013, principally reflecting the interaction of the decrease in interest rates in 2014 with the call features embedded in the majority
of the company's tax exempt municipal bonds. Decreasing interest rates in 2014 had the effect of increasing the likelihood that issuers would call those bonds prior to the contractual maturity date
and refinance at lower interest rates causing the fair value of the majority of those bonds to reflect the term until the call date rather than the term to the contractual maturity date. Under the
interest rate environment that prevailed at December 31, 2013, the majority of those bonds were expected to remain outstanding until their contractual maturity date. In the portions of the
table below involving a decrease in interest rates, the potential for the company's bond portfolio to appreciate increased at
December 31, 2014 compared to December 31, 2013, principally as a result of the decrease in interest rates in 2014 which generally results in an increase in the duration of the bond
portfolio. There were no significant changes to the company's framework used to monitor, evaluate and manage interest rate risk at December 31, 2014 compared to December 31, 2013.

Movements
in the term structure of interest rates affect the level and timing of recognition in earnings of gains and losses on fixed income securities held. Generally, the company's investment income
may be reduced during sustained periods of lower interest rates as higher yielding fixed income securities are called, mature, or are sold and the proceeds are reinvested at lower rates. During
periods of rising interest rates, the market value of the company's existing fixed income securities will generally decrease and gains on fixed income securities will likely be reduced. Losses are
likely to be incurred following significant increases in interest rates. General economic conditions, political conditions and many other factors can also adversely affect the bond markets and,
consequently, the value of the fixed income securities held. These risks are monitored by the company's senior portfolio managers along with the company's CEO and are considered when managing the
consolidated bond portfolio and yield.

98

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The
table below displays the potential impact of changes in interest rates on the company's fixed income portfolio based on parallel 200 basis point shifts up and down, in 100 basis
point increments. This analysis was performed on each individual security, with the hypothetical effect on net earnings calculated on an after-tax basis.

|                         |  | December 31, 2014 |  | December 31, 2013 |  
|------------------------ |  | ----------------- |  | ----------------- | -
|
|Change in interest rates |  |                   |  |                   |  
|200 basis point increase |  | 10,517.6          |  | (1,290.4          | )
|100 basis point increase |  | 11,393.1          |  | (696.5            | )
|No change                |  | 12,419.3          |  |                  |  
|100 basis point decrease |  | 13,668.7          |  | 847.2             |  
|200 basis point decrease |  | 15,214.3          |  | 1,894.8           |  

Certain shortcomings are inherent in the method of analysis presented above. Computations of the prospective effects of hypothetical interest rate changes are based on numerous
assumptions, including the maintenance of the level and composition of fixed income securities at the indicated date, and should not be relied on as indicative of future results. Actual values may
differ from the projections presented should market conditions vary from assumptions used in the calculation of the fair value of individual securities; such variations include non-parallel shifts in
the term structure of interest rates and a change in individual issuer credit spreads.

Market Price Fluctuations

Market price fluctuation is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices (other than those
arising from interest rate risk or currency risk), whether those changes are caused by factors specific to the individual financial instrument or its issuer, or other factors affecting all similar
financial instruments in the market. Changes to the company's exposure to equity price risk through its equity and equity-related holdings at December 31, 2014 compared to December 31,
2013 are described below.

The
company holds significant investments in equities and equity-related securities. The market value and the liquidity of these investments are volatile and may vary dramatically either up or down in
short periods, and their ultimate value will therefore only be known over the long term or on disposition. The company has economically hedged its equity and equity-related holdings (comprised of
common stocks, convertible preferred stocks, convertible bonds, non-insurance investments in associates and equity-related derivatives) against a potential decline in equity markets by way of short
positions effected through equity and equity index total return swaps, including short positions in certain individual equities and the Russell 2000 index, the S&P/TSX 60 index and other equity
indexes (the "indexes"). The company's economic equity hedges are structured to provide a return which is inverse to changes in the fair values of the indexes and certain individual equities.

At
December 31, 2014 equity hedges with a notional amount of $6,856.9 (December 31, 2013  $6,327.4) represented 89.6% (December 31,
2013  98.2%) of the company's
equity and equity-related holdings of $7,651.7 (December 31, 2013  $6,442.6). The decrease in the hedge ratio resulted from appreciation and net purchases
of equity and equity-related holdings, which exceeded the performance of the equity hedges and net purchases of equity hedges, during the year. During 2014 the company's equity and
equity-related holdings after equity hedges produced net gains of $347.4 (2013  net losses of $536.9).

One
risk of a hedging strategy (sometimes referred to as basis risk) is the risk that the fair value or cash flows of derivative instruments designated as economic hedges will not experience changes
in exactly the opposite directions from those of the underlying hedged exposure. This imperfect correlation between the derivative instrument and underlying hedged exposure creates the potential for
excess gains or losses in a hedging strategy. In the context of the company's equity hedges, the company expects that there may be periods when the notional amount of the equity hedges may exceed or
be deficient relative to the company's equity price risk exposure as a result of the timing of opportunities to exit and enter hedges at attractive prices, decisions by the company to hedge an amount
less than the company's full equity exposure or, as a result of any non-correlated performance of the equity hedges relative to the equity and equity-related holdings (basis risk).

99

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The
company's risk management objective when selecting a hedging instrument (including its equity index total return swaps) is to economically protect capital over potentially long periods of time and
especially during periods of market turbulence. The company regularly monitors the effectiveness of its equity hedging program on a prospective and retrospective basis. Based on its historical
observation, the company believes that its hedges of its equity and equity-related holdings will be effective in the medium to long term and especially in the event of a significant market correction.
However, due to the lack of a perfect correlation between the derivative instruments and the hedged exposures, combined with other market uncertainties, it is not possible to predict the future impact
of the company's hedging program related to equity risk.

The
following table summarizes the effect of the equity hedges and the equity and equity-related holdings on the company's financial position as at December 31, 2014 and December 31,
2013 and results of operations for the years then ended:

|                                   |                                          | December 31, 2014                                 |         | December 31, 2013 |         | Year ended
December 31,
2014 |         | Year ended
December 31,
2013 |        
|---------------------------------- | ---------------------------------------- | ------------------------------------------------- | ------- | ----------------- | ------- | ---------------------------- | ------- | ---------------------------- | -------
|
|Equity exposures:                  |                                          |                                                   |         |                   |         |                              |         |                              |        
|                                   | Common stocks                            |                                                   | 4,938.3 |                   | 4,938.3 |                              | 4,100.6 |                              | 4,100.6
|                                   | Preferred stocks  convertible           |                                                   | 329.8   |                   | 329.8   |                              | 479.0   |                              | 479.0  
|                                   | Bonds  convertible                      |                                                   | 773.3   |                   | 773.3   |                              | 408.5   |                              | 408.5  
|                                   | Investments in associates(1)             |                                                   | 1,397.2 |                   | 1,178.1 |                              | 1,173.9 |                              | 1,041.9
|                                   | Derivatives and other invested assets:   |                                                   |         |                   |         |                              |         |                              |        
|                                   |                                          | Equity total return swaps  long positions        |         | 177.9             |         | (15.9                        | )       | 263.5                        |        
|                                   |                                          | Equity warrants and call options                  |         | 35.2              |         | 35.2                         |         | 17.1                         |        
|                                   |                                          |                                                   |         |                   |         |                              |         |                              |        
|                                   | Total equity and equity related holdings |                                                   | 7,651.7 |                   | 7,238.8 |                              | 6,442.6 |                              | 6,055.0
|                                   |                                          |                                                   |         |                   |         |                              |         |                              |        
|Hedging instruments:               |                                          |                                                   |         |                   |         |                              |         |                              |        
|                                   | Derivatives and other invested assets:   |                                                   |         |                   |         |                              |         |                              |        
|                                   |                                          | Equity total return swaps  short positions       |         | (1,965.1          | )       | 61.2                         |         | (1,744.4                     | )      
|                                   |                                          | Equity index total return swaps  short positions |         | (4,891.8          | )       | (67.4                        | )       | (4,583.0                     | )      
|                                   |                                          |                                                   |         |                   |         |                              |         |                              |        
|                                   |                                          | (6,856.9                                          | )       | (6.2              | )       | (6,327.4                     | )       | (190.7                       | )      
|                                   |                                          |                                                   |         |                   |         |                              |         |                              |        
|Net exposure and financial effects |                                          | 794.8                                             |         |                   |         | 115.2                        |         |                              |        
|                                   |                                          |                                                   |         |                   |         |                              |         |                              |        

The
tables that follow illustrate the potential impact on net earnings of various combinations of changes in fair value of the company's equity and equity-related holdings and simultaneous changes in
global equity markets at December 31, 2014 and 2013. The analysis assumes variations ranging from 5% to 10% which the company believes to be reasonably possible based on analysis of the return
on various equity indexes and management's knowledge of global equity markets.

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

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December 31, 2014

|                                                           |  | Scenario |  
|---------------------------------------------------------- |  | -------- | -
|
|Change in the company's equity and equity-related holdings |  | +10%     |  
|Change in global equity markets                            |  | +10%     |  
|Equity and equity-related holdings                         |  | 576.7    |  
|Equity hedges                                              |  | (685.7   | )
|                                                           |  |          |  
|Pre-tax impact on net earnings                             |  | (109.0   | )
|                                                           |  |          |  
|After-tax impact on net earnings                           |  | (89.0    | )
|                                                           |  |          |  

December 31, 2013

|                                                           |  | Scenario |  
|---------------------------------------------------------- |  | -------- | -
|
|Change in the company's equity and equity-related holdings |  | +10%     |  
|Change in global equity markets                            |  | +10%     |  
|Equity and equity-related holdings                         |  | 515.2    |  
|Equity hedges                                              |  | (651.8   | )
|                                                           |  |          |  
|Pre-tax impact on net earnings                             |  | (136.6   | )
|                                                           |  |          |  
|After-tax impact on net earnings                           |  | (99.6    | )
|                                                           |  |          |  

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

At
December 31, 2014 the company's exposure to the ten largest issuers of common stock owned in the investment portfolio was $3,020.9 (December 31,
2013  $2,713.1), which represented 11.5% (December 31, 2013  10.9%) of the total investment portfolio. The exposure
to the largest single issuer of common stock held at December 31, 2014 was $700.0 (December 31, 2013  $958.9), which represented 2.7%
(December 31, 2013  3.9%) of the total investment portfolio.

Risk of Decreasing Price Levels

The risk of decreases in the general price level of goods and services is the potential for a negative impact on the consolidated balance sheet (including the company's equity
and equity-related holdings and fixed income investments in non-sovereign debt) and/or consolidated statement of earnings. Among their effects on the economy, decreasing price levels typically result
in decreased consumption, restriction of credit, shrinking output and investment and numerous bankruptcies.

The
company has purchased derivative contracts referenced to the CPI in the geographic regions in which it operates, which serve as an economic hedge against the potential adverse financial impact on
the company of decreasing price levels. At December 31, 2014 these contracts have a remaining weighted average life of 7.4 years (December 31,
2013  7.5 years), a notional amount of $111,797.9 (December 31, 2013  $82,866.9) and a fair value of $238.4
(December 31, 2013 -$131.7). As the average remaining life of a contract declines, the fair value of the contract (excluding the impact of CPI changes) will generally decline. The company's
maximum potential loss on any contract is limited to the original cost of that contract.

101

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During
2014 the company purchased $35,954.2 (2013  $32,327.7) notional amount of CPI-linked derivative contracts at a cost of $120.6
(2013  $99.8). Additional premiums of $24.0 were paid in 2013 to increase the strike price of certain CPI-linked derivative contracts (primarily the
U.S. CPI-linked derivatives). The company's CPI-linked derivative contracts produced net unrealized gains of $17.7 in 2014 (2013  net unrealized losses
of $126.9).

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

Foreign Currency Risk

Foreign currency risk is the risk that the fair value or cash flows of a financial instrument or another asset will fluctuate because of changes in exchange rates and as a
result, could produce an adverse effect on earnings and equity when measured in a company's functional currency. The company is exposed to foreign currency risk through transactions conducted in
currencies other than the U.S. dollar, and also through its investments in associates and net investment in subsidiaries that have a functional currency other than the U.S. dollar. Long
and short foreign exchange forward contracts primarily denominated in the euro, the British pound sterling and the Canadian dollar are used to manage foreign currency exposure on foreign currency
denominated transactions. Foreign currency denominated liabilities may be used to manage the company's foreign currency
exposures to net investments in foreign operations having a functional currency other than the U.S. dollar. The company's exposure to foreign currency risk was not significantly different at
December 31, 2014 compared to December 31, 2013.

The
company's foreign currency risk management objective is to mitigate the net earnings impact of foreign currency rate fluctuations. The company has a process to accumulate, on a consolidated basis,
all significant asset and liability exposures relating to foreign currencies. These exposures are matched and any net unmatched positions, whether long or short, are identified. The company may then
take action to cure an unmatched position through the acquisition of a derivative contract or the purchase or sale of investment assets denominated in the exposed currency.

A
portion of the company's premiums are written in foreign currencies and a portion of the company's loss reserves are denominated in foreign currencies. Moreover, a portion of the company's cash and
investments are held in currencies other than the U.S. dollar. In general, the company manages foreign currency risk on liabilities by investing in financial instruments and other assets
denominated in the same currency as the liabilities to which they relate. The company also monitors the exposure of invested assets to foreign currency risk and limits these amounts as deemed
necessary. The company may nevertheless, from time to time, experience gains or losses resulting from fluctuations in the values of these foreign currencies, which may favourably or adversely affect
operating results.

At
December 31, 2014 the company had designated the carrying value of Cdn$1,525.0 principal amount of its Canadian dollar denominated unsecured senior notes with a fair value of $1,488.7
(December 31, 2013  principal amount of Cdn$1,525.0 with a fair value of $1,544.4) as a hedge of its net investment in its Canadian subsidiaries for
financial reporting purposes. In 2014 the company recognized pre-tax gains of $118.7 (2013  $96.9) related to foreign currency movements on the unsecured senior
notes in change in gains on hedge of net investment in Canadian subsidiaries in the consolidated statement of comprehensive income.

The
pre-tax foreign exchange effect on certain line items in the company's consolidated financial statements for the years ended December 31 follows:

|                                                           |                            | 2014  |        | 2013 |      
|---------------------------------------------------------- | -------------------------- | ----- | ------ | ---- | -----
|Net gains (losses) on investments                          |                            |       |        |      |      
|                                                           | Investing activities       |       | (154.5 | )    | 69.3 
|                                                           | Underwriting activities    |       | 53.5   |      | 15.8 
|                                                           | Foreign currency contracts |       | 204.4  |      | (22.7
|                                                           |                            |       |        |      |      
|Foreign currency gains included in pre-tax earnings (loss) |                            | 103.4 |        | 62.4 |      
|                                                           |                            |       |        |      |      

102

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The table below shows the approximate effect of the appreciation of the U.S. dollar compared with the Canadian dollar, the euro and the British pound sterling, and all
other currencies, respectively, by 5% on pre-tax earnings (loss), net earnings (loss), pre-tax other comprehensive income (loss) and other comprehensive income (loss).

|                                                    |  | 2014   |   | 2013  |  
|--------------------------------------------------- |  | ------ | - | ----- | -
|Canadian dollar                                     |  |        |   |       |  
|Impact on pre-tax earnings (loss)                   |  | 4.1    |   | (4.2  | )
|Impact on net earnings (loss)                       |  | 1.5    |   | (5.4  | )
|Impact on pre-tax other comprehensive income (loss) |  | (29.6  | ) | (15.7 | )
|Impact on other comprehensive income (loss)         |  | (25.9  | ) | (12.4 | )
|Euro                                                |  |        |   |       |  
|Impact on pre-tax earnings (loss)                   |  | (2.0   | ) | (37.9 | )
|Impact on net earnings (loss)                       |  | (4.3   | ) | (27.5 | )
|Impact on pre-tax other comprehensive income (loss) |  | 7.2    |   | 18.3  |  
|Impact on other comprehensive income (loss)         |  | 1.3    |   | 10.7  |  
|British pound sterling                              |  |        |   |       |  
|Impact on pre-tax earnings (loss)                   |  | 7.6    |   | 6.0   |  
|Impact on net earnings (loss)                       |  | 4.8    |   | 4.0   |  
|Impact on pre-tax other comprehensive income (loss) |  | (43.6  | ) | (39.2 | )
|Impact on other comprehensive income (loss)         |  | (35.7  | ) | (32.3 | )
|All other currencies                                |  |        |   |       |  
|Impact on pre-tax earnings (loss)                   |  | 39.9   |   | 67.4  |  
|Impact on net earnings (loss)                       |  | 18.9   |   | 50.0  |  
|Impact on pre-tax other comprehensive income (loss) |  | (63.5  | ) | (50.9 | )
|Impact on other comprehensive income (loss)         |  | (61.9  | ) | (50.6 | )
|Total                                               |  |        |   |       |  
|Impact on pre-tax earnings (loss)                   |  | 49.6   |   | 31.3  |  
|Impact on net earnings (loss)                       |  | 20.9   |   | 21.1  |  
|Impact on pre-tax other comprehensive income (loss) |  | (129.5 | ) | (87.5 | )
|Impact on other comprehensive income (loss)         |  | (122.2 | ) | (84.6 | )

In the preceding scenarios, certain shortcomings are inherent in the method of analysis presented, as the analysis is based on the assumption that the 5% appreciation of the
U.S. dollar occurred with all other variables held constant.

103

---



Capital Management

The company's capital management framework is designed to protect, in the following order, its policyholders, its bondholders and its preferred shareholders and then finally to
optimize returns to common shareholders. Effective capital management includes measures designed to maintain capital above minimum regulatory levels, above levels required to satisfy issuer credit
ratings and financial strength ratings requirements, and above internally determined and calculated risk management levels. Total capital at December 31, 2014, comprising total debt,
shareholders' equity attributable to shareholders of Fairfax and non-controlling interests, was $12,922.8 compared to $11,455.0 at December 31, 2013. The company manages its capital based on
the following financial measurements and ratios:

|                                                                                    |  | December 31, 2014 |   | December 31, 2013 |  
|----------------------------------------------------------------------------------- |  | ----------------- | - | ----------------- | -
|Holding company cash and investments (net of short sale and derivative obligations) |  | 1,212.7           |   | 1,241.6           |  
|                                                                                    |  |                   |   |                   |  
|Long term debt  holding company borrowings                                         |  | 2,656.5           |   | 2,491.0           |  
|Long term debt  insurance and reinsurance companies                                |  | 385.9             |   | 458.8             |  
|Subsidiary indebtedness  non-insurance companies                                   |  | 37.6              |   | 25.8              |  
|Long term debt  non-insurance companies                                            |  | 99.0              |   | 18.9              |  
|                                                                                    |  |                   |   |                   |  
|Total debt                                                                          |  | 3,179.0           |   | 2,994.5           |  
|                                                                                    |  |                   |   |                   |  
|Net debt                                                                            |  | 1,966.3           |   | 1,752.9           |  
|                                                                                    |  |                   |   |                   |  
|Common shareholders' equity                                                         |  | 8,361.0           |   | 7,186.7           |  
|Preferred stock                                                                     |  | 1,164.7           |   | 1,166.4           |  
|Non-controlling interests                                                           |  | 218.1             |   | 107.4             |  
|                                                                                    |  |                   |   |                   |  
|Total equity                                                                        |  | 9,743.8           |   | 8,460.5           |  
|                                                                                    |  |                   |   |                   |  
|Net debt/total equity                                                               |  | 20.2              | % | 20.7              | %
|Net debt/net total capital(1)                                                       |  | 16.8              | % | 17.2              | %
|Total debt/total capital(2)                                                         |  | 24.6              | % | 26.1              | %
|Interest coverage(3)                                                                |  | 12.3              | x | n/a               |  
|Interest and preferred share dividend distribution coverage(4)                      |  | 9.0               | x | n/a               |  

The
company manages its capital using the ratios presented above because they provide an indication of the company's ability to issue and service debt without impacting the operating companies or
their portfolio investments.

During
2014 the company completed a private debt offering of $300.0 principal amount of 4.875% senior notes due August 13, 2024 for net proceeds of $294.2. The company used a portion of these
net proceeds to redeem the $50.0 principal amount of OdysseyRe Series B unsecured senior notes due 2016 and the $25.0 principal amount of American Safety trust preferred securities due 2035 and
disclosed that it intends to use the remaining net proceeds to fund the repayment, upon maturity, of the Fairfax ($82.4) and OdysseyRe ($125.0) unsecured senior notes due in 2015.

During
2013 the company completed a public debt offering of Cdn$250.0 principal amount of a re-opening of unsecured senior notes due 2022 for net proceeds of $259.9 (Cdn$258.1). The company used those
proceeds to fund the repayment upon maturity of $182.9 principal amount of OdysseyRe's unsecured senior notes due November 1, 2013, and repurchased and redeemed $48.4 of the outstanding
principal amount of its unsecured senior notes due 2017. In addition, the company issued 1 million subordinate voting shares at a price of Cdn$431.00 per share, resulting in net proceeds of
$399.5 (Cdn$417.1). These net proceeds were retained to augment holding company cash and investments and to retire outstanding debt and other corporate obligations from time to time.

104

---



The
company's capital management objectives includes maintaining sufficient liquid resources at the holding company to be able to pay interest on its debt, dividends to its preferred shareholders and
all other holding company obligations. Accordingly, the company monitors its interest and preferred share dividend distribution coverage ratio calculated as described in footnote 4 in the
table above.

In
the U.S., the National Association of Insurance Commissioners ("NAIC") has developed a model law and risk-based capital ("RBC") formula designed to help regulators identify property and casualty
insurers that may be inadequately capitalized. Under the NAIC's requirements, an insurer must maintain total capital and surplus above a calculated threshold or face varying levels of regulatory
action. The threshold is based on a formula that attempts to quantify the risk of a company's insurance, investment and other business activities. At December 31, 2014 and 2013 the
U.S. insurance, reinsurance and runoff subsidiaries had capital and surplus in excess of the regulatory minimum requirement of two times the authorized control level.

In
Canada, property and casualty companies are regulated by the Office of the Superintendent of Financial Institutions on the basis of a minimum supervisory target of 150% of a minimum capital test
("MCT") formula. At December 31, 2014 and 2013 Northbridge's subsidiaries had a weighted average MCT ratio well in excess of the 150% minimum supervisory target.

In
countries other than the U.S. and Canada where the company operates (the United Kingdom, Barbados, Singapore, Malaysia, Hong Kong, Poland, Brazil and Indonesia and other
jurisdictions), the company met or exceeded the applicable regulatory capital requirements at December 31, 2014.

25.  Segmented Information

The company is aholding company which, through its subsidiaries, is engaged in property and casualty insurance, conducted on a
primary and reinsurance basis, and runoff operations. The company identifies its operating segments by operating company consistent with its management structure. The company has aggregated certain of
these operating segments into reporting segments as subsequently described. The accounting policies of the reporting segments are the same as those described in note 3. Transfer prices for
inter-segment transactions are set at arm's length. Geographic premiums are determined based on the domicile of the various subsidiaries and where the primary underlying risk of the business resides.

Insurance

Northbridge  Northbridge is a national commercial property and casualty insurer in Canada providing property and casualty insurance
products through its Northbridge Insurance and Federated subsidiaries.

U.S. Insurance  U.S. Insurance
is comprised of Crum & Forster and Zenith National. Crum & Forster is a national commercial property
and casualty insurance company in the United States writing a broad range of commercial coverages. Its subsidiaries, Seneca Insurance and First Mercury, provide property and casualty insurance
to small businesses and certain specialty coverages. Zenith National is primarily engaged in the workers' compensation insurance business in the United States.

Fairfax
Asia  Fairfax Asia includes the company's operations that underwrite insurance and reinsurance coverages in Singapore (First Capital), Hong Kong
(Falcon), Malaysia (Pacific Insurance) and an 80.0% interest in Indonesia (Fairfax Indonesia acquired on May 21, 2014). Fairfax Asia also includes the company's equity accounted interests in
Mumbai-based ICICI Lombard (26.0%) and Thailand-based Falcon Thailand (40.5%).

Reinsurance

OdysseyRe  OdysseyRe underwrites reinsurance, providing a full range of property and casualty products on a worldwide basis, and
underwrites specialty insurance, primarily in the United States and in the United Kingdom, both directly and through the Lloyd's market in London.

Insurance and Reinsurance  Other

Insurance and Reinsurance  Other is comprised of Group Re, Advent, Polish Re and Fairfax Brasil. Group Re primarily
constitutes the participation of CRC Re and Wentworth (both based in Barbados) in the reinsurance of Fairfax's subsidiaries by quota share or through participation in those subsidiaries' third
party reinsurance programs on the same terms as third party reinsurers. Group Re also writes third party business. Advent is a reinsurance and

105

---



insurance
company, operating through Syndicate 780 at Lloyd's, focused on specialty property reinsurance and insurance risks. Polish Re underwrites reinsurance in Central and
Eastern Europe. Fairfax Brasil writes commercial property and casualty insurance in Brazil.

Runoff

The Runoff reporting segment principally comprises RiverStone (UK), Syndicate 3500, RiverStone Insurance and the U.S. runoff company formed on the merger of TIG
Insurance and International Insurance Company combined with Old Lyme, Fairmont, General Fidelity, Clearwater Insurance, Commonwealth Insurance Company of America (since January 1, 2013) and
American Safety (since October 3, 2013 pursuant to the transaction described in note 23).

Other

The Other reporting segment is comprised of Ridley, William Ashley, Sporting Life, Prime Restaurants, Thomas Cook India, IKYA, The Keg (since February 4, 2014), Praktiker
(since June 5, 2014), Sterling Resorts (consolidated since September 3, 2014), MFXchange (since November 3, 2014) and Pethealth (since November 14, 2014). Ridley is engaged
in the animal nutrition business in the U.S. and Canada. William Ashley is a prestige retailer of exclusive tableware and gifts in Canada. Sporting Life is a Canadian retailer of sporting goods and
sports apparel. Prime Restaurants (acquired on January 10, 2012) franchises, owns and operates a network of casual dining restaurants and pubs primarily in Canada. The assets and liabilities of
Prime Restaurants were de-consolidated from the company's financial reporting effective October 31, 2013 following the sale of Prime Restaurants to Cara. Thomas Cook India is an integrated
travel and travel-related financial services company in India offering a broad range of services that include foreign exchange, corporate and leisure travel and insurance. IKYA (acquired by Thomas
Cook India on May 14, 2013 pursuant to the transaction described in note 23) provides specialized human resources services to leading corporate clients in India. The Keg (acquired on
February 4, 2014 pursuant to the transaction described in note 23) franchises, owns and operates a network of premium dining restaurants across Canada and in select locations in the
United States. Praktiker (acquired on June 5, 2014 pursuant to the transaction described in note 23) is one of the largest home improvement and do-it-yourself goods retailers in
Greece, operating 14 stores. Sterling Resorts (consolidated since September 3, 2014 pursuant to the transaction described in note 23) is engaged in vacation ownership and leisure
hospitality and operates a network of resorts in India. MFXchange (reported in the Other segment since November 3, 2014) is a technology company. Pethealth (acquired on November 14, 2014
pursuant to the transaction described in note 23) is headquartered in Canada and provides pet medical insurance, management software and pet-related database management services in North
America and the United Kingdom. The goodwill and intangible assets associated with Pethealth's marketing of pet medical insurance were allocated to the Crum & Forster and Northbridge
reporting segments since Crum & Forster and Northbridge were to become Pethealth's ongoing insurance carriers. Pethealth's residual assets and liabilities and results of operations were
consolidated in the Other reporting segment.

Corporate and Other

Corporate and Other includes the parent entity (Fairfax Financial Holdings Limited), its subsidiary intermediate holding companies and Hamblin Watsa, an investment management
company. MFXchange was reported in the Corporate and Other segment prior to its transfer to the Other segment as described in the preceding paragraph.

In
the fourth quarter of 2014, Fairfax centralized the ownership of wholly-owned OdysseyRe under a single intermediate holding company in the U.S. (the "OdysseyRe reorganization"). Prior
to the OdysseyRe reorganization, OdysseyRe was owned by Crum & Forster (8.1%), Runoff (TIG Insurance) (20.1%) and Fairfax (71.8%, through various U.S. intermediate holding
companies). The OdysseyRe reorganization had no effect on Fairfax's consolidated financial reporting.

The
OdysseyRe reorganization was principally comprised of the following transactions: OdysseyRe redeemed the investment of Crum & Forster in it and portions of the investments of Runoff and
Fairfax in it in exchange for cash and unaffiliated marketable securities with fair values of $367.5, $510.1 and $12.8 respectively. The remainder of Runoff's investment in OdysseyRe (fair value of
$380.7) was distributed to Fairfax as a dividend-in-kind. Crum & Forster and Runoff remitted to Fairfax a portion of the redemption proceeds received
from OdysseyRe (Crum & Forster paid a dividend of $150.0 and Runoff made an intercompany advance of $350.0), from which Fairfax made a capital contribution to OdysseyRe of $400.0.

106

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Pre-tax Income (Loss) by Reporting Segment

Pre-tax income (loss) by reporting segment for the years ended December 31 was as follows:

2014

|                                               |                           |         |   |          |   |        |   |          |   | Insurance
and
Reinsurance |   |          |   |        |   |       |          |        |   |        |   |          |         
|---------------------------------------------- | ------------------------- | ------- | - | -------- | - | ------ | - | -------- | - | ------------------------- | - | -------- | - | ------ | - | ----- | -------- | ------ | - | ------ | - | -------- | --------
|
|
|
|Gross premiums written                         |                           |         |   |          |   |        |   |          |   |                           |   |          |   |        |   |       |          |        |   |        |   |          |         
|External                                       |                           | 1,107.3 |   | 2,429.1  |   | 567.9  |   | 2,704.1  |   | 487.6                     |   | 7,296.0  |   | 163.9  |   |      |          |       |   |       |   | 7,459.9  |         
|Intercompany                                   |                           | 2.0     |   | 3.4      |   | (4.4   | ) | 35.4     |   | 65.7                      |   | 102.1    |   |       |   |      |          |       |   | (102.1 | ) |         |         
|                                               |                           |         |   |          |   |        |   |          |   |                           |   |          |   |        |   |       |          |        |   |        |   |          |         
|                                               |                           | 1,109.3 |   | 2,432.5  |   | 563.5  |   | 2,739.5  |   | 553.3                     |   | 7,398.1  |   | 163.9  |   |      |          |       |   | (102.1 | ) | 7,459.9  |         
|                                               |                           |         |   |          |   |        |   |          |   |                           |   |          |   |        |   |       |          |        |   |        |   |          |         
|Net premiums written                           |                           | 967.1   |   | 2,067.2  |   | 280.1  |   | 2,393.8  |   | 413.9                     |   | 6,122.1  |   | 179.7  |   |      |          |       |   |       |   | 6,301.8  |         
|                                               |                           |         |   |          |   |        |   |          |   |                           |   |          |   |        |   |       |          |        |   |        |   |          |         
|Net premiums earned                            |                           |         |   |          |   |        |   |          |   |                           |   |          |   |        |   |       |          |        |   |        |   |          |         
|External                                       |                           | 951.3   |   | 2,032.2  |   | 306.7  |   | 2,347.2  |   | 341.2                     |   | 5,978.6  |   | 237.6  |   |      |          |       |   |       |   | 6,216.2  |         
|Intercompany                                   |                           | (9.0    | ) | (11.4    | ) | (34.5  | ) | 9.4      |   | 51.5                      |   | 6.0      |   | (6.0   | ) |      |          |       |   |       |   |         |         
|                                               |                           |         |   |          |   |        |   |          |   |                           |   |          |   |        |   |       |          |        |   |        |   |          |         
|                                               |                           | 942.3   |   | 2,020.8  |   | 272.2  |   | 2,356.6  |   | 392.7                     |   | 5,984.6  |   | 231.6  |   |      |          |       |   |       |   | 6,216.2  |         
|Underwriting expenses                          |                           | (899.6  | ) | (1,928.8 | ) | (236.0 | ) | (1,996.2 | ) | (372.0                    | ) | (5,432.6 | ) | (383.1 | ) |      |          |       |   |       |   | (5,815.7 | )       
|                                               |                           |         |   |          |   |        |   |          |   |                           |   |          |   |        |   |       |          |        |   |        |   |          |         
|Underwriting profit (loss)                     |                           | 42.7    |   | 92.0     |   | 36.2   |   | 360.4    |   | 20.7                      |   | 552.0    |   | (151.5 | ) |      |          |       |   |       |   | 400.5    |         
|                                               |                           |         |   |          |   |        |   |          |   |                           |   |          |   |        |   |       |          |        |   |        |   |          |         
|Interest income                                |                           | 22.5    |   | 67.6     |   | 20.9   |   | 161.5    |   | 27.1                      |   | 299.6    |   | 74.5   |   |      |          | (23.8  | ) |       |   | 350.3    |         
|Dividends                                      |                           | 17.4    |   | 7.9      |   | 5.0    |   | 26.8     |   | 3.6                       |   | 60.7     |   | 5.8    |   | 7.2   |          | 6.5    |   |       |   | 80.2     |         
|Investment expenses                            |                           | (17.7   | ) | (21.3    | ) | (3.6   | ) | (32.7    | ) | (12.0                     | ) | (87.3    | ) | (15.1  | ) |      |          | (3.4   | ) | 79.1   |   | (26.7    | )       
|                                               |                           |         |   |          |   |        |   |          |   |                           |   |          |   |        |   |       |          |        |   |        |   |          |         
|Interest and dividends                         |                           | 22.2    |   | 54.2     |   | 22.3   |   | 155.6    |   | 18.7                      |   | 273.0    |   | 65.2   |   | 7.2   |          | (20.7  | ) | 79.1   |   | 403.8    |         
|                                               |                           |         |   |          |   |        |   |          |   |                           |   |          |   |        |   |       |          |        |   |        |   |          |         
|Share of profit (loss) of associates           |                           | 10.3    |   | 7.0      |   | 38.2   |   | 26.6     |   | 8.3                       |   | 90.4     |   | (2.2   | ) | 3.1   |          | 14.4   |   |       |   | 105.7    |         
|                                               |                           |         |   |          |   |        |   |          |   |                           |   |          |   |        |   |       |          |        |   |        |   |          |         
|Other                                          |                           |         |   |          |   |        |   |          |   |                           |   |          |   |        |   |       |          |        |   |        |   |          |         
|                                               | Revenue                   |         |  |          |  |        |  |          |  |                           |  |          |  |        |  |       | 1,556.0  |        |  |        |  |          | 1,556.0 
|                                               | Expenses                  |         |  |          |  |        |  |          |  |                           |  |          |  |        |  |       | (1,488.7 | )      |  |        |  |          | (1,488.7
|                                               |                           |         |   |          |   |        |   |          |   |                           |   |          |   |        |   |       |          |        |   |        |   |          |         
|                                               |                           |        |   |         |   |       |   |         |   |                          |   |         |   |       |   | 67.3  |          |       |   |       |   | 67.3     |         
|                                               |                           |         |   |          |   |        |   |          |   |                           |   |          |   |        |   |       |          |        |   |        |   |          |         
|Operating income (loss)                        |                           | 75.2    |   | 153.2    |   | 96.7   |   | 542.6    |   | 47.7                      |   | 915.4    |   | (88.5  | ) | 77.6  |          | (6.3   | ) | 79.1   |   | 977.3    |         
|Net gains (losses) on investments(1)           |                           | 213.1   |   | 738.9    |   | (19.3  | ) | 579.3    |   | 135.8                     |   | 1,647.8  |   | 771.0  |   | 43.1  |          | 29.7   |   | (755.4 | ) | 1,736.2  |         
|Loss on repurchase of long term debt (note 15) |                           |        |   |         |   |       |   |         |   |                          |   |         |   | (3.5   | ) |      |          | (0.1   | ) |       |   | (3.6     | )       
|Interest expense                               |                           |        |   | (4.7     | ) |       |   | (12.7    | ) | (4.2                      | ) | (21.6    | ) | (1.0   | ) | (12.3 | )        | (171.4 | ) |       |   | (206.3   | )       
|Corporate overhead                             |                           | (12.2   | ) | (40.4    | ) | (0.1   | ) | (27.5    | ) | (0.4                      | ) | (80.6    | ) |       |   |      |          | (6.0   | ) | (79.1  | ) | (165.7   | )       
|                                               |                           |         |   |          |   |        |   |          |   |                           |   |          |   |        |   |       |          |        |   |        |   |          |         
|Pre-tax income (loss)                          |                           | 276.1   |   | 847.0    |   | 77.3   |   | 1,081.7  |   | 178.9                     |   | 2,461.0  |   | 678.0  |   | 108.4 |          | (154.1 | ) | (755.4 | ) | 2,337.9  |         
|Income taxes                                   |                           |         |   |          |   |        |   |          |   |                           |   |          |   |        |   |       |          |        |   |        |   | (673.3   | )       
|                                               |                           |         |   |          |   |        |   |          |   |                           |   |          |   |        |   |       |          |        |   |        |   |          |         
|Net earnings                                   |                           |         |   |          |   |        |   |          |   |                           |   |          |   |        |   |       |          |        |   |        |   | 1,664.6  |         
|                                               |                           |         |   |          |   |        |   |          |   |                           |   |          |   |        |   |       |          |        |   |        |   |          |         
|Attributable to:                               |                           |         |   |          |   |        |   |          |   |                           |   |          |   |        |   |       |          |        |   |        |   |          |         
|                                               | Shareholders of Fairfax   |         |   |          |   |        |   |          |   |                           |   |          |   |        |   |       |          |        |   |        |   |          | 1,633.2 
|                                               | Non-controlling interests |         |   |          |   |        |   |          |   |                           |   |          |   |        |   |       |          |        |   |        |   |          | 31.4    
|                                               |                           |         |   |          |   |        |   |          |   |                           |   |          |   |        |   |       |          |        |   |        |   |          |         
|                                               |                           |         |   |          |   |        |   |          |   |                           |   |          |   |        |   |       |          |        |   |        |   | 1,664.6  |         
|                                               |                           |         |   |          |   |        |   |          |   |                           |   |          |   |        |   |       |          |        |   |        |   |          |         

107

---



2013

|                                               |                           |         |   |          |   |        |   |          |   | Insurance
and
Reinsurance |   |          |   |        |   |      |        |        |   |       |   |          |       
|---------------------------------------------- | ------------------------- | ------- | - | -------- | - | ------ | - | -------- | - | ------------------------- | - | -------- | - | ------ | - | ---- | ------ | ------ | - | ----- | - | -------- | ------
|
|
|
|Gross premiums written                         |                           |         |   |          |   |        |   |          |   |                           |   |          |   |        |   |      |        |        |   |       |   |          |       
|External                                       |                           | 1,147.6 |   | 2,278.0  |   | 530.0  |   | 2,700.1  |   | 535.1                     |   | 7,190.8  |   | 36.3   |   |     |        |       |   |      |   | 7,227.1  |       
|Intercompany                                   |                           | 2.4     |   | 0.5      |   | 0.2    |   | 15.4     |   | 3.4                       |   | 21.9     |   |       |   |     |        |       |   | (21.9 | ) |         |       
|                                               |                           |         |   |          |   |        |   |          |   |                           |   |          |   |        |   |      |        |        |   |       |   |          |       
|                                               |                           | 1,150.0 |   | 2,278.5  |   | 530.2  |   | 2,715.5  |   | 538.5                     |   | 7,212.7  |   | 36.3   |   |     |        |       |   | (21.9 | ) | 7,227.1  |       
|                                               |                           |         |   |          |   |        |   |          |   |                           |   |          |   |        |   |      |        |        |   |       |   |          |       
|Net premiums written                           |                           | 1,031.4 |   | 1,933.2  |   | 257.4  |   | 2,376.9  |   | 406.9                     |   | 6,005.8  |   | 30.4   |   |     |        |       |   |      |   | 6,036.2  |       
|                                               |                           |         |   |          |   |        |   |          |   |                           |   |          |   |        |   |      |        |        |   |       |   |          |       
|Net premiums earned                            |                           |         |   |          |   |        |   |          |   |                           |   |          |   |        |   |      |        |        |   |       |   |          |       
|External                                       |                           | 997.8   |   | 1,942.0  |   | 274.9  |   | 2,370.7  |   | 407.6                     |   | 5,993.0  |   | 84.3   |   |     |        |       |   |      |   | 6,077.3  |       
|Intercompany                                   |                           | (7.6    | ) | (7.2     | ) | (18.7  | ) | 2.9      |   | 31.9                      |   | 1.3      |   | (1.3   | ) |     |        |       |   |      |   |         |       
|                                               |                           |         |   |          |   |        |   |          |   |                           |   |          |   |        |   |      |        |        |   |       |   |          |       
|                                               |                           | 990.2   |   | 1,934.8  |   | 256.2  |   | 2,373.6  |   | 439.5                     |   | 5,994.3  |   | 83.0   |   |     |        |       |   |      |   | 6,077.3  |       
|Underwriting expenses                          |                           | (972.0  | ) | (1,939.9 | ) | (224.2 | ) | (1,993.7 | ) | (424.5                    | ) | (5,554.3 | ) | (71.7  | ) |     |        |       |   |      |   | (5,626.0 | )     
|                                               |                           |         |   |          |   |        |   |          |   |                           |   |          |   |        |   |      |        |        |   |       |   |          |       
|Underwriting profit (loss)                     |                           | 18.2    |   | (5.1     | ) | 32.0   |   | 379.9    |   | 15.0                      |   | 440.0    |   | 11.3   |   |     |        |       |   |      |   | 451.3    |       
|                                               |                           |         |   |          |   |        |   |          |   |                           |   |          |   |        |   |      |        |        |   |       |   |          |       
|Interest income                                |                           | 19.3    |   | 62.9     |   | 20.9   |   | 144.2    |   | 19.7                      |   | 267.0    |   | 67.2   |   |     |        | (27.4  | ) |      |   | 306.8    |       
|Dividends                                      |                           | 16.2    |   | 15.4     |   | 5.9    |   | 32.1     |   | 5.6                       |   | 75.2     |   | 12.1   |   |     |        | 8.0    |   |      |   | 95.3     |       
|Investment expenses                            |                           | (19.4   | ) | (18.5    | ) | (2.8   | ) | (37.9    | ) | (13.7                     | ) | (92.3    | ) | (17.5  | ) |     |        | (3.7   | ) | 88.3  |   | (25.2    | )     
|                                               |                           |         |   |          |   |        |   |          |   |                           |   |          |   |        |   |      |        |        |   |       |   |          |       
|Interest and dividends                         |                           | 16.1    |   | 59.8     |   | 24.0   |   | 138.4    |   | 11.6                      |   | 249.9    |   | 61.8   |   |     |        | (23.1  | ) | 88.3  |   | 376.9    |       
|                                               |                           |         |   |          |   |        |   |          |   |                           |   |          |   |        |   |      |        |        |   |       |   |          |       
|Share of profit of associates                  |                           | 11.0    |   | 0.8      |   | 12.7   |   | 53.3     |   | 2.5                       |   | 80.3     |   | 4.2    |   | 0.8  |        | 11.4   |   |      |   | 96.7     |       
|                                               |                           |         |   |          |   |        |   |          |   |                           |   |          |   |        |   |      |        |        |   |       |   |          |       
|Other                                          |                           |         |   |          |   |        |   |          |   |                           |   |          |   |        |   |      |        |        |   |       |   |          |       
|                                               | Revenue                   |         |  |          |  |        |  |          |  |                           |  |          |  |        |  |      | 958.0  |        |  |       |  |          | 958.0 
|                                               | Expenses                  |         |  |          |  |        |  |          |  |                           |  |          |  |        |  |      | (906.9 | )      |  |       |  |          | (906.9
|                                               |                           |         |   |          |   |        |   |          |   |                           |   |          |   |        |   |      |        |        |   |       |   |          |       
|                                               |                           |        |   |         |   |       |   |         |   |                          |   |         |   |       |   | 51.1 |        |       |   |      |   | 51.1     |       
|                                               |                           |         |   |          |   |        |   |          |   |                           |   |          |   |        |   |      |        |        |   |       |   |          |       
|Operating income (loss)                        |                           | 45.3    |   | 55.5     |   | 68.7   |   | 571.6    |   | 29.1                      |   | 770.2    |   | 77.3   |   | 51.9 |        | (11.7  | ) | 88.3  |   | 976.0    |       
|Net gains (losses) on investments              |                           | (55.5   | ) | (445.0   | ) | (23.8  | ) | (816.5   | ) | 18.8                      |   | (1,322.0 | ) | (306.5 | ) |     |        | 64.5   |   |      |   | (1,564.0 | )     
|Loss on repurchase of long term debt (note 15) |                           |        |   |         |   |       |   |         |   |                          |   |         |   |       |   |     |        | (3.4   | ) |      |   | (3.4     | )     
|Interest expense                               |                           |        |   | (4.8     | ) |       |   | (24.8    | ) | (4.3                      | ) | (33.9    | ) | (0.4   | ) | (4.6 | )      | (172.3 | ) |      |   | (211.2   | )     
|Corporate overhead                             |                           | (37.2   | ) | (36.6    | ) | (0.1   | ) | (22.0    | ) | (0.1                      | ) | (96.0    | ) |       |   |     |        | (14.2  | ) | (88.3 | ) | (198.5   | )     
|                                               |                           |         |   |          |   |        |   |          |   |                           |   |          |   |        |   |      |        |        |   |       |   |          |       
|Pre-tax income (loss)                          |                           | (47.4   | ) | (430.9   | ) | 44.8   |   | (291.7   | ) | 43.5                      |   | (681.7   | ) | (229.6 | ) | 47.3 |        | (137.1 | ) |      |   | (1,001.1 | )     
|Income taxes                                   |                           |         |   |          |   |        |   |          |   |                           |   |          |   |        |   |      |        |        |   |       |   | 436.6    |       
|                                               |                           |         |   |          |   |        |   |          |   |                           |   |          |   |        |   |      |        |        |   |       |   |          |       
|Net loss                                       |                           |         |   |          |   |        |   |          |   |                           |   |          |   |        |   |      |        |        |   |       |   | (564.5   | )     
|                                               |                           |         |   |          |   |        |   |          |   |                           |   |          |   |        |   |      |        |        |   |       |   |          |       
|Attributable to:                               |                           |         |   |          |   |        |   |          |   |                           |   |          |   |        |   |      |        |        |   |       |   |          |       
|                                               | Shareholders of Fairfax   |         |   |          |   |        |   |          |   |                           |   |          |   |        |   |      |        |        |   |       |   |          | (573.4
|                                               | Non-controlling interests |         |   |          |   |        |   |          |   |                           |   |          |   |        |   |      |        |        |   |       |   |          | 8.9   
|                                               |                           |         |   |          |   |        |   |          |   |                           |   |          |   |        |   |      |        |        |   |       |   |          |       
|                                               |                           |         |   |          |   |        |   |          |   |                           |   |          |   |        |   |      |        |        |   |       |   | (564.5   | )     
|                                               |                           |         |   |          |   |        |   |          |   |                           |   |          |   |        |   |      |        |        |   |       |   |          |       

108

---



Investments in Associates, Additions to Goodwill, Segment Assets and Segment Liabilities

Investments in associates, additions to goodwill, segment assets and segment liabilities by reporting segment as at and for the years ended December 31 were
as follows:

|                                                     |         |                                             | Investments in
associates |  | Additions to
goodwill |  | Segment assets |  | Segment
liabilities
|---------------------------------------------------- | ------- | ------------------------------------------- | ------------------------- |  | --------------------- |  | -------------- |  | -------------------
|
|Insurance                                            |         |  Canada (Northbridge)                      | 164.7                     |  | 176.5                 |  | 8.3            |  |                   
|                                                     |         |  U.S. (Crum & Forster and Zenith National) | 156.2                     |  | 119.5                 |  | 44.3           |  | 21.2               
|                                                     |         |  Asia (Fairfax Asia)                       | 163.6                     |  | 115.1                 |  | 4.1            |  |                   
|Reinsurance                                          |         |  OdysseyRe                                 | 519.8                     |  | 492.4                 |  | 11.8           |  |                   
|Insurance and Reinsurance  Other                    | 107.4   |                                             | 64.3                      |  |                      |  |               |  | 2,371.4            
|                                                     |         |                                             |                           |  |                       |  |                |  |                    
|Ongoing operations                                   | 1,111.7 |                                             | 967.8                     |  | 68.5                  |  | 21.2           |  | 29,144.8           
|Runoff                                               | 275.5   |                                             | 210.6                     |  |                      |  | 34.4           |  | 6,963.7            
|Other                                                | 17.9    |                                             | 17.3                      |  | 152.4                 |  | 27.6           |  | 1,376.4            
|Corporate and other and eliminations and adjustments | 212.6   |                                             | 236.8                     |  |                      |  |               |  | (1,353.7           
|                                                     |         |                                             |                           |  |                       |  |                |  |                    
|Consolidated                                         | 1,617.7 |                                             | 1,432.5                   |  | 220.9                 |  | 83.2           |  | 36,131.2           
|                                                     |         |                                             |                           |  |                       |  |                |  |                    

Product Line

Revenue by product line for the years ended December 31 was as follows:

|                                  |  |                                             |  | Property |  | Casualty |  | Specialty |  | Total   | 
|--------------------------------- |  | ------------------------------------------- |  | -------- |  | -------- |  | --------- |  | ------- | 
|
|Net premiums earned               |  |                                             |  |          |  |          |  |           |  |         | 
|Insurance                         |  |  Canada (Northbridge)                      |  | 405.0    |  | 420.7    |  | 443.8     |  | 478.3   | 
|                                  |  |  U.S. (Crum & Forster and Zenith National) |  | 204.9    |  | 178.0    |  | 1,746.8   |  | 1,693.9 | 
|                                  |  |  Asia (Fairfax Asia)                       |  | 25.6     |  | 23.2     |  | 186.8     |  | 174.1   | 
|Reinsurance                       |  |  OdysseyRe                                 |  | 1,317.9  |  | 1,235.0  |  | 811.8     |  | 859.6   | 
|Insurance and Reinsurance  Other |  | 171.5                                       |  | 244.8    |  | 119.4    |  | 121.1     |  | 101.8   | 
|                                  |  |                                             |  |          |  |          |  |           |  |         | 
|Ongoing operations                |  | 2,124.9                                     |  | 2,101.7  |  | 3,308.6  |  | 3,327.0   |  | 551.1   | 
|Runoff                            |  | 2.6                                         |  | 1.3      |  | 224.5    |  | 15.3      |  | 4.5     | 
|                                  |  |                                             |  |          |  |          |  |           |  |         | 
|                                  |  |                                             |  | 2,127.5  |  | 2,103.0  |  | 3,533.1   |  | 3,342.3 | 
|Interest and dividends            |  |                                             |  |          |  |          |  |           |  |         | 
|Share of profit of associates     |  |                                             |  |          |  |          |  |           |  |         | 
|Net gains (losses) on investments |  |                                             |  |          |  |          |  |           |  |         | 
|Other                             |  |                                             |  |          |  |          |  |           |  |         | 
|                                  |  |                                             |  |          |  |          |  |           |  |         | 
|Total consolidated revenue        |  |                                             |  |          |  |          |  |           |  |         | 
|                                  |  |                                             |  |          |  |          |  |           |  |         | 
|Allocation of revenue             |  | 34.2%                                       |  | 34.6%    |  | 56.9%    |  | 55.0%     |  | 8.9%    | 

109

---



Geographic Region

Revenue by geographic region for the years ended December 31 was as follows:

|                                  |  |                                             |  | Canada  |  | United States |  | Asia(1) |  | International(2) |  | Total | 
|--------------------------------- |  | ------------------------------------------- |  | ------- |  | ------------- |  | ------- |  | ---------------- |  | ----- | 
|
|Net premiums earned               |  |                                             |  |         |  |               |  |         |  |                  |  |       | 
|Insurance                         |  |  Canada (Northbridge)                      |  | 933.0   |  | 980.6         |  | 9.2     |  | 9.5              |  |      | 
|                                  |  |  U.S. (Crum & Forster and Zenith National) |  |        |  |              |  | 2,020.6 |  | 1,934.7          |  |      | 
|                                  |  |  Asia (Fairfax Asia)                       |  |        |  |              |  |        |  |                 |  | 272.2 | 
|Reinsurance                       |  |  OdysseyRe                                 |  | 96.3    |  | 95.7          |  | 1,346.5 |  | 1,281.3          |  | 281.4 | 
|Insurance and Reinsurance  Other |  | 8.2                                         |  | 19.6    |  | 95.7          |  | 120.3   |  | 75.7             |  | 60.5  | 
|                                  |  |                                             |  |         |  |               |  |         |  |                  |  |       | 
|Ongoing operations                |  | 1,037.5                                     |  | 1,095.9 |  | 3,472.0       |  | 3,345.8 |  | 629.3            |  | 566.4 | 
|Runoff                            |  |                                            |  |        |  | 150.1         |  | 31.5    |  |                 |  |      | 
|                                  |  |                                             |  |         |  |               |  |         |  |                  |  |       | 
|                                  |  |                                             |  | 1,037.5 |  | 1,095.9       |  | 3,622.1 |  | 3,377.3          |  | 629.3 | 
|Interest and dividends            |  |                                             |  |         |  |               |  |         |  |                  |  |       | 
|Share of profit of associates     |  |                                             |  |         |  |               |  |         |  |                  |  |       | 
|Net gains (losses) on investments |  |                                             |  |         |  |               |  |         |  |                  |  |       | 
|Other                             |  |                                             |  |         |  |               |  |         |  |                  |  |       | 
|                                  |  |                                             |  |         |  |               |  |         |  |                  |  |       | 
|Total consolidated revenue        |  |                                             |  |         |  |               |  |         |  |                  |  |       | 
|                                  |  |                                             |  |         |  |               |  |         |  |                  |  |       | 
|Allocation of revenue             |  | 16.7%                                       |  | 18.0%   |  | 58.3%         |  | 55.6%   |  | 10.1%            |  | 9.3%  | 

26.  Expenses

Losses on claims, net, operating expenses and other expenses for the years ended December 31 were comprised as follows:

|                                                  |  | 2014    |  | 2013   
|------------------------------------------------- |  | ------- |  | -------
|Losses and loss adjustment expenses               |  | 3,584.0 |  | 3,467.5
|Salaries and employee benefits expense (note 27)  |  | 1,145.1 |  | 1,010.1
|Other reporting segment cost of sales             |  | 978.3   |  | 623.2  
|Depreciation, amortization and impairment charges |  | 94.2    |  | 104.3  
|Premium taxes                                     |  | 93.2    |  | 93.8   
|Audit, legal and tax professional fees            |  | 99.6    |  | 93.0   
|Information technology costs                      |  | 79.8    |  | 78.1   
|Operating lease costs                             |  | 96.9    |  | 66.2   
|Restructuring costs                               |  | 20.6    |  | 12.9   
|Loss on repurchase of long term debt (note 15)    |  | 3.6     |  | 3.4    
|Administrative expense and other                  |  | 318.5   |  | 213.1  
|                                                  |  |         |  |        
|                                                  |  | 6,513.8 |  | 5,765.6
|                                                  |  |         |  |        

110

---



27.  Salaries and Employee Benefits Expense

Salaries and employee benefits expense for the years ended December 31 were comprised as follows:

|                                                    |  | 2014    |  | 2013   
|--------------------------------------------------- |  | ------- |  | -------
|Wages and salaries                                  |  | 904.6   |  | 790.4  
|Employee benefits                                   |  | 161.5   |  | 141.9  
|Defined benefit pension plan expense (note 21)      |  | 20.7    |  | 24.9   
|Defined contribution pension plan expense (note 21) |  | 24.1    |  | 21.9   
|Share-based payments to directors and employees     |  | 25.4    |  | 20.5   
|Defined benefit post retirement expense (note 21)   |  | 8.8     |  | 10.5   
|                                                    |  |         |  |        
|                                                    |  | 1,145.1 |  | 1,010.1
|                                                    |  |         |  |        

28.  Supplementary Cash Flow Information

Cash and cash equivalents were included on the consolidated balance sheets as follows:

|                                                                                                 |                                         | December 31,
2014 |         | December 31,
2013 |        
|------------------------------------------------------------------------------------------------ | --------------------------------------- | ----------------- | ------- | ----------------- | -------
|Holding company cash and investments:                                                            |                                         |                   |         |                   |        
|                                                                                                 | Cash and balances with banks            |                   | 93.7    |                   | 157.2  
|                                                                                                 | Treasury bills and other eligible bills |                   | 224.0   |                   | 57.2   
|                                                                                                 |                                         |                   |         |                   |        
|                                                                                                 |                                         | 317.7             |         | 214.4             |        
|                                                                                                 |                                         |                   |         |                   |        
|Subsidiary cash and short term investments:                                                      |                                         |                   |         |                   |        
|                                                                                                 | Cash and balances with banks            |                   | 1,336.3 |                   | 1,786.7
|                                                                                                 | Treasury bills and other eligible bills |                   | 1,698.2 |                   | 2,091.7
|                                                                                                 |                                         |                   |         |                   |        
|                                                                                                 |                                         | 3,034.5           |         | 3,878.4           |        
|                                                                                                 |                                         |                   |         |                   |        
|Subsidiary assets pledged for short sale and derivative obligations:                             |                                         |                   |         |                   |        
|                                                                                                 | Treasury bills and other eligible bills |                   |        |                   | 11.8   
|                                                                                                 |                                         |                   |         |                   |        
|Subsidiary indebtedness  bank overdrafts                                                        |                                         |                  |         | (6.0              | )      
|                                                                                                 |                                         |                   |         |                   |        
|Cash, cash equivalents and bank overdrafts included in the consolidated balance sheets           |                                         | 3,352.2           |         | 4,098.6           |        
|                                                                                                 |                                         |                   |         |                   |        
|Less: Subsidiary cash and cash equivalents  restricted(1)                                       |                                         |                   |         |                   |        
|                                                                                                 | Cash and balances with banks            |                   | 122.1   |                   | 96.7   
|                                                                                                 | Treasury bills and other eligible bills |                   | 211.4   |                   | 243.7  
|                                                                                                 |                                         |                   |         |                   |        
|                                                                                                 |                                         | 333.5             |         | 340.4             |        
|                                                                                                 |                                         |                   |         |                   |        
|Cash, cash equivalents and bank overdrafts included in the consolidated statements of cash flows |                                         | 3,018.7           |         | 3,758.2           |        
|                                                                                                 |                                         |                   |         |                   |        

111

---



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

|    |                                                                 |  | 2014   |   | 2013     |  
|--- | --------------------------------------------------------------- |  | ------ | - | -------- | -
|(a) | Net (purchases) sales of securities classified as at FVTPL      |  |        |   |          |  
|    | Short term investments                                          |  | 918.9  |   | 1,159.1  |  
|    | Bonds                                                           |  | (620.9 | ) | 8.7      |  
|    | Preferred stocks                                                |  | 60.3   |   | (34.6    | )
|    | Common stocks                                                   |  | (527.5 | ) | 1,585.6  |  
|    | Derivatives and short sales                                     |  | (420.8 | ) | (1,823.1 | )
|    |                                                                 |  |        |   |          |  
|    |                                                                 |  | (590.0 | ) | 895.7    |  
|    |                                                                 |  |        |   |          |  
|(b) | Changes in operating assets and liabilities                     |  |        |   |          |  
|    | Net decrease (increase) in restricted cash and cash equivalents |  | 4.7    |   | (168.5   | )
|    | Provision for losses and loss adjustment expenses               |  | (926.8 | ) | (855.3   | )
|    | Provision for unearned premiums                                 |  | 102.1  |   | (67.6    | )
|    | Insurance contract receivables                                  |  | 21.7   |   | (57.2    | )
|    | Recoverable from reinsurers                                     |  | 860.7  |   | 481.0    |  
|    | Other receivables                                               |  | (33.2  | ) | (39.3    | )
|    | Funds withheld payable to reinsurers                            |  | 5.0    |   | (34.4    | )
|    | Accounts payable and accrued liabilities                        |  | 23.3   |   | (44.3    | )
|    | Income taxes payable                                            |  | 27.0   |   | 9.8      |  
|    | Other                                                           |  | (13.7  | ) | 8.9      |  
|    |                                                                 |  |        |   |          |  
|    |                                                                 |  | 70.8   |   | (766.9   | )
|    |                                                                 |  |        |   |          |  
|(c) | Net interest and dividends received                             |  |        |   |          |  
|    | Interest and dividends received                                 |  | 612.3  |   | 547.7    |  
|    | Interest paid                                                   |  | (192.3 | ) | (199.7   | )
|    |                                                                 |  |        |   |          |  
|    |                                                                 |  | 420.0  |   | 348.0    |  
|    |                                                                 |  |        |   |          |  
|(d) | Net income taxes (paid) refund received                         |  | (52.3  | ) | 19.9     |  
|    |                                                                 |  |        |   |          |  
|(e) | Dividends paid                                                  |  |        |   |          |  
|    | Common share dividends paid                                     |  | (215.7 | ) | (205.5   | )
|    | Preferred share dividends paid                                  |  | (56.9  | ) | (60.8    | )
|    | Dividends paid to non-controlling interests                     |  | (6.6   | ) | (6.4     | )
|    |                                                                 |  |        |   |          |  
|    |                                                                 |  | (279.2 | ) | (272.7   | )
|    |                                                                 |  |        |   |          |  

29.  Related Party Transactions

Compensation for the company's key management team for the years ended December 31 was as follows:

|                                                |  | 2014 |  | 2013
|----------------------------------------------- |  | ---- |  | ----
|Salaries and other short-term employee benefits |  | 10.7 |  | 7.1 
|Share-based payments                            |  | 1.4  |  | 1.0 
|                                                |  |      |  |     
|                                                |  | 12.1 |  | 8.1 
|                                                |  |      |  |     

Compensation for the company's Board of Directors for the years ended December 31 was as follows:

|                     |  | 2014 |  | 2013
|-------------------- |  | ---- |  | ----
|Retainers and fees   |  | 0.8  |  | 1.0 
|Share-based payments |  | 0.1  |  | 0.1 
|                     |  |      |  |     
|                     |  | 0.9  |  | 1.1 
|                     |  |      |  |     

The compensation presented above is determined in accordance with the company's IFRS accounting policies and will differ from the compensation presented in the company's
Management Proxy Circular.

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