Exhibit 99.3

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Management's Discussion and Analysis of Financial Condition and Results of Operations(as of March 10, 2017)

(Figures and amounts are in US$ and $ millions except per share amounts and as otherwise indicated. Figures may not add due to rounding.)

Notes to Management's Discussion and Analysis of Financial Condition and Results of Operations



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Overview of Consolidated Performance

The insurance and reinsurance operations produced an underwriting profit of $575.9 and a combined ratio of 92.5% in 2016 compared to an underwriting profit of $704.5 and a
combined ratio of 89.9% in 2015. Underwriting profit in 2016 was lower than the record underwriting profit set in 2015 primarily due to an increase in current period catastrophe losses, partially
offset by higher net favourable prior year reserve development. Operating income of the insurance and reinsurance operations (excluding net gains (losses) on investments) decreased to $1,039.2 in 2016
from $1,181.5 in 2015 primarily as a result of lower underwriting profit and lower share of profit of associates, partially offset by increased interest income. Net premiums written by the insurance
and reinsurance operations increased by 10.7% in 2016 principally reflecting that Brit was consolidated only in June 2015 (net premiums written increased by 3.8% excluding Brit).

Net
investment losses of $1,203.6 in 2016 (compared to net investment losses of $259.2 in 2015) were principally due to net losses on equity hedges and CPI-linked derivatives, partially offset by net
gains on bonds. Consolidated interest and dividend income increased to $555.2 in 2016 from $512.2 in 2015 principally reflecting higher interest income earned (primarily due to increased holdings of
higher yielding government and corporate bonds for most of 2016, partially offset by lower holdings of U.S. state and municipal bonds), lower total return swap expense and lower interest on
funds withheld expense. At December 31, 2016 subsidiary cash and short term investments of $10,127.6 (excluding Fairfax India) accounted for 37.4% of portfolio investments.

The
net loss of $512.5 in 2016 (compared to net earnings of $567.7 in 2015) was primarily as a result of increased net losses on investments, lower interest and dividends (primarily related to a
decrease in share of profit of associates) and a decrease in underwriting profit, partially offset by an increase in the recovery of income taxes. The company's consolidated total debt to total
capital ratio increased to 28.7% at December 31, 2016 from 21.8% at December 31, 2015 primarily as a result of borrowings during 2016 by Fairfax, Fairfax India and Cara to finance
various acquisitions and also reflected the company's lower shareholders' equity at the end of 2016. Common shareholders' equity decreased to $8,484.6 ($367.40 per basic share) at December 31,
2016 from $8,952.5 ($403.01 per basic share) at December 31, 2015 (a decrease of 6.4%, adjusted for the $10.00 per common share dividend paid in the first quarter of 2016).

Maintaining
its emphasis on financial soundness, the company held $1,371.6 of cash and investments at the holding company level ($1,329.4 net of $42.2 of holding company short sale and derivative
obligations) at December 31, 2016 compared to $1,276.5 ($1,275.9 net of $0.6 of holding company short sale and derivative obligations) at December 31, 2015.

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Business Developments



The following narrative sets out the company's key business developments in 2016 and 2015. Unless indicated otherwise, all completed acquisitions described in the following
paragraphs resulted in a 100% ownership interest in the acquiree. For further details about these acquisitions and transactions (including definitions of terms set out in italics), refer to
note 23 (Acquisitions and Divestitures) to the consolidated financial statements for the year ended December 31, 2016 or the Components of Net Earnings section of this MD&A under the
relevant reporting segment heading.

On
February 8, 2017 the company entered into an agreement to acquireTower, a general insurer in New Zealand and the Pacific Islands.

On
December 18, 2016 the company entered into an agreement to acquireAllied World, a global property, casualty and specialty insurer
and reinsurer.

On
October 18, 2016 the company agreed to acquire fromAIGcertain of its insurance operations in Latin America and Central and
Eastern Europe.

OdysseyRe

In 2015 OdysseyRe acquiredEuclid(an underwriting and claims manager for internet, technology, media, manufacturers and
other professional liability coverage which produce annual gross premiums written of approximately $15) to ensure it will have the opportunity to participate in future renewals of Euclid's business.

Crum & Forster

On October 4, 2016 Crum & Forster acquiredTrinity, which focuses on occupational accident insurance and produces
approximately $26 of gross premiums written annually.

In
2015 Crum & Forster acquiredTII(a leading travel insurance provider that specializes in offering travel insurance protection), Brownyard(a specialist in writing and servicing security guard and security services business insurance) and Redwoods(a producer of property and casualty packaged insurance business focused on YMCAs,
community centers and day camps), which produce annual
gross premiums written of approximately $50, $15 and $50 respectively. These acquisitions will complement Crum & Forster's existing footprint in each of these lines of business.

Brit

On August 3, 2016 Brit paid cash consideration of $57.8 to purchase shares for cancellation fromOMERS, which increased the
company's ownership interest in Brit by 2.4%.

On
June 5, 2015 the company acquired Brit, a market-leading global Lloyd's of London specialty insurer and reinsurer. On June 29, 2015 the company sold 29.9% of the outstanding ordinary
shares of Brit to OMERS and will have the ability to repurchase those shares over time.

Fairfax Asia

On October 10, 2016 the company acquired an 80.0% interest inAMAG, an established general insurer in Indonesia with gross
written premiums of approximately $70 during 2016.

On
October 3, 2016 Union Assurance acquiredFairfirst Insurance, a general insurer in Sri Lanka with gross written premiums of approximately $16
during 2016.

On
March 31, 2016 the company increased its ownership interest inICICI Lombardto 34.6% by acquiring an additional 9.0% of ICICI Lombard from
ICICI Bank.

In
2015 Pacific Insurance acquired the general insurance business ofMCIS,an established general insurer in Malaysia with approximately $55 of annual
gross premiums. In 2015 Fairfax Asia acquired 78.0% ofUnion Assurance,an underwriter of general insurance in Sri Lanka, specializing in automobile and
personal accident lines of business with approximately $43 of annual gross premiums written.

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Insurance and Reinsurance  Other

On December 7, 2016 the company acquiredBryte Insurance, a property and casualty insurer in South Africa and Botswana with
gross written premiums of approximately $269 during 2016.

The
business and renewal rights of QBE Insurance (Europe) Limited's Hungarian, Czech and Slovakian insurance operations were acquired and transferred to the company's Colonnadesubsidiary on February 1,
 2016, April 1, 2016 and May 2, 2016 respectively. Those operations generate approximately $78 of
gross premiums written annually across a range of general insurance classes.

Other

Subsequent to December 31, 2016

On February 17, 2017 the company, through its subsidiaries, acquired 98.8% of the voting rights and 64.2% of the equity interest inFairfax
Africa, which was established, with the support of Fairfax, to invest in public and private equity and debt instruments of African businesses or other businesses with customers,
suppliers or business primarily conducted in, or dependent on, Africa.

On
February 14, 2017 Fairfax India acquired a 51.0% interest inSaurashtra Freight, which operates a container freight station at the Mundra Port
in the Indian state of Gujarat.

On
January 13, 2017 the company acquired an additional 12,340,500 subordinate voting shares ofFairfax Indiafor $145.0 in a private
placement.

Years ended December 31, 2016 and 2015

On November 28, 2016 Cara acquired an 89.2% interest inOriginal Joe's, a Canadian multi-brand restaurant company. On
September 2, 2016 Cara acquiredSt-Hubert, a Canadian full-service restaurant operator and fully integrated food manufacturer.

On
October 31, 2016 the company acquired a 60.0% indirect interest inGolf Town, a Canadian specialty retailer of golf equipment, consumables, golf
apparel and accessories.

On
August 26, 2016 Fairfax India acquired a 50.8% interest inPrivi Organics, a supplier of aroma chemicals to the fragrance industry.

On
February 8, 2016 Fairfax India acquired a 44.9% interest inFairchem, a specialty chemical manufacturer in India of oleo chemicals used in the
paints, inks and adhesives industries, as well as intermediate nutraceutical and health products.

On
November 9, 2015 and December 16, 2015 Thomas Cook India acquiredKuoni Hong KongandKuoni
India,travel and travel-related companies in Hong Kong and India that offer a broad range of services including corporate and leisure travel.

On
July 17, 2015 the company acquired a 55.0% interest inBoat Rocker, a Canadian company engaged in the development, production, marketing and
distribution of television programming. On August 19, 2016 the company increased its ownership interest in Boat Rocker to 58.2%.

On
June 18, 2015 Fairfax sold its 73.6% interest inRidley.

On
April 10, 2015 Fairfax acquired a 52.6% and a 40.7% voting and economic interest respectively inCara,Canada's largest full-service restaurant
company which franchises, owns and operates numerous restaurant brands across Canada.

On
January 30, 2015 Fairfax acquired 95.1% of the voting rights and 28.1% of the equity interest in newly incorporatedFairfax India. 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. In 2015 Fairfax India acquired an 88.1% interest inNCML, a leading private-sector agricultural commodities storage company
in India.

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Insurance Environment

The property and casualty insurance and reinsurance industry is expected to report a small underwriting loss in 2016 after three years of underwriting profitability, reflecting
a return to more normal levels of catastrophe losses and lower levels of favourable reserve development. Accident year combined ratios in 2016 are expected to be slightly above 100% as a result of
price decreases and increased severity of liability claims. The industry continues to feel the effects of historically low interest rates that are negatively affecting operating income, as well as the
effect of volatile equity markets. Although interest rates have recently increased, interest income earned in the future will likely continue to decline even further as higher yielding securities that
mature are reinvested at prevailing lower rates. Strong performance in the equity markets in the U.S. and Canada in the fourth quarter of 2016, partially offset by the impact of increases in interest
rates and underwriting losses, contributed to very modest growth in capital for the industry. Insurance pricing on property and casualty lines of business declined, with larger account business
continuing to experience more pricing pressure than medium-to-small account business. Insurance pricing in 2017 is likely to be affected by the direction of investment yields, lower levels of
favourable reserve development, capacity available within the industry, the extent to which a line of business is loss-affected and the general strength of the global economy.

The
reinsurance sector remains overcapitalized as a result of recent strong earnings and additional capacity from non-traditional capital providers. Pricing on many reinsurance lines remains
attractive: property catastrophe-exposed business has experienced a slowdown in rate decreases after double digit decreases the last few years, while non-catastrophe property and casualty reinsurance
business is experiencing more moderate price decreases reflecting the factors described above affecting insurance pricing.

Sources of Revenue

Revenue for the most recent three years is shown in the table that follows.

|                                                |                 | 2016     |         | 2015    |         | 2014    
|----------------------------------------------- | --------------- | -------- | ------- | ------- | ------- | --------
|Net premiums earned  Insurance and Reinsurance |                 |          |         |         |         |         
|                                                | Northbridge     |          | 908.8   |         | 874.7   |         
|                                                | OdysseyRe       |          | 2,074.1 |         | 2,204.1 |         
|                                                | Crum & Forster  |          | 1,769.5 |         | 1,522.0 |         
|                                                | Zenith National |          | 807.3   |         | 766.4   |         
|                                                | Brit(1)         |          | 1,399.3 |         | 892.5   |         
|                                                | Fairfax Asia    |          | 302.5   |         | 287.0   |         
|                                                | Other           |          | 437.2   |         | 442.7   |         
|Runoff                                          |                 | 163.5    |         | 381.6   |         | 231.6   
|                                                |                 |          |         |         |         |         
|                                                |                 | 7,862.2  |         | 7,371.0 |         | 6,216.2 
|Interest and dividends                          |                 | 579.4    |         | 685.1   |         | 509.5   
|Net gains (losses) on investments               |                 | (1,203.6 | )       | (259.2  | )       | 1,736.2 
|Other revenue(2)                                |                 | 2,061.6  |         | 1,783.5 |         | 1,556.0 
|                                                |                 |          |         |         |         |         
|                                                |                 | 9,299.6  |         | 9,580.4 |         | 10,017.9
|                                                |                 |          |         |         |         |         

Revenue
of $9,299.6 in 2016 decreased from $9,580.4 in 2015 principally as a result of increased net losses on investments, lower interest and dividends (primarily related to a decrease in share of
profit of associates), partially offset by higher net premiums earned and increased other revenue. The increase in net losses on investments in 2016

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was
principally due to net losses on equity and equity-related holdings after equity hedges (primarily realized losses) and CPI-linked derivatives, partially offset by net gains on bonds. Consolidated
interest and dividend income of $512.2 in 2015 increased to $555.2 in 2016 reflecting higher interest income earned (primarily due to increased holdings of higher yielding government and corporate
bonds for most of 2016, partially offset by lower holdings of U.S. state and municipal bonds), lower total return swap expense and lower interest on funds withheld expense. Share of profit of
associates decreased from $172.9 in 2015 to $24.2 in 2016 primarily reflecting a non-cash impairment charge of $100.4 recognized on the company's investment in Resolute and a lower share of profit
from the company's investments in KWF LPs (a Kennedy Wilson real estate partnership recognized a significant gain on disposition of its investment properties in 2015), partially offset
by a higher share of profit of ICICI Lombard.

The
increase in net premiums earned by the company's insurance and reinsurance operations in 2016 reflected the consolidation of a full year of net premiums earned by Brit ($506.8 incremental increase
year-over-year), increases at Crum & Forster ($247.5, 16.3%), Zenith National ($40.9, 5.3%), Northbridge ($34.1, 3.9% including
the unfavourable effect of foreign currency translation) and Fairfax Asia ($15.5, 5.4%), partially offset by decreases at OdysseyRe ($130.0, 5.9%) and Insurance and
Reinsurance  Other ($5.5, 1.2%). Net premiums earned at Runoff in 2016 principally reflected the impacts of the second quarter 2016 construction defect
reinsurance transaction and the habitational casualty reinsurance transaction. Net premiums earned at Runoff in 2015 principally reflected the impacts of the fourth quarter 2015 APH, the Everest APH,
first quarter 2015 APH and the AXA Canada reinsurance transactions. These reinsurance transactions are described in more detail in the Components of Net Earnings section of this MD&A under the
heading Runoff.

Revenue
of $9,580.4 in 2015 decreased from $10,017.9 in 2014 principally as a result of net losses on investments, partially offset by increased net premiums earned, increased other revenue and higher
interest and dividends. Net losses on investments in 2015 was principally comprised of net unrealized losses on bonds, partially offset by net gains on equity and equity-related holdings after equity
hedges and the favourable impact of foreign currency. Consolidated interest and dividend income increased from $403.8 in 2014 to $512.2 in 2015, reflecting higher interest income earned, principally
due to increased holdings of higher yielding government bonds and the impact of consolidating the portfolio investments of Brit and Fairfax India. The increase in net premiums earned by the company's
insurance and reinsurance operations in 2015 reflected year-over-year increases at Crum & Forster ($215.5, 16.5%), Zenith National ($52.1, 7.3%), Insurance and
Reinsurance  Other ($50.0, 12.7%) and Fairfax Asia ($14.8, 5.4%) and the consolidation of the net premiums earned by Brit ($892.5), partially offset by decreases
at OdysseyRe ($152.5, 6.5%) and Northbridge ($67.6, 7.2% including the unfavourable effect of foreign currency translation). Net premiums earned at Runoff in 2015 and 2014 ($381.6 and $231.6
respectively) primarily reflected the impact of various transactions during those years involving the reinsurance of third party runoff portfolios.

Net
premiums written by the company's insurance and reinsurance operations for the years ended December 31, 2016 and 2015 are shown in the table that follows.

|                                                    |                 | 2016    |         | 2015    |         | % change
year-over-
year |     
|--------------------------------------------------- | --------------- | ------- | ------- | ------- | ------- | ------------------------ | ----
|Net premiums written                                |                 |         |         |         |         |                          |     
|                                                    | Northbridge     |         | 942.6   |         | 887.0   |                          | 6.3 
|                                                    | OdysseyRe       |         | 2,100.2 |         | 2,095.0 |                          | 0.2 
|                                                    | Crum & Forster  |         | 1,801.1 |         | 1,659.4 |                          | 8.5 
|                                                    | Zenith National |         | 819.4   |         | 785.4   |                          | 4.3 
|                                                    | Brit(1)         |         | 1,480.2 |         | 946.4   |                          | 56.4
|                                                    | Fairfax Asia    |         | 303.1   |         | 275.9   |                          | 9.9 
|                                                    | Other           |         | 458.4   |         | 489.8   |                          | (6.4
|                                                    |                 |         |         |         |         |                          |     
|Insurance and reinsurance operations                |                 | 7,905.0 |         | 7,138.9 |         | 10.7                     |     
|                                                    |                 |         |         |         |         |                          |     
|Insurance and reinsurance operations excluding Brit |                 | 6,424.8 |         | 6,192.5 |         | 3.8                      |     
|                                                    |                 |         |         |         |         |                          |     

Northbridge's net premiums written increased by 6.3% in 2016 including the unfavourable effect of foreign currency translation. In Canadian dollar terms, Northbridge's net
premiums written increased by 10.1% in 2016, primarily

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due
to increased new business writings at Northbridge Insurance, modest price increases across the group and reduced reinsurance costs.

OdysseyRe's
net premiums written increased by 0.2% in 2016, primarily reflecting the non-renewal on June 1, 2015 of a Florida property quota share reinsurance contract (following the cedent's
decision to retain all the risk associated with that contract), partially offset by decreases in the Latin America and London Market divisions and purchases of property catastrophe excess of loss
reinsurance at favourable pricing.

Crum &
Forster's net premiums written increased by 8.5% in 2016, principally reflecting growth in Crum & Forster's accident and health and commercial transportation lines of business and
incremental contributions from prior year acquisitions, partially offset by decreases in the construction contracting line of business.

Zenith
National's net premiums written increased by 4.3% in 2016, primarily as a result of an increase in exposure, partially offset by modest price decreases.

Net
premiums written by Fairfax Asia increased by 9.9% in 2016, principally reflecting the consolidation of Fairfirst Insurance and AMAG, increased writings at Pacific Insurance (primarily in
commercial automobile and property lines of business) and increased premium retention (primarily at First Capital).

Net
premiums written by the Insurance and Reinsurance  Other reporting segment decreased by 6.4% in 2016, primarily reflecting the non-recurring impact of the
QBE loss portfolio transfer in 2015 and decreases at Group Re (primarily related to the non-renewal in 2016 of an intercompany property quota share agreement with Brit), partially offset by
increases at Fairfax Brasil (primarily growth in the infrastructure line of business and the favourable effect of foreign currency translation, partially offset by a decrease in risk retention) and
Advent (primarily increases in the accident and health line of business, partially offset by a decrease in risk retention).

Net
gains (losses) on investments in 2016 and 2015 were comprised as shown in the following table:

|                                                     |                                                     | 2016     |          | 2015   |       
|---------------------------------------------------- | --------------------------------------------------- | -------- | -------- | ------ | ------
|                                                     | Common stocks                                       |          | (78.0    | )      | (670.5
|                                                     | Preferred stocks  convertible                      |          | (6.6     | )      | (22.5 
|                                                     | Bonds  convertible                                 |          | (39.4    | )      | (119.2
|                                                     | Gain on disposition of subsidiary and associates(1) |          |         |        | 235.5 
|                                                     | Other equity derivatives(2)                         |          | 19.3     |        | 151.7 
|                                                     |                                                     |          |          |        |       
|Long equity exposures                                |                                                     | (104.7   | )        | (425.0 | )     
|                                                     | Equity hedges and short equity exposures            |          | (1,192.9 | )      | 501.8 
|                                                     |                                                     |          |          |        |       
|Net equity exposure and financial effects            |                                                     | (1,297.6 | )        | 76.8   |       
|                                                     | Bonds                                               |          | 322.7    |        | (468.7
|                                                     | CPI-linked derivatives                              |          | (196.2   | )      | 35.7  
|                                                     | U.S. treasury bond forward contracts                |          | 47.0     |        |      
|                                                     | Other derivatives                                   |          | (7.4     | )      | (2.6  
|                                                     | Foreign currency                                    |          | (129.5   | )      | 112.5 
|                                                     | Other                                               |          | 57.4     |        | (12.9 
|                                                     |                                                     |          |          |        |       
|Net losses on investments                            |                                                     | (1,203.6 | )        | (259.2 | )     
|                                                     |                                                     |          |          |        |       
|Net gains (losses) on bonds is comprised as follows: |                                                     |          |          |        |       
|                                                     | Government bonds                                    |          | 256.8    |        | (58.7 
|                                                     | U.S. states and municipalities                      |          | (29.5    | )      | (213.2
|                                                     | Corporate and other                                 |          | 95.4     |        | (196.8
|                                                     |                                                     |          |          |        |       
|                                                     |                                                     | 322.7    |          | (468.7 | )     
|                                                     |                                                     |          |          |        |       

After
giving consideration to the outcome of the U.S. elections in 2016 and the potential for fundamental changes that may bolster U.S. economic growth and equity markets, the company
discontinued its economic equity hedging strategy during the fourth quarter of 2016. Accordingly, the company closed out $6,350.6 notional amount of short

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positions
during 2016 effected through equity and equity index total return swaps, including all of the company's Russell 2000, S&P 500 and S&P/TSX 60 short equity index total return
swaps. The short equity index total return swaps closed out in 2016 produced a realized loss of $2,665.4 (of which $1,710.2 was recorded as unrealized losses in prior years). The company
continues to invest or maintain investments in short equity total return swaps in individual equities as investments, and not as hedges of the company's equity and equity-related holdings. Refer to
note 24 (Financial Risk Management) under the heading Market Price Fluctuations in the company's consolidated financial statements for the year ended December 31, 2016, for a tabular
analysis followed by a discussion of the net effect of the company's equity and equity-related holdings (long exposures net of short exposures) and to the tabular analysis in the Investments section
of this MD&A for further details about the components of net gains (losses) on investments.

Net
gains on bonds of $322.7 in 2016 were primarily comprised of net gains on U.S. treasury bonds ($138.1), Indian government bonds ($105.2) and corporate and other bonds ($95.4), partially
offset by net losses on U.S. state and municipal bonds ($29.5).

The
company's CPI-linked derivative contracts produced net unrealized losses of $196.2 in 2016 compared to net unrealized gains of $35.7 in 2015. Net unrealized gains (losses) on CPI-linked derivative
contracts typically reflect the market's expectation of decreases (increases) in the values of the CPI indexes underlying those contracts at their respective maturities during the periods presented
(those contracts are structured to benefit the company during periods of decreasing CPI index values).

The
increase in other revenue from $1,783.5 in 2015 to $2,061.6 in 2016 principally reflected increased revenue at Cara (acquired on April 10, 2015), Quess, Fairfax India and Boat Rocker
(acquired on July 17, 2015), partially offset by the divestiture of Ridley on June 18, 2015. The increase at Cara was also due to Cara's acquisitions of St-Hubert on September 2,
2016 and Original Joe's on November 28, 2016.

Net Premiums Earned by Geographic Region

As presented in note 25 (Segmented Information) to the consolidated financial statements for the year ended December 31, 2016, the United States, Canada,
International and Asia accounted for 65.5%, 13.4%, 12.4% and 8.7% respectively, of net premiums earned by geographic region in 2016, compared to 63.0%, 14.4%, 13.4% and 9.2% respectively,
in 2015.

United States

Net premiums earned in the United States geographic region increased by 11.0% from $4,641.3 in 2015 to $5,152.8 in 2016 primarily reflecting the consolidation of Brit for
the full year of 2016 ($346.5 incremental increase year-over-year), growth in specialty lines of business at Crum & Forster and growth in workers' compensation business at Zenith National,
partially offset by lower net premiums earned at Runoff reflecting a decrease in transactions involving the reinsurance of third party runoff portfolios.

Canada

Net premiums earned in the Canada geographic region decreased by 0.8% from $1,062.0 in 2015 to $1,053.1 in 2016 primarily as a result of lower net premiums earned at Runoff
reflecting a non-recurring transaction in 2015 involving the reinsurance of a third party, partially offset by increases at Northbridge (increased new business writings at Northbridge Insurance and
modest price increases across the group, partially offset by the impact of reduced reinsurance costs and the unfavourable effect of the strengthening of the U.S. dollar relative to the Canadian
dollar as measured by average annual rates of exchange) and the consolidation of Brit for the full year of 2016 ($33.3 incremental increase year-over-year).

International

Net premiums earned in the International geographic region decreased by 1.4% from $986.3 in 2015 to $972.0 in 2016 principally reflecting decreases at OdysseyRe in its
reinsurance business, partially offset by the consolidation of Brit for the full year of 2016 ($108.8 incremental increase year-over-year).

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Asia

Net premiums earned in the Asia geographic region increased by 0.4% from $681.4 in 2015 to $684.3 in 2016 primarily as a result of the consolidation of Brit for the full year of
2016 ($18.2 incremental increase year-over-year) and growth at Fairfax Asia, partially offset by decreases at OdysseyRe.

Sources of Net Earnings

The following table presents the combined ratios and underwriting and operating results for each of the insurance and reinsurance operations and, as applicable, for runoff
operations, as well as the earnings contributions from the Other reporting segment for the years ended December 31, 2016, 2015 and 2014. In that table, interest and dividends are presented
separately as they relate to the insurance and reinsurance reporting segments, and included in Runoff, Corporate overhead and other, and Other as they relate to those segments. Net realized gains
before equity hedges and short equity exposures, net change in unrealized gains (losses) before equity hedges and short equity exposures and net gains (losses) on equity hedges and short equity
exposures are each shown separately to present more meaningfully the results of the company's investment management strategies.

|                                                                                        |                           | 2016            |          | 2015   |       | 2014     |      
|--------------------------------------------------------------------------------------- | ------------------------- | --------------- | -------- | ------ | ----- | -------- | -----
|Combined ratios  Insurance and Reinsurance                                             |                           |                 |          |        |       |          |      
|                                                                                        |                           | Northbridge     |          |        | 94.9  | %        |      
|                                                                                        |                           | OdysseyRe       |          |        | 88.7  | %        |      
|                                                                                        |                           | Crum & Forster  |          |        | 98.2  | %        |      
|                                                                                        |                           | Zenith National |          |        | 79.7  | %        |      
|                                                                                        |                           | Brit(1)         |          |        | 97.9  | %        |      
|                                                                                        |                           | Fairfax Asia    |          |        | 86.4  | %        |      
|                                                                                        |                           | Other           |          |        | 93.7  | %        |      
|                                                                                        |                           |                 |          |        |       |          |      
|Consolidated                                                                            |                           |                 | 92.5     | %      |       | 89.9     | %    
|                                                                                        |                           |                 |          |        |       |          |      
|Sources of net earnings                                                                 |                           |                 |          |        |       |          |      
|Underwriting  Insurance and Reinsurance                                                |                           |                 |          |        |       |          |      
|                                                                                        |                           | Northbridge     |          |        | 46.3  |          |      
|                                                                                        |                           | OdysseyRe       |          |        | 235.2 |          |      
|                                                                                        |                           | Crum & Forster  |          |        | 32.4  |          |      
|                                                                                        |                           | Zenith National |          |        | 164.1 |          |      
|                                                                                        |                           | Brit(1)         |          |        | 29.1  |          |      
|                                                                                        |                           | Fairfax Asia    |          |        | 41.1  |          |      
|                                                                                        |                           | Other           |          |        | 27.7  |          |      
|                                                                                        |                           |                 |          |        |       |          |      
|Underwriting profit  Insurance and Reinsurance                                         |                           |                 | 575.9    |        |       | 704.5    |      
|Interest and dividends  Insurance and Reinsurance                                      |                           |                 | 463.3    |        |       | 477.0    |      
|                                                                                        |                           |                 |          |        |       |          |      
|Operating income  Insurance and Reinsurance                                            |                           |                 | 1,039.2  |        |       | 1,181.5  |      
|Runoff (excluding net gains (losses) on investments)                                    |                           |                 | (149.4   | )      |       | (74.1    | )    
|Other reporting segment (excluding net gains (losses) on investments)                   |                           |                 | 133.5    |        |       | 127.8    |      
|Interest expense                                                                        |                           |                 | (242.8   | )      |       | (219.0   | )    
|Corporate overhead and other                                                            |                           |                 | (131.2   | )      |       | (132.5   | )    
|                                                                                        |                           |                 |          |        |       |          |      
|Pre-tax income before net gains (losses) on investments                                 |                           |                 | 649.3    |        |       | 883.7    |      
|Net realized gains before equity hedges and short equity exposures                      |                           |                 | 563.4    |        |       | 1,049.7  |      
|                                                                                        |                           |                 |          |        |       |          |      
|Pre-tax income including net realized gains before equity hedges                        |                           |                 | 1,212.7  |        |       | 1,933.4  |      
|Net change in unrealized gains (losses) before equity hedges and short equity exposures |                           |                 | (574.1   | )      |       | (1,810.7 | )    
|Net gains (losses) on equity hedges and short equity exposures                          |                           |                 | (1,192.9 | )      |       | 501.8    |      
|                                                                                        |                           |                 |          |        |       |          |      
|Pre-tax income (loss)                                                                   |                           |                 | (554.3   | )      |       | 624.5    |      
|Income taxes                                                                            |                           |                 | 159.6    |        |       | 17.5     |      
|                                                                                        |                           |                 |          |        |       |          |      
|Net earnings (loss)                                                                     |                           |                 | (394.7   | )      |       | 642.0    |      
|                                                                                        |                           |                 |          |        |       |          |      
|Attributable to:                                                                        |                           |                 |          |        |       |          |      
|                                                                                        | Shareholders of Fairfax   |                 |          | (512.5 | )     |          | 567.7
|                                                                                        | Non-controlling interests |                 |          | 117.8  |       |          | 74.3 
|                                                                                        |                           |                 |          |        |       |          |      
|                                                                                        |                           |                 | (394.7   | )      |       | 642.0    |      
|                                                                                        |                           |                 |          |        |       |          |      
|Net earnings (loss) per share                                                           |                           | $               | (24.18   | )      | $     | 23.67    |      
|Net earnings (loss) per diluted share                                                   |                           | $               | (24.18   | )      | $     | 23.15    |      
|Cash dividends paid per share                                                           |                           | $               | 10.00    |        | $     | 10.00    |      

123

---



The company's insurance and reinsurance operations produced an underwriting profit of $575.9 (combined ratio of 92.5%) in 2016 compared to $704.5 (combined ratio
of 89.9%) in 2015. The increase in the combined ratio in 2016 principally reflected higher current period catastrophe losses and modest increases in the underwriting and commission expense ratios,
partially offset by increased net favourable prior year reserve development and a modest improvement in non-catastrophe loss experience related to the current accident year.

Net
favourable development of $654.6 (8.5 combined ratio points) in 2016 increased from $544.3 (7.8 combined ratio points) in 2015 and was comprised as follows:

|                           |                 | 2016   |        | 2015   |       
|-------------------------- | --------------- | ------ | ------ | ------ | ------
|Insurance and Reinsurance  |                 |        |        |        |       
|                           | Northbridge     |        | (112.8 | )      | (93.9 
|                           | OdysseyRe       |        | (266.5 | )      | (233.3
|                           | Crum & Forster  |        | (8.3   | )      |      
|                           | Zenith National |        | (101.0 | )      | (89.6 
|                           | Brit(1)         |        | (53.5  | )      | (19.7 
|                           | Fairfax Asia    |        | (52.1  | )      | (39.5 
|                           | Other           |        | (60.4  | )      | (68.3 
|                           |                 |        |        |        |       
|Net favourable development |                 | (654.6 | )      | (544.3 | )     
|                           |                 |        |        |        |       

Current
period catastrophe losses of $352.7 (4.6 combined ratio points) in 2016 increased from $133.7 (1.9 combined ratio points) in 2015 and were comprised as follows:

|                        | 2016  |  | 2015 |       
|----------------------- | ----- |  | ---- | ------
|
|Hurricane Matthew       | 67.9  |  | 0.9  |       
|Fort McMurray wildfires | 61.8  |  | 0.8  |       
|Other                   | 223.0 |  | 2.9  |       
|                        |       |  |      |       
|                        | 352.7 |  | 4.6  | points
|                        |       |  |      |       

The following table presents the components of the company's combined ratios for the years ended December 31:

|                                                |                            | 2016  |       | 2015  |      
|----------------------------------------------- | -------------------------- | ----- | ----- | ----- | -----
|Underwriting profit  Insurance and Reinsurance |                            | 575.9 |       | 704.5 |      
|                                                |                            |       |       |       |      
|                                                | Loss & LAE  accident year |       | 66.7  | %     | 64.5 
|                                                | Commissions                |       | 17.3  | %     | 16.8 
|                                                | Underwriting expense       |       | 17.0  | %     | 16.4 
|                                                |                            |       |       |       |      
|Combined ratio  accident year                  |                            | 101.0 | %     | 97.7  | %    
|                                                | Net favourable development |       | (8.5) | %     | (7.8)
|                                                |                            |       |       |       |      
|Combined ratio  calendar year                  |                            | 92.5  | %     | 89.9  | %    
|                                                |                            |       |       |       |      

The commission expense ratio increased from 16.8% in 2015 to 17.3% in 2016, primarily reflecting the consolidation of Brit (Brit's commission expense ratio is generally higher
than Fairfax's other operating companies as commission rates on the Lloyd's platform tend to be higher than typical non-Lloyd's insurance and reinsurance arrangements) and increases at Crum &
Forster (primarily reflecting the impact of increased writings of accident and health insurance which incur higher commission rates and reductions in ceding commissions as a result of the increase in
retentions that occurred in 2015), partially offset by a decrease at First Capital (primarily increased profit commission on reinsurance ceded).

124

---



The
underwriting expense ratio increased from 16.4% in 2015 to 17.0% in 2016, primarily reflecting increases at OdysseyRe (principally lower net premiums earned) and Fairfax Asia (primarily due to
integration and acquisition related expenses incurred with respect to AMAG and Fairfirst Insurance and higher compensation related expenses).

Underwriting
expenses in 2016 increased by 7.8% (excluding Brit's underwriting expenses of $221.7 and $141.2 in 2016 and 2015 respectively), primarily reflecting increases at Crum & Forster
(primarily due to higher personnel costs associated with acquisitions and new business initiatives consistent with its growth in net premiums earned), Fairfax Asia (primarily due to integration and
acquisition related expenses incurred with respect to AMAG and Fairfirst Insurance and higher compensation related expenses) and Colonnade (costs incurred related to the start-up of Fairfax's
operations in Eastern Europe).

Operating
expenses in the consolidated statements of earnings include only the operating expenses of the company's insurance and reinsurance and runoff operations and corporate overhead. Operating
expenses increased from $1,470.1 in 2015 to $1,597.7 in 2016 primarily as a result of increased underwriting expenses of the insurance and reinsurance operations as described in the preceding
paragraph (including the year-over-year impact of the consolidation of Brit's operating expenses), partially offset by decreased Runoff operating expenses and lower Fairfax corporate overhead
(principally due to non-recurring expenses incurred in connection with the acquisition of Brit in 2015).

Other
expenses increased from $1,703.1 in 2015 to $1,958.4 in 2016 principally reflecting increased expenses at Thomas Cook India (primarily related to Quess, consistent with its growth in revenue)
and Fairfax India, the consolidation of Cara and Boat Rocker (acquired on April 10, 2015 and July 17, 2015), and Cara's acquisitions of St-Hubert and Original Joe's (acquired on
September 2, 2016 and November 28, 2016), partially offset by the divestiture of Ridley on June 18, 2015.

The
company reported a net loss attributable to shareholders of Fairfax of $512.5 (net loss of $24.18 per basic and diluted share) in 2016 compared to net earnings attributable to shareholders
of Fairfax of $567.7 (net earnings of $23.67 per basic share and $23.15 per diluted share) in 2015. The year-over-year decrease in profitability primarily reflected increased net losses on
investments, lower interest and dividends (primarily related to a decrease in share of profit of associates) and a decrease in underwriting profit, partially offset by an increase in the recovery of
income taxes.

Common
shareholders' equity decreased from $8,952.5 at December 31, 2015 to $8,484.6 at December 31, 2016 primarily reflecting the net loss attributable to shareholders of Fairfax
($512.5), payment of dividends on the company's common and preferred shares ($271.8) and other comprehensive loss of $183.9 (primarily related to net unrealized foreign currency translation losses on
foreign operations of $98.9), partially offset by net proceeds from the issuance of 1.0 million subordinate voting shares on March 2, 2016 ($523.5). Common shareholders' equity per basic
share at December 31, 2016 was $367.40 compared to $403.01 per basic share at December 31, 2015, representing a decrease of 8.8% (without adjustment for the $10.00 per common share
dividend paid in the first quarter of 2016, or a decrease of 6.4% adjusted to include that dividend).

125

---



Net Earnings by Reporting Segment

The company's sources of net earnings (loss) shown by reporting segment are set out below for the years ended December 31, 2016 and 2015. The intercompany adjustment for
gross premiums written eliminates premiums on reinsurance ceded within the group, primarily to OdysseyRe and Group Re.

Year ended December 31, 2016

|                                  |                           | Insurance and Reinsurance |   |         |   |         |   |        |   |         |   |       |   |       |  
|--------------------------------- | ------------------------- | ------------------------- | - | ------- | - | ------- | - | ------ | - | ------- | - | ----- | - | ----- | -
|
|
|Gross premiums written            |                           | 1,055.1                   |   | 2,380.7 |   | 2,055.0 |   | 831.7  |   | 1,912.2 |   | 648.7 |   | 643.3 |  
|                                  |                           |                           |   |         |   |         |   |        |   |         |   |       |   |       |  
|Net premiums written              |                           | 942.6                     |   | 2,100.2 |   | 1,801.1 |   | 819.4  |   | 1,480.2 |   | 303.1 |   | 458.4 |  
|                                  |                           |                           |   |         |   |         |   |        |   |         |   |       |   |       |  
|Net premiums earned               |                           | 908.8                     |   | 2,074.1 |   | 1,769.5 |   | 807.3  |   | 1,399.3 |   | 302.5 |   | 437.2 |  
|                                  |                           |                           |   |         |   |         |   |        |   |         |   |       |   |       |  
|Underwriting profit (loss)        |                           | 46.3                      |   | 235.2   |   | 32.4    |   | 164.1  |   | 29.1    |   | 41.1  |   | 27.7  |  
|Interest and dividends            |                           | 57.4                      |   | 171.0   |   | 43.2    |   | 30.8   |   | 58.8    |   | 74.8  |   | 27.3  |  
|                                  |                           |                           |   |         |   |         |   |        |   |         |   |       |   |       |  
|Operating income (loss)           |                           | 103.7                     |   | 406.2   |   | 75.6    |   | 194.9  |   | 87.9    |   | 115.9 |   | 55.0  |  
|Net gains (losses) on investments |                           | (161.3                    | ) | (318.7  | ) | (184.7  | ) | (168.2 | ) | 87.3    |   | (1.7  | ) | (90.0 | )
|Other reporting segment           |                           |                          |   |        |   |        |   |       |   |        |   |      |   |      |  
|Interest expense                  |                           |                          |   | (2.8    | ) | (1.6    | ) | (3.3   | ) | (14.2   | ) |      |   | (4.2  | )
|Corporate overhead and other      |                           | (6.6                      | ) | (30.2   | ) | (20.4   | ) | (8.4   | ) | (9.2    | ) | (0.1  | ) |      |  
|                                  |                           |                           |   |         |   |         |   |        |   |         |   |       |   |       |  
|Pre-tax income (loss)             |                           | (64.2                     | ) | 54.5    |   | (131.1  | ) | 15.0   |   | 151.8   |   | 114.1 |   | (39.2 | )
|Income taxes                      |                           |                           |   |         |   |         |   |        |   |         |   |       |   |       |  
|                                  |                           |                           |   |         |   |         |   |        |   |         |   |       |   |       |  
|Net loss                          |                           |                           |   |         |   |         |   |        |   |         |   |       |   |       |  
|                                  |                           |                           |   |         |   |         |   |        |   |         |   |       |   |       |  
|Attributable to:                  |                           |                           |   |         |   |         |   |        |   |         |   |       |   |       |  
|                                  | Shareholders of Fairfax   |                           |   |         |   |         |   |        |   |         |   |       |   |       |  
|                                  | Non-controlling interests |                           |   |         |   |         |   |        |   |         |   |       |   |       |  
|                                  |                           |                           |   |         |   |         |   |        |   |         |   |       |   |       |  
|                                  |                           |                           |   |         |   |         |   |        |   |         |   |       |   |       |  
|                                  |                           |                           |   |         |   |         |   |        |   |         |   |       |   |       |  

|
|

Year ended December 31, 2015

|                                  |                           | Insurance and Reinsurance |   |         |   |         |   |       |   |         |   |       |   |       |  
|--------------------------------- | ------------------------- | ------------------------- | - | ------- | - | ------- | - | ----- | - | ------- | - | ----- | - | ----- | -
|
|
|Gross premiums written            |                           | 1,059.6                   |   | 2,404.0 |   | 1,896.1 |   | 797.6 |   | 1,087.5 |   | 620.9 |   | 634.7 |  
|                                  |                           |                           |   |         |   |         |   |       |   |         |   |       |   |       |  
|Net premiums written              |                           | 887.0                     |   | 2,095.0 |   | 1,659.4 |   | 785.4 |   | 946.4   |   | 275.9 |   | 489.8 |  
|                                  |                           |                           |   |         |   |         |   |       |   |         |   |       |   |       |  
|Net premiums earned               |                           | 874.7                     |   | 2,204.1 |   | 1,522.0 |   | 766.4 |   | 892.5   |   | 287.0 |   | 442.7 |  
|                                  |                           |                           |   |         |   |         |   |       |   |         |   |       |   |       |  
|Underwriting profit (loss)        |                           | 71.4                      |   | 336.9   |   | 35.4    |   | 134.4 |   | 45.4    |   | 34.8  |   | 46.2  |  
|Interest and dividends            |                           | 42.3                      |   | 221.8   |   | 66.8    |   | 48.9  |   | 29.5    |   | 41.0  |   | 26.7  |  
|                                  |                           |                           |   |         |   |         |   |       |   |         |   |       |   |       |  
|Operating income (loss)           |                           | 113.7                     |   | 558.7   |   | 102.2   |   | 183.3 |   | 74.9    |   | 75.8  |   | 72.9  |  
|Net gains (losses) on investments |                           | 131.9                     |   | (267.2  | ) | (105.6  | ) | (58.8 | ) | (75.3   | ) | (24.5 | ) | (68.4 | )
|Other reporting segment           |                           |                          |   |        |   |        |   |      |   |        |   |      |   |      |  
|Interest expense                  |                           |                          |   | (5.5    | ) | (1.4    | ) | (3.3  | ) | (9.8    | ) |      |   | (4.1  | )
|Corporate overhead and other      |                           | (11.0                     | ) | (27.1   | ) | (19.5   | ) | (9.4  | ) | (16.4   | ) | (0.1  | ) | 0.4   |  
|                                  |                           |                           |   |         |   |         |   |       |   |         |   |       |   |       |  
|Pre-tax income (loss)             |                           | 234.6                     |   | 258.9   |   | (24.3   | ) | 111.8 |   | (26.6   | ) | 51.2  |   | 0.8   |  
|Income taxes                      |                           |                           |   |         |   |         |   |       |   |         |   |       |   |       |  
|                                  |                           |                           |   |         |   |         |   |       |   |         |   |       |   |       |  
|Net earnings                      |                           |                           |   |         |   |         |   |       |   |         |   |       |   |       |  
|                                  |                           |                           |   |         |   |         |   |       |   |         |   |       |   |       |  
|Attributable to:                  |                           |                           |   |         |   |         |   |       |   |         |   |       |   |       |  
|                                  | Shareholders of Fairfax   |                           |   |         |   |         |   |       |   |         |   |       |   |       |  
|                                  | Non-controlling interests |                           |   |         |   |         |   |       |   |         |   |       |   |       |  
|                                  |                           |                           |   |         |   |         |   |       |   |         |   |       |   |       |  
|                                  |                           |                           |   |         |   |         |   |       |   |         |   |       |   |       |  
|                                  |                           |                           |   |         |   |         |   |       |   |         |   |       |   |       |  

126

---



Balance Sheets by Reporting Segment

The company's segmented balance sheets as at December 31, 2016 and 2015 present the assets and liabilities of, and the capital invested by the company in, each of the
company's reporting segments. The segmented balance sheets have been prepared on the following basis:



|                   |  | Economic ownership percentage in Fairfax Affiliates |  |       |  |      
|------------------ |  | --------------------------------------------------- |  | ----- |  | -----
|
|Fairfax Affiliates |  |                                                     |  |       |  |      
|Zenith National    |  |                                                    |  | 6.1%  |  | 2.0% 
|Advent             |  |                                                    |  | 15.7% |  | 12.7%
|TRG (Runoff)       |  |                                                    |  |      |  | 5.2% 
|Thomas Cook India  |  | 1.1%                                                |  | 11.0% |  | 1.5% 
|Fairfax India      |  |                                                    |  | 8.3%  |  | 4.0% 
|The Keg            |  | 11.0%                                               |  | 14.7% |  | 7.3% 
|Cara               |  | 8.3%                                                |  | 13.6% |  | 4.8% 
|Boat Rocker Media  |  |                                                    |  | 27.3% |  |     

127

---



Segmented Balance Sheet as at December 31, 2016

|                                                             |  | Insurance and Reinsurance |  |          |  |         |  |         |  |         |  |        
|------------------------------------------------------------ |  | ------------------------- |  | -------- |  | ------- |  | ------- |  | ------- |  | -------
|
|Assets                                                       |  |                           |  |          |  |         |  |         |  |         |  |        
|Holding company cash and investments                         |  | 125.9                     |  | 508.6    |  | 7.2     |  | 10.3    |  |        |  |       
|Insurance contract receivables                               |  | 272.7                     |  | 830.8    |  | 279.1   |  | 238.2   |  | 639.2   |  | 169.6  
|Portfolio investments                                        |  | 2,638.2                   |  | 6,831.8  |  | 3,780.4 |  | 1,667.9 |  | 3,912.0 |  | 1,524.0
|Deferred premium acquisition costs                           |  | 96.4                      |  | 182.5    |  | 122.0   |  | 10.9    |  | 192.7   |  | 30.6   
|Recoverable from reinsurers                                  |  | 463.3                     |  | 774.8    |  | 1,104.1 |  | 68.0    |  | 923.7   |  | 634.3  
|Deferred income taxes                                        |  | 65.9                      |  | 300.5    |  | 257.3   |  | 55.0    |  |        |  |       
|Goodwill and intangible assets                               |  | 152.8                     |  | 174.9    |  | 331.6   |  | 439.0   |  | 730.9   |  | 173.1  
|Due from affiliates                                          |  | 120.9                     |  | 4.0      |  | 31.4    |  |        |  | 0.3     |  | 23.3   
|Other assets                                                 |  | 103.2                     |  | 182.9    |  | 183.5   |  | 60.6    |  | 106.0   |  | 85.0   
|Investments in Fairfax affiliates                            |  | 110.6                     |  | 544.0    |  | 197.5   |  | 40.8    |  | 74.7    |  | 44.8   
|                                                             |  |                           |  |          |  |         |  |         |  |         |  |        
|Total assets                                                 |  | 4,149.9                   |  | 10,334.8 |  | 6,294.1 |  | 2,590.7 |  | 6,579.5 |  | 2,684.7
|                                                             |  |                           |  |          |  |         |  |         |  |         |  |        
|Liabilities                                                  |  |                           |  |          |  |         |  |         |  |         |  |        
|Accounts payable and accrued liabilities                     |  | 161.3                     |  | 511.0    |  | 282.2   |  | 94.6    |  | 79.4    |  | 273.7  
|Income taxes payable                                         |  | 6.3                       |  |         |  |        |  | 1.5     |  |        |  | 13.0   
|Short sale and derivative obligations                        |  | 40.9                      |  | 79.5     |  | 37.2    |  | 3.1     |  | 11.8    |  |       
|Due to affiliates                                            |  | 0.9                       |  | 9.2      |  | 0.6     |  | 3.0     |  |        |  | 5.5    
|Funds withheld payable to reinsurers                         |  | 3.3                       |  | 61.6     |  | 18.2    |  |        |  | 302.3   |  | 51.8   
|Provision for losses and loss adjustment expenses            |  | 1,875.0                   |  | 4,896.9  |  | 3,562.3 |  | 1,212.5 |  | 3,406.7 |  | 800.0  
|Provision for unearned premiums                              |  | 542.5                     |  | 722.5    |  | 683.8   |  | 280.2   |  | 836.8   |  | 308.9  
|Deferred income taxes                                        |  |                          |  |         |  |        |  |        |  | 102.8   |  | 4.8    
|Borrowings                                                   |  |                          |  | 89.8     |  | 41.4    |  | 38.2    |  | 175.9   |  |       
|                                                             |  |                           |  |          |  |         |  |         |  |         |  |        
|Total liabilities                                            |  | 2,630.2                   |  | 6,370.5  |  | 4,625.7 |  | 1,633.1 |  | 4,915.7 |  | 1,457.7
|                                                             |  |                           |  |          |  |         |  |         |  |         |  |        
|Equity                                                       |  |                           |  |          |  |         |  |         |  |         |  |        
|Shareholders' equity attributable to shareholders of Fairfax |  | 1,519.7                   |  | 3,964.3  |  | 1,668.4 |  | 957.6   |  | 1,663.8 |  | 1,166.9
|Non-controlling interests                                    |  |                          |  |         |  |        |  |        |  |        |  | 60.1   
|                                                             |  |                           |  |          |  |         |  |         |  |         |  |        
|Total equity                                                 |  | 1,519.7                   |  | 3,964.3  |  | 1,668.4 |  | 957.6   |  | 1,663.8 |  | 1,227.0
|                                                             |  |                           |  |          |  |         |  |         |  |         |  |        
|Total liabilities and total equity                           |  | 4,149.9                   |  | 10,334.8 |  | 6,294.1 |  | 2,590.7 |  | 6,579.5 |  | 2,684.7
|                                                             |  |                           |  |          |  |         |  |         |  |         |  |        
|Capital                                                      |  |                           |  |          |  |         |  |         |  |         |  |        
|Borrowings                                                   |  |                          |  | 89.8     |  | 41.4    |  | 38.2    |  | 175.9   |  |       
|Investments in Fairfax affiliates                            |  | 110.6                     |  | 544.0    |  | 197.5   |  | 40.8    |  | 74.7    |  | 44.8   
|Shareholders' equity attributable to shareholders of Fairfax |  | 1,409.1                   |  | 3,420.3  |  | 1,470.9 |  | 916.8   |  | 1,125.7 |  | 1,122.1
|Non-controlling interests                                    |  |                          |  |         |  |        |  |        |  | 463.4   |  | 60.1   
|                                                             |  |                           |  |          |  |         |  |         |  |         |  |        
|Total capital                                                |  | 1,519.7                   |  | 4,054.1  |  | 1,709.8 |  | 995.8   |  | 1,839.7 |  | 1,227.0
|                                                             |  |                           |  |          |  |         |  |         |  |         |  |        
|% of consolidated total capital                              |  | 9.2%                      |  | 24.4%    |  | 10.3%   |  | 6.0%    |  | 11.1%   |  | 7.4%   
|                                                             |  |                           |  |          |  |         |  |         |  |         |  |        

128

---



Segmented Balance Sheet as at December 31, 2015

|                                                             |  | Insurance and Reinsurance |  |          |  |         |  |         |  |         |  |        
|------------------------------------------------------------ |  | ------------------------- |  | -------- |  | ------- |  | ------- |  | ------- |  | -------
|
|Assets                                                       |  |                           |  |          |  |         |  |         |  |         |  |        
|Holding company cash and investments                         |  | 245.0                     |  | 560.3    |  | 8.2     |  | 65.9    |  |        |  |       
|Insurance contract receivables                               |  | 242.7                     |  | 806.7    |  | 258.8   |  | 222.6   |  | 605.6   |  | 131.2  
|Portfolio investments                                        |  | 2,569.4                   |  | 7,215.3  |  | 3,883.4 |  | 1,787.9 |  | 3,967.1 |  | 1,157.5
|Deferred premium acquisition costs                           |  | 84.4                      |  | 181.0    |  | 118.2   |  | 10.7    |  | 63.2    |  | 24.4   
|Recoverable from reinsurers                                  |  | 478.0                     |  | 828.9    |  | 1,079.1 |  | 78.1    |  | 793.0   |  | 579.9  
|Deferred income taxes                                        |  | 41.1                      |  | 222.9    |  | 183.1   |  | 4.0     |  |        |  |       
|Goodwill and intangible assets                               |  | 144.0                     |  | 188.4    |  | 331.4   |  | 446.7   |  | 739.2   |  | 40.1   
|Due from affiliates                                          |  | 71.7                      |  | 2.1      |  | 0.1     |  |        |  |        |  | 8.0    
|Other assets                                                 |  | 73.9                      |  | 102.1    |  | 116.9   |  | 73.9    |  | 132.0   |  | 65.1   
|Investments in Fairfax affiliates                            |  | 106.8                     |  | 510.8    |  | 176.0   |  | 40.8    |  | 47.3    |  | 45.5   
|                                                             |  |                           |  |          |  |         |  |         |  |         |  |        
|Total assets                                                 |  | 4,057.0                   |  | 10,618.5 |  | 6,155.2 |  | 2,730.6 |  | 6,347.4 |  | 2,051.7
|                                                             |  |                           |  |          |  |         |  |         |  |         |  |        
|Liabilities                                                  |  |                           |  |          |  |         |  |         |  |         |  |        
|Accounts payable and accrued liabilities                     |  | 169.9                     |  | 575.5    |  | 230.6   |  | 86.5    |  | 141.3   |  | 241.2  
|Income taxes payable                                         |  | 3.7                       |  | 31.1     |  | 2.6     |  |        |  |        |  | 11.0   
|Short sale and derivative obligations                        |  | 40.4                      |  | 13.0     |  | 5.3     |  | 1.4     |  | 12.5    |  |       
|Due to affiliates                                            |  | 2.0                       |  | 6.1      |  | 15.5    |  | 0.4     |  |        |  | 1.9    
|Funds withheld payable to reinsurers                         |  | 4.0                       |  | 56.1     |  | 20.3    |  |        |  | 206.1   |  | 66.2   
|Provision for losses and loss adjustment expenses            |  | 1,852.2                   |  | 5,010.4  |  | 3,428.5 |  | 1,252.4 |  | 3,324.1 |  | 757.0  
|Provision for unearned premiums                              |  | 492.4                     |  | 729.4    |  | 657.0   |  | 267.7   |  | 664.9   |  | 252.7  
|Deferred income taxes                                        |  |                          |  |         |  |        |  |        |  | 120.3   |  | 8.8    
|Borrowings                                                   |  |                          |  | 89.8     |  | 41.4    |  | 38.1    |  | 208.6   |  |       
|                                                             |  |                           |  |          |  |         |  |         |  |         |  |        
|Total liabilities                                            |  | 2,564.6                   |  | 6,511.4  |  | 4,401.2 |  | 1,646.5 |  | 4,677.8 |  | 1,338.8
|                                                             |  |                           |  |          |  |         |  |         |  |         |  |        
|Equity                                                       |  |                           |  |          |  |         |  |         |  |         |  |        
|Shareholders' equity attributable to shareholders of Fairfax |  | 1,492.4                   |  | 4,107.1  |  | 1,754.0 |  | 1,084.1 |  | 1,669.6 |  | 693.7  
|Non-controlling interests                                    |  |                          |  |         |  |        |  |        |  |        |  | 19.2   
|                                                             |  |                           |  |          |  |         |  |         |  |         |  |        
|Total equity                                                 |  | 1,492.4                   |  | 4,107.1  |  | 1,754.0 |  | 1,084.1 |  | 1,669.6 |  | 712.9  
|                                                             |  |                           |  |          |  |         |  |         |  |         |  |        
|Total liabilities and total equity                           |  | 4,057.0                   |  | 10,618.5 |  | 6,155.2 |  | 2,730.6 |  | 6,347.4 |  | 2,051.7
|                                                             |  |                           |  |          |  |         |  |         |  |         |  |        
|Capital                                                      |  |                           |  |          |  |         |  |         |  |         |  |        
|Borrowings                                                   |  |                          |  | 89.8     |  | 41.4    |  | 38.1    |  | 208.6   |  |       
|Investments in Fairfax affiliates                            |  | 106.8                     |  | 510.8    |  | 176.0   |  | 40.8    |  | 47.3    |  | 45.5   
|Shareholders' equity attributable to shareholders of Fairfax |  | 1,385.6                   |  | 3,596.3  |  | 1,578.0 |  | 1,043.3 |  | 1,117.2 |  | 648.2  
|Non-controlling interests                                    |  |                          |  |         |  |        |  |        |  | 505.1   |  | 19.2   
|                                                             |  |                           |  |          |  |         |  |         |  |         |  |        
|Total capital                                                |  | 1,492.4                   |  | 4,196.9  |  | 1,795.4 |  | 1,122.2 |  | 1,878.2 |  | 712.9  
|                                                             |  |                           |  |          |  |         |  |         |  |         |  |        
|% of consolidated total capital                              |  | 9.7%                      |  | 27.3%    |  | 11.7%   |  | 7.3%    |  | 12.2%   |  | 4.6%   
|                                                             |  |                           |  |          |  |         |  |         |  |         |  |        

129

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Components of Net Earnings



Set out and discussed below are the underwriting and operating results of Fairfax's insurance and reinsurance operations, Runoff and Other by reporting segment for the years
ended December 31, 2016 and 2015.



|                               |                            | Cdn$    |       |         |       |         |      
|------------------------------ | -------------------------- | ------- | ----- | ------- | ----- | ------- | -----
|
|Underwriting profit            |                            | 61.3    |       | 91.2    |       | 46.3    |      
|                               |                            |         |       |         |       |         |      
|                               | Loss & LAE  accident year |         | 71.6  | %       | 67.5  | %       | 71.6 
|                               | Commissions                |         | 16.6  | %       | 15.8  | %       | 16.6 
|                               | Underwriting expenses      |         | 19.1  | %       | 19.2  | %       | 19.1 
|                               |                            |         |       |         |       |         |      
|Combined ratio  accident year |                            | 107.3   | %     | 102.5   | %     | 107.3   | %    
|                               | Net favourable development |         | (12.4 | )%      | (10.7 | )%      | (12.4
|                               |                            |         |       |         |       |         |      
|Combined ratio  calendar year |                            | 94.9    | %     | 91.8    | %     | 94.9    | %    
|                               |                            |         |       |         |       |         |      
|Gross premiums written         |                            | 1,395.9 |       | 1,353.3 |       | 1,055.1 |      
|                               |                            |         |       |         |       |         |      
|Net premiums written           |                            | 1,247.0 |       | 1,132.8 |       | 942.6   |      
|                               |                            |         |       |         |       |         |      
|Net premiums earned            |                            | 1,202.3 |       | 1,117.1 |       | 908.8   |      
|                               |                            |         |       |         |       |         |      
|Underwriting profit            |                            | 61.3    |       | 91.2    |       | 46.3    |      
|Interest and dividends         |                            | 75.9    |       | 54.0    |       | 57.4    |      
|                               |                            |         |       |         |       |         |      
|Operating income               |                            | 137.2   |       | 145.2   |       | 103.7   |      
|                               |                            |         |       |         |       |         |      

The
average U.S. dollar foreign exchange rate (relative to the Canadian dollar) strengthened by 3.5% in 2016 compared to 2015. To avoid the distortion caused by foreign currency translation,
the table above presents Northbridge's underwriting and operating results in both U.S. dollars and Canadian dollars (Northbridge's functional currency). The discussion which follows makes
reference to those Canadian dollar figures unless indicated otherwise.

In
2015 Northbridge assumed gross premiums written of Cdn$70.6 ($56.6) and gross loss reserves of Cdn$66.5 ($53.3) in connection with the "AXA Canada reinsurance transaction" as described in the
Components of Net Earnings section of this MD&A under the heading Runoff. Northbridge fully retroceded these amounts to Runoff and received a commission of Cdn$1.7 ($1.4) from Runoff for fronting this
transaction.

Northbridge
reported an underwriting profit of Cdn$61.3 ($46.3) and a combined ratio of 94.9% in 2016 compared to an underwriting profit of Cdn$91.2 ($71.4) and a combined ratio of 91.8% in 2015. The
decrease in underwriting profit in 2016 principally reflected increased current period catastrophe losses and a
deterioration in non-catastrophe loss experience related to the current accident year (increased frequency of large losses), partially offset by increased net favourable prior year reserve
development.

Net
favourable prior year reserve development in 2016 of Cdn$149.2 ($112.8) (12.4 combined ratio points) principally reflected better than expected emergence on automobile and casualty lines of
business related to accident years 2011 through 2014. Net favourable prior year reserve development in 2015 of Cdn$119.9 ($93.9) (10.7 combined ratio points) principally reflected better than
expected emergence across most accident years and lines of business.

Underwriting
profit in 2016 included Cdn$38.0 ($28.7) (3.2 combined ratio points) of current period catastrophe losses principally related to the Fort McMurray wildfires (Cdn$29.8 ($22.5) or
2.5 combined ratio points). Current period catastrophe losses were not significant in 2015.

130

---



Northbridge's
commission expense ratio increased from 15.8% in 2015 to 16.6% in 2016, primarily reflecting commission expense adjustments, and also reflected the impact of non-recurring commission
revenue earned in the first quarter of 2015 related to the AXA Canada reinsurance transaction described earlier in this section. Northbridge's underwriting expense ratio decreased from 19.2% in 2015
to 19.1% in 2016 reflecting higher net premiums earned, partially offset by the impact in 2015 of the release of a provision related to harmonized sales tax on premiums ceded to foreign affiliated
reinsurers following a favourable tax ruling.

Excluding
the impact of the AXA Canada reinsurance transaction, gross premiums written increased by 8.8% from Cdn$1,282.7 in 2015 to Cdn$1,395.9 in 2016, primarily reflecting increased new business
writings at Northbridge Insurance and modest price increases across the group. Net premiums written increased by 10.1% in 2016, reflecting the same factors which affected gross premiums written and
also included the impact of reduced reinsurance costs. Net premiums earned increased by 7.6% in 2016, consistent with the growth in net premiums written.

Interest
and dividends increased from Cdn$54.0 ($42.3) in 2015 to Cdn$75.9 ($57.4) in 2016, principally due to increased holdings of higher yielding government bonds year-over-year, partially offset
by a non-cash impairment charge in 2016 of Cdn$9.8 ($7.4) related to an associate (Resolute).

Cash
provided by operating activities (excluding operating cash flow activity related to securities recorded as FVTPL) increased from Cdn$16.8 ($13.2) in 2015 to Cdn$67.4 ($51.0) in 2016, primarily as
a result of higher net premium collections and lower income taxes paid, partially offset by higher net paid claims.

Northbridge's
average annual return on average equity over the past 31 years since inception in 1985 was 13.1% at December 31, 2016 (December 31,
2015  13.6%) (expressed in Canadian dollars).



|                               |                            | 2016    |       | 2015    |      
|------------------------------ | -------------------------- | ------- | ----- | ------- | -----
|Underwriting profit            |                            | 235.2   |       | 336.9   |      
|                               |                            |         |       |         |      
|                               | Loss & LAE  accident year |         | 69.3  | %       | 64.4 
|                               | Commissions                |         | 20.8  | %       | 20.4 
|                               | Underwriting expenses      |         | 11.4  | %       | 10.5 
|                               |                            |         |       |         |      
|Combined ratio  accident year |                            | 101.5   | %     | 95.3    | %    
|                               | Net favourable development |         | (12.8 | )%      | (10.6
|                               |                            |         |       |         |      
|Combined ratio  calendar year |                            | 88.7    | %     | 84.7    | %    
|                               |                            |         |       |         |      
|Gross premiums written         |                            | 2,380.7 |       | 2,404.0 |      
|                               |                            |         |       |         |      
|Net premiums written           |                            | 2,100.2 |       | 2,095.0 |      
|                               |                            |         |       |         |      
|Net premiums earned            |                            | 2,074.1 |       | 2,204.1 |      
|                               |                            |         |       |         |      
|Underwriting profit            |                            | 235.2   |       | 336.9   |      
|Interest and dividends         |                            | 171.0   |       | 221.8   |      
|                               |                            |         |       |         |      
|Operating income               |                            | 406.2   |       | 558.7   |      
|                               |                            |         |       |         |      

On
June 3, 2015 Hudson Insurance Company (a wholly owned subsidiary of OdysseyRe) completed the acquisition of certain assets of Euclid Managers, LLC ("Euclid"), an underwriting
and claims manager for internet, technology, media, manufacturers and other professional liability coverage. The acquisition of Euclid, which produces annual gross premiums written of approximately
$15, ensures that Hudson Insurance has the opportunity to participate on future renewals of this business.

OdysseyRe
reported an underwriting profit of $235.2 and a combined ratio of 88.7% in 2016 compared to an underwriting profit of $336.9 and a combined ratio of 84.7% in 2015. The decrease in
underwriting profit in 2016 principally reflected higher current period catastrophe losses, lower net premiums earned, lower writings of higher margin property catastrophe business and continued rate
pressure, partially offset by increased net favourable prior

131

---



year
reserve development. Extraordinary losses of $61.9 (3.0 combined ratio points) in 2016 decreased from $98.7 (4.5 combined ratio points) in 2015. The Tianjin port explosion in China
in 2015 resulted in an incurred loss of $52.9 (2.4 combined ratio points).

Underwriting
profit in 2016 included $191.9 (9.2 combined ratio points) of current period catastrophe losses (net of reinstatement premiums), principally comprised of the impacts of
Hurricane Matthew ($30.0 or 1.4 combined ratio points), flooding in Europe ($19.0 or 0.9 of a combined ratio point), the Fort McMurray wildfires ($14.1 or 0.7 of a combined ratio point) and
other attritional losses. Underwriting profit in 2015 included $108.0 (4.9 combined ratio points) of attritional current period catastrophe losses (net of reinstatement premiums).
Underwriting profit in 2016 included $266.5 (12.8 combined ratio points) of net favourable prior year reserve development compared to $233.3 (10.6 combined ratio points) in 2015,
principally related to casualty and property catastrophe loss reserves in both years. OdysseyRe's underwriting expense ratio increased from 10.5% in 2015 to 11.4% in 2016, principally due to the
decrease in net premiums earned.

In
2015 OdysseyRe did not renew a significant property quota share reinsurance contract covering risks in Florida following the cedent's decision to retain all the risk associated with that contract.
Consequently on June 1, 2015, OdysseyRe returned the remaining unearned premium associated with this contract to the cedent,
which decreased each of gross premiums written and net premiums written by $17.8 in 2015. Net premiums earned associated with that contract during 2015 was $71.7 prior to cancellation. Excluding the
impact of the cancellation of this contract, gross premiums written, net premiums written and net premiums earned decreased by 1.7%, 0.6% and 2.7% in 2016, principally reflecting decreases in the
Latin America and London Market divisions. Net premiums written and net premiums earned in 2016 also reflected the impact of additional purchases of property catastrophe excess of loss reinsurance at
favourable pricing, which is expected to significantly mitigate the impact of small to medium-sized catastrophe events on OdysseyRe's U.S. and international operations.

Interest
and dividends decreased from $221.8 in 2015 to $171.0 in 2016 reflecting lower share of profit of associates and a non-cash impairment charge in 2016 of $3.2 related to an associate
(Resolute), partially offset by lower total return swap expense. Share of profit of associates in 2015 reflected OdysseyRe's $37.5 share of a gain recognized by a Kennedy Wilson real estate
partnership on the disposition of investment properties.

Cash
provided by operating activities (excluding operating cash flow activity related to securities recorded at FVTPL) increased from $111.8 in 2015 to $268.9 in 2016 reflecting decreased income taxes
paid and increased investment income received.



|                               |                            | 2016    |      | 2015    |     
|------------------------------ | -------------------------- | ------- | ---- | ------- | ----
|Underwriting profit            |                            | 32.4    |      | 35.4    |     
|                               |                            |         |      |         |     
|                               | Loss & LAE  accident year |         | 64.2 | %       | 64.1
|                               | Commissions                |         | 16.0 | %       | 14.8
|                               | Underwriting expenses      |         | 18.5 | %       | 18.8
|                               |                            |         |      |         |     
|Combined ratio  accident year |                            | 98.7    | %    | 97.7    | %   
|                               | Net favourable development |         | (0.5 | )%      |    
|                               |                            |         |      |         |     
|Combined ratio  calendar year |                            | 98.2    | %    | 97.7    | %   
|                               |                            |         |      |         |     
|Gross premiums written         |                            | 2,055.0 |      | 1,896.1 |     
|                               |                            |         |      |         |     
|Net premiums written           |                            | 1,801.1 |      | 1,659.4 |     
|                               |                            |         |      |         |     
|Net premiums earned            |                            | 1,769.5 |      | 1,522.0 |     
|                               |                            |         |      |         |     
|Underwriting profit            |                            | 32.4    |      | 35.4    |     
|Interest and dividends         |                            | 43.2    |      | 66.8    |     
|                               |                            |         |      |         |     
|Operating income               |                            | 75.6    |      | 102.2   |     
|                               |                            |         |      |         |     

On October 4, 2016 Crum & Forster acquired a 100% interest in Trinity Risk LLC ("Trinity") for consideration of $12.0. Trinity focuses on occupational
accident insurance and produces approximately $26 of gross premiums written annually.

132

---



In
2015 Crum & Forster completed the following acquisitions: Brownyard Programs, Ltd. ("Brownyard"  a specialist in writing and servicing security
guard and security services business insurance, acquired on October 30, 2015); Travel Insured International, Inc. ("TII"  a leading travel
insurance provider that specializes in offering travel insurance protection, acquired on October 8, 2015); and, The Redwoods Group, Inc.
("Redwoods"  a producer of property and casualty packaged insurance business focused on YMCAs, community centers and day camps, acquired on April 10,
2015). These acquisitions, which complement Crum & Forster's existing footprint in each of these lines of business, produced gross premiums written of $15.9, $56.2 and $44.7 in 2016.

On
October 15, 2015 Crum & Forster commuted a significant aggregate stop loss reinsurance treaty (the "significant commutation"). The commutation reduced each of recoverable from
reinsurers and funds withheld payable to reinsurers by $334.0. The significant commutation had no initial effect on the income statement but funds withheld interest expense (a component of
interest and dividends) will be reduced in future periods by approximately $20 annually.

Crum &
Forster reported an underwriting profit of $32.4 and a combined ratio of 98.2% in 2016 compared to an underwriting profit of $35.4 and a combined ratio of 97.7% in 2015. The decrease in
underwriting profit in 2016 principally reflected higher current period catastrophe losses, a deterioration in accident and health loss experience related to the current accident year and increased
commission expense, partially offset by net favourable prior year reserve development in 2016 and an improvement in non-catastrophe loss experience related to the current accident year.

Underwriting
profit in 2016 included $26.0 (1.5 combined ratio points) of current period catastrophe losses (net of reinstatement premiums), principally related to the Texas hailstorms
($10.5 or 0.6 of a combined ratio point), Hurricane Matthew ($5.0 or 0.3 of a combined ratio point) and other attritional losses. The underwriting profit in 2015 included $12.0 (0.8 of a combined
ratio point) of current period catastrophe losses principally related to severe winter weather and storms in the U.S. Underwriting profit in 2016 included $8.3 (0.5 of a combined ratio point)
of net favourable prior year reserve development, principally related to net favourable emergence on workers' compensation and professional risk loss reserves, partially offset by an increase in
construction defect loss reserves. There was no net prior year reserve development in 2015.

Crum &
Forster's commission expense ratio increased from 14.8% in 2015 to 16.0% in 2016 primarily reflecting increased writings of accident and health insurance which incur higher commission
rates and the impact of reductions in ceding commissions as a result of the increase in retentions that occurred in 2015. Crum & Forster's underwriting expense ratio decreased from 18.8% in
2015 to 18.5% in 2016 primarily reflecting increased net premiums earned.

Gross
premiums written increased by 8.4% in 2016, principally reflecting growth in Crum & Forster's accident and health and commercial transportation lines of business and incremental
contributions from Brownyard, TII and Redwoods as described earlier in this section, partially offset by decreases in the construction contracting line of business. Net premiums written increased by
8.5% in 2016, consistent with the growth in gross premiums written. Net premiums earned increased by 16.3% in 2016 reflecting the growth in net premiums written during 2015 and 2016.

Interest
and dividends decreased from $66.8 in 2015 to $43.2 in 2016 reflecting lower share of profit of associates primarily due to a non-cash impairment charge in 2016 of $25.3 related to an
associate (Resolute), partially offset by lower funds held interest expense related to the significant commutation (described earlier in this section). Share of profit of associates in 2015 reflected
Crum & Forster's $12.2 share of a gain recognized by a Kennedy Wilson real estate partnership on the disposition of investment properties.

Cash
provided by operating activities (excluding operating cash flow activity related to securities recorded at FVTPL) increased from $218.0 in 2015 to $238.5 in 2016 primarily as a result of
increased cash flow from underwriting.

Crum &
Forster's cumulative net earnings since acquisition on August 13, 1998 was $1,879.6 and its average annual return on average equity since acquisition has been 9.4%
(December 31, 2015  10.1%).

133

---





|                               |                            | 2016  |       | 2015  |      
|------------------------------ | -------------------------- | ----- | ----- | ----- | -----
|Underwriting profit            |                            | 164.1 |       | 134.4 |      
|                               |                            |       |       |       |      
|                               | Loss & LAE  accident year |       | 56.9  | %     | 58.6 
|                               | Commissions                |       | 10.1  | %     | 9.9  
|                               | Underwriting expenses      |       | 25.2  | %     | 25.7 
|                               |                            |       |       |       |      
|Combined ratio  accident year |                            | 92.2  | %     | 94.2  | %    
|                               | Net favourable development |       | (12.5 | )%    | (11.7
|                               |                            |       |       |       |      
|Combined ratio  calendar year |                            | 79.7  | %     | 82.5  | %    
|                               |                            |       |       |       |      
|Gross premiums written         |                            | 831.7 |       | 797.6 |      
|                               |                            |       |       |       |      
|Net premiums written           |                            | 819.4 |       | 785.4 |      
|                               |                            |       |       |       |      
|Net premiums earned            |                            | 807.3 |       | 766.4 |      
|                               |                            |       |       |       |      
|Underwriting profit            |                            | 164.1 |       | 134.4 |      
|Interest and dividends         |                            | 30.8  |       | 48.9  |      
|                               |                            |       |       |       |      
|Operating income               |                            | 194.9 |       | 183.3 |      
|                               |                            |       |       |       |      

Zenith
National reported an underwriting profit of $164.1 and a combined ratio of 79.7% in 2016 compared to an underwriting profit of $134.4 and a combined ratio of 82.5% in 2015. Net premiums earned
in 2016 of $807.3 increased from $766.4 in 2015 primarily as a result of an increase in exposure, partially offset by modest earned price decreases.

The
improvement in Zenith National's combined ratio in 2016 compared to 2015 principally reflected increased net favourable prior year reserve development and a decrease in the estimated accident year
loss and LAE ratio. Net favourable prior year reserve development in 2016 of $101.0 reflected net favourable emergence principally related to accident years 2012 through 2015. The 1.7 combined
ratio point decrease in the estimated accident year loss and LAE ratio in 2016 reflected favourable loss development trends for accident year 2015 emerging in 2016, partially offset by modest earned
price decreases and estimated loss trends for accident year 2016. The decrease in the underwriting expense ratio from 25.7% in 2015 to 25.2% in 2016, primarily reflected increased net premiums earned.

Interest
and dividends decreased from $48.9 in 2015 to $30.8 in 2016, principally reflecting lower share of profit of associates (primarily relating to Zenith National's $21.5 share of a gain
recognized by a Kennedy Wilson real estate partnership on the disposition of investment properties in 2015).

Cash
provided by operating activities (excluding operating cash flow activity related to securities recorded at FVTPL) increased from $137.0 in 2015 to $141.2 in 2016, primarily as a result of
increased net premiums collected and lower income taxes paid.

134

---





|                               |                            | 2016    |      | For the period
June 5, 2015 to
December 31,
2015 |     
|------------------------------ | -------------------------- | ------- | ---- | ------------------------------------------------ | ----
|Underwriting profit            |                            | 29.1    |      | 45.4                                             |     
|                               |                            |         |      |                                                  |     
|                               | Loss & LAE  accident year |         | 65.0 | %                                                | 60.5
|                               | Commissions                |         | 20.9 | %                                                | 20.8
|                               | Underwriting expenses      |         | 15.8 | %                                                | 15.8
|                               |                            |         |      |                                                  |     
|Combined ratio  accident year |                            | 101.7   | %    | 97.1                                             | %   
|                               | Net favourable development |         | (3.8 | )%                                               | (2.2
|                               |                            |         |      |                                                  |     
|Combined ratio  calendar year |                            | 97.9    | %    | 94.9                                             | %   
|                               |                            |         |      |                                                  |     
|Gross premiums written         |                            | 1,912.2 |      | 1,087.5                                          |     
|                               |                            |         |      |                                                  |     
|Net premiums written           |                            | 1,480.2 |      | 946.4                                            |     
|                               |                            |         |      |                                                  |     
|Net premiums earned            |                            | 1,399.3 |      | 892.5                                            |     
|                               |                            |         |      |                                                  |     
|Underwriting profit            |                            | 29.1    |      | 45.4                                             |     
|Interest and dividends         |                            | 58.8    |      | 29.5                                             |     
|                               |                            |         |      |                                                  |     
|Operating income               |                            | 87.9    |      | 74.9                                             |     
|                               |                            |         |      |                                                  |     

On
June 5, 2015 the company acquired 97.0% of the outstanding ordinary shares of Brit and acquired the remaining 3.0% by July 8, 2015. On June 29, 2015 the company sold 29.9% of
Brit to Ontario Municipal Employees Retirement System ("OMERS"), the pension plan manager for government employees in the province of Ontario. OMERS has a dividend in priority to the company, and the
company will have the ability to repurchase the shares owned by OMERS over time. On August 3, 2016 Brit paid cash consideration of $57.8 to purchase shares for cancellation from OMERS, which
increased the company's ownership interest in Brit by 2.4%. Brit is a leading specialty insurer operating globally on the Lloyd's of London platform.

Brit
reported an underwriting profit of $29.1 and a combined ratio of 97.9% in 2016. Net favourable prior year reserve development in 2016 of $53.5 (3.8 combined ratio points) primarily
reflected better than expected emergence on casualty and property reinsurance lines of business. Underwriting profit in 2016 included $76.4 (5.5 combined ratio points) of current period
catastrophe losses (net of reinstatement premiums), principally comprised of the impacts of Hurricane Matthew ($26.1 or 1.9 combined ratio points), the Fort McMurray wildfires ($17.8 or
1.3 combined ratio points) and other attritional losses.

Net
premiums written of $1,480.2 in 2016 were in line with expectations and impacted by a combination of factors, including underwriting discipline, rate reductions on direct business (energy and
property lines of business) and reinsurance business (property treaty and casualty treaty lines of business), the unfavourable effect of foreign currency translation and the purchase of additional
proportional reinsurance, partially offset by growth in net premiums written related to underwriting initiatives launched in prior years. Brit seeks to balance its portfolio by actively defending its
core business and modestly expanding in areas where profitable opportunities exist, while contracting in areas where underwriting margins are thinner.

Brit
reported an underwriting profit of $45.4 and a combined ratio of 94.9% for the period June 5, 2015 to December 31, 2015. Net favourable prior year reserve development for the period
June 5, 2015 to December 31, 2015 of $19.7 (2.2 combined ratio points) primarily reflected better than expected emergence on insurance lines of business (marine, specialty, energy
and aviation) and reinsurance lines of business (property treaty and casualty treaty). Current period catastrophe losses were insignificant for the period June 5, 2015 to December 31,
2015. Net premiums written of $946.4 for the period June 5, 2015 to December 31, 2015, were in line with expectations and were impacted by a combination of factors, including rate
reductions on direct business (energy and property lines of business) and reinsurance business (property treaty lines of business) and the unfavourable effect of foreign currency

135

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translation,
partially offset by growth in net premiums written related to underwriting initiatives launched in prior years.



|                               |                            | 2016  |       | 2015  |      
|------------------------------ | -------------------------- | ----- | ----- | ----- | -----
|Underwriting profit            |                            | 41.1  |       | 34.8  |      
|                               |                            |       |       |       |      
|                               | Loss & LAE  accident year |       | 83.4  | %     | 83.5 
|                               | Commissions                |       | (2.1  | )%    |     
|                               | Underwriting expenses      |       | 22.3  | %     | 18.2 
|                               |                            |       |       |       |      
|Combined ratio  accident year |                            | 103.6 | %     | 101.7 | %    
|                               | Net favourable development |       | (17.2 | )%    | (13.8
|                               |                            |       |       |       |      
|Combined ratio  calendar year |                            | 86.4  | %     | 87.9  | %    
|                               |                            |       |       |       |      
|Gross premiums written         |                            | 648.7 |       | 620.9 |      
|                               |                            |       |       |       |      
|Net premiums written           |                            | 303.1 |       | 275.9 |      
|                               |                            |       |       |       |      
|Net premiums earned            |                            | 302.5 |       | 287.0 |      
|                               |                            |       |       |       |      
|Underwriting profit            |                            | 41.1  |       | 34.8  |      
|Interest and dividends         |                            | 74.8  |       | 41.0  |      
|                               |                            |       |       |       |      
|Operating income               |                            | 115.9 |       | 75.8  |      
|                               |                            |       |       |       |      

Fairfax Asia comprises the company's Asian holdings and operations: 97.7%-owned Singapore-based First Capital Insurance Limited ("First Capital"), Hong Kong-based Falcon
Insurance (Hong Kong) Company Ltd. ("Falcon"), 85.0%-owned Malaysia-based The Pacific Insurance Berhad ("Pacific Insurance"), 80.0%-owned Indonesia-based PT Fairfax Insurance Indonesia
("Fairfax Indonesia"), 80.0%-owned Indonesia-based PT Asuransi Multi Artha Guna Tbk. ("AMAG"), 78.0%-owned Sri Lanka-based Union Assurance General Limited ("Union Assurance") and its wholly-owned
subsidiary Fairfirst Insurance Limited ("Fairfirst Insurance"), 35.0%-owned Vietnam-based Bank for Investment and Development of Vietnam Insurance Joint Stock Corporation ("BIC Insurance"),
41.2%-owned Bangkok-based Falcon Insurance PLC ("Falcon Thailand") and 34.6%-owned Mumbai-based ICICI Lombard General Insurance Company Limited ("ICICI Lombard"). The remaining interest in
ICICI Lombard is held by ICICI Bank Limited ("ICICI Bank"), India's second largest commercial bank. Thai Re, BIC Insurance, Falcon Thailand and ICICI Lombard are reported under the equity method
of accounting.

On
October 10, 2016 the company acquired an 80.0% interest in AMAG from PT Bank Pan Indonesia Tbk. ("Panin Bank") for $178.9 (2.322 trillion Indonesian rupiah). Fairfax Indonesia will be
integrated with AMAG and AMAG will distribute its insurance products through a long-term bancassurance partnership with Panin Bank. AMAG is a general insurer in Indonesia with gross written premiums
of approximately $70 during 2016.

On
October 3, 2016 Union Assurance acquired a 100% ownership interest in Asian Alliance General Insurance Limited (subsequently renamed Fairfirst Insurance Limited) for $10.2
(1,488.9 million Sri Lankan rupees). Fairfirst Insurance is a general insurer in Sri Lanka with gross written premiums of approximately $16 during 2016.

On
March 31, 2016 the company increased its ownership interest in ICICI Lombard to 34.6% by acquiring an additional 9.0% of the issued and outstanding shares of ICICI Lombard from ICICI Bank
for $234.1 (15.5 billion Indian rupees). ICICI Lombard is the largest private sector general insurance company in India with gross premiums written of approximately $1.2 billion for its
fiscal year ended March 31, 2016.

On
September 18, 2015 Fairfax Asia acquired a 35.0% ownership interest in BIC Insurance for purchase consideration of $48.1 (1.1 trillion Vietnamese dong). BIC Insurance is a leading
property and casualty insurer in Vietnam, producing approximately $70 of annual gross premiums written in 2015 through an exclusive arrangement with its majority shareholder, Bank for Investment and
Development of Vietnam ("BIDV"), to sell its products through BIDV's distribution network.

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On
March 1, 2015 Pacific Insurance, a wholly-owned subsidiary of the company, completed the acquisition of the general insurance business of MCIS Insurance Berhad (formerly known as MCIS Zurich
Insurance Berhad) ("MCIS") for cash consideration of $13.4 (48.6 million Malaysian ringgits). MCIS is an established general insurer in Malaysia with approximately $55 of annual gross premiums
written in its general insurance business.

On
January 1, 2015 the company completed the acquisition of 78.0% of Union Assurance for cash consideration of $27.9 (3.7 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.

Fairfax
Asia reported an underwriting profit of $41.1 and a combined ratio of 86.4% in 2016, compared to an underwriting profit of $34.8 and a combined ratio of 87.9% in 2015. The entities comprising
Fairfax Asia produced combined ratios as set out in the following table:

|                                                   |  | 2016  |     | 2015  |    
|-------------------------------------------------- |  | ----- | --- | ----- | ---
|First Capital                                      |  | 64.9  | %   | 69.3  | %  
|Falcon                                             |  | 97.6  | %   | 98.6  | %  
|Pacific Insurance                                  |  | 95.6% | (1) | 96.0% | (2)
|AMAG (inclusive of Fairfax Indonesia)              |  | 128.0 | %   | 114.7 | %  
|Union Assurance (inclusive of Fairfirst Insurance) |  | 105.2 | %   | 107.8 | %  

Fairfax
Asia's underwriting profit in 2016 included $52.1 (17.2 combined ratio points) of net favourable prior year reserve development, primarily related to commercial automobile, engineering
and marine hull loss reserves. Fairfax Asia's underwriting profit in 2015 included $39.5 (13.8 combined ratio points) of net favourable prior year reserve development, primarily related to
property, workers' compensation and commercial automobile loss reserves.

Fairfax
Asia's commission income ratio increased to 2.1% in 2016, primarily as a result of increased profit commission on reinsurance ceded by First Capital related to its property and marine hull
lines of business. Fairfax Asia's underwriting expense ratio increased from 18.2% in 2015 to 22.3% in 2016, primarily due to integration and acquisition related expenses incurred with respect to AMAG
and Fairfirst Insurance and higher compensation related expenses.

The
consolidation of Fairfirst Insurance, AMAG and MCIS and the 2016 LPT and 2015 LPT affected gross premiums written, net premiums written and net premiums earned as set out in the
following table:

|                                          |  | 2016  |   | 2015  |  
|----------------------------------------- |  | ----- | - | ----- | -
|
|Fairfax Asia  as reported                |  | 648.7 |   | 303.1 |  
|Fairfirst Insurance                       |  | (4.1  | ) | (3.9  | )
|AMAG                                      |  | (11.8 | ) | (9.1  | )
|MCIS                                      |  | (25.4 | ) | (12.0 | )
|Pacific Insurance  2016 LPT and 2015 LPT |  |      |   | 15.8  |  
|                                          |  |       |   |       |  
|Fairfax Asia  as adjusted                |  | 607.4 |   | 293.9 |  
|                                          |  |       |   |       |  
|Percentage change (year-over-year)        |  | 1.3%  |   | 7.4%  |  

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Gross premiums written increased by 1.3% in 2016, principally reflecting increased writings at Pacific Insurance (primarily in commercial automobile and property lines of business). Net premiums
written increased by 7.4% in 2016 reflecting the same factors which affected gross premiums written and also included the impact of increased premium retention (primarily at First Capital). Net
premiums earned increased by 5.2% in 2016, principally reflecting the normal lag of net premiums earned relative to net premiums written.

Interest
and dividends increased from $41.0 in 2015 to $74.8 in 2016 primarily as a result of increased share of profit of associates (ICICI Lombard).

As
at December 31, 2016 the company had invested a total of $346.8 to acquire and maintain its 34.6% interest in ICICI Lombard and carried this investment at $371.1 under the equity method of
accounting (fair value of $878.0 as disclosed in note 6 (Investments in Associates) to the consolidated financial statements for the year ended December 31, 2016). The company's
investment in ICICI Lombard is included in portfolio investments in the Fairfax Asia balance sheet as set out in the Balance Sheets by Reporting Segment section of this MD&A.

During
its fiscal year ended March 31, 2016, ICICI Lombard's gross written premiums increased in Indian rupees by 20.2% over the prior year, with a combined ratio of 106.2% compared to 104.5%
in the prior year. The increase in the combined ratio was primarily a result of losses related to floods in Chennai and in its crop insurance line of business. The Indian property and casualty
insurance industry experienced increasingly competitive market conditions in 2016 as a result of both new private insurers entering the market and existing insurers continuing to increase their market
share. With an 8.4% market share, 7,954 employees and 257 offices across India, ICICI Lombard is India's largest (by market share) private general insurer. Please see its website
(www.icicilombard.com) for further details of its operations.



|                               |                                      | 2016  |      
|------------------------------ | ------------------------------------ | ----- | -----
|
|Underwriting profit (loss)     |                                      | 35.4  |      
|                               |                                      |       |      
|                               | Loss & LAE  accident year           |       | 66.0 
|                               | Commissions                          |       | 30.9 
|                               | Underwriting expenses                |       | 5.2  
|                               |                                      |       |      
|Combined ratio  accident year |                                      | 102.1 | %    
|                               | Net adverse (favourable) development |       | (28.5
|                               |                                      |       |      
|Combined ratio  calendar year |                                      | 73.6  | %    
|                               |                                      |       |      
|Gross premiums written         |                                      | 156.9 |      
|                               |                                      |       |      
|Net premiums written           |                                      | 140.6 |      
|                               |                                      |       |      
|Net premiums earned            |                                      | 133.8 |      
|                               |                                      |       |      
|Underwriting profit (loss)     |                                      | 35.4  |      
|Interest and dividends         |                                      | 9.5   |      
|                               |                                      |       |      
|Operating income (loss)        |                                      | 44.9  |      
|                               |                                      |       |      

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|                               |                                      | 2015  |      
|------------------------------ | ------------------------------------ | ----- | -----
|
|Underwriting profit (loss)     |                                      | 48.2  |      
|                               |                                      |       |      
|                               | Loss & LAE  accident year           |       | 63.9 
|                               | Commissions                          |       | 27.8 
|                               | Underwriting expenses                |       | 4.7  
|                               |                                      |       |      
|Combined ratio  accident year |                                      | 96.4  | %    
|                               | Net adverse (favourable) development |       | (25.7
|                               |                                      |       |      
|Combined ratio  calendar year |                                      | 70.7  | %    
|                               |                                      |       |      
|Gross premiums written         |                                      | 174.3 |      
|                               |                                      |       |      
|Net premiums written           |                                      | 166.7 |      
|                               |                                      |       |      
|Net premiums earned            |                                      | 164.3 |      
|                               |                                      |       |      
|Underwriting profit (loss)     |                                      | 48.2  |      
|Interest and dividends         |                                      | 13.5  |      
|                               |                                      |       |      
|Operating income (loss)        |                                      | 61.7  |      
|                               |                                      |       |      

On December 7, 2016 the company acquired a 100% interest in Zurich Insurance Company South Africa Limited (subsequently renamed Bryte Insurance Company Limited ("Bryte
Insurance")) from Zurich Insurance Company Ltd. for $128.0 (1.8 billion South African rand). Bryte Insurance is a property and casualty insurer in South Africa and Botswana with gross
written premiums of approximately $269 during 2016.

On
December 16, 2014 the company entered into an agreement with QBE Insurance (Europe) Limited ("QBE") to acquire QBE's insurance operations in the Czech Republic, Hungary and Slovakia
(the "QBE insurance operations"). A new Luxembourg insurer, Colonnade Insurance S.A. ("Colonnade"), was licensed in July 2015 and branches of Colonnade were established in each of
the Czech Republic, Hungary and Slovakia during the fourth quarter of 2015. The business and renewal rights of QBE's Hungarian, Czech and Slovakian insurance operations were transferred to Colonnade
on February 1, 2016, April 1, 2016 and May 2, 2016 respectively. In 2015 the QBE insurance operations generated approximately $78 in gross premiums written across a range of
general insurance classes, including property, travel, general liability and product protection. Colonnade in the table above also includes the results of QBE's non-life operations in Ukraine
(now known as "Colonnade Ukraine") which were acquired by the company during the fourth quarter of 2015.

Prior
to the formal closing of the transaction to acquire the QBE insurance operations, Polish Re entered into a two-part 100% quota share reinsurance transaction with QBE
(the "QBE reinsurance transactions") to: (i) reinsure the runoff of the QBE insurance operations in respect of any business written up to December 31, 2014 (the "QBE loss
portfolio transfer"); and (ii) reinsure any business written by the QBE insurance operations on or after January 1, 2015 (the "QBE quota share transaction"). The QBE reinsurance
transactions increased Polish Re's gross premiums written, net premiums written and net premiums earned by $22.9, $19.7 and $21.6 in 2016 (increased Polish Re's gross premiums written, net premiums
written and net premiums earned by $77.6, $72.5 and $52.6 in 2015).

The
Insurance and Reinsurance  Other segment produced an underwriting profit of $27.7 and a combined ratio of 93.7% in 2016 compared to an underwriting profit of
$46.2 and a combined ratio of 89.6% in 2015. The decrease in underwriting profit in 2016 principally reflected increased current period catastrophe losses and lower net favourable prior year reserve
development, partially offset by an improvement in the non-catastrophe loss experience related to the current accident year.

The
underwriting results in 2016 included net favourable prior year reserve development of $60.4 (13.8 combined ratio points), primarily reflecting net favourable development at Group Re
(property and liability loss reserves including net favourable emergence on the runoff of the intercompany quota share reinsurance contract with Northbridge), Advent (property and casualty reinsurance
loss reserves) and Fairfax Brasil. The underwriting results in 2015 included net favourable prior year reserve development of $68.3 (15.4 combined ratio points), primarily reflecting net
favourable development at Group Re (principally related to net favourable emergence on the runoff of

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the
intercompany quota share reinsurance contract with Northbridge and prior years' catastrophe loss reserves) and Advent (insurance loss reserves (terrorism and energy) and property and casualty
reinsurance loss reserves).

The
underwriting results in 2016 included $29.7 (6.8 combined ratio points) of current period catastrophe losses (net of reinstatement premiums), principally comprised of the impacts of
Hurricane Matthew ($5.7 or 1.3 combined ratio points), the Fort McMurray wildfires ($7.3 or 1.7 combined ratio points) and other attritional losses. The underwriting results in 2015
included $4.4 (1.0 combined ratio point) of current period catastrophe losses, principally comprised of an aggregation of smaller catastrophe losses at Advent.

The
expense ratio increased from 16.0% in 2015 to 17.8% in 2016, principally reflecting higher operating expenses at Fairfax Brasil and the impact of the start-up of Colonnade, partially offset by
lower operating expenses at Advent. The commission expense ratio increased from 21.8% in 2015 to 23.3% in 2016, primarily reflecting higher commission expense at Group Re and the impact of the
start-up of Colonnade.

Gross
premiums written increased by 1.4% in 2016, primarily reflecting increases at Fairfax Brasil (primarily growth in the infrastructure line of business and the favourable effect of foreign
currency translation) and Advent (primarily increases in the accident and health line of business), partially offset by the non-recurring impact of the QBE loss portfolio transfer in 2015 and
decreases at Group Re (primarily related to the non-renewal in 2016 of an intercompany property quota share agreement with Brit). Net premiums written decreased by 6.4% in 2016 reflecting the
same factors which affected gross premiums written tempered by a decrease in risk retention at Advent and Group Re. Net premiums earned decreased by 1.2% in 2016 principally reflecting the
normal lag of net premiums earned relative to net premiums written.

Interest
and dividends increased from $26.7 in 2015 to $27.3 in 2016 principally due to higher interest and dividend income at Group Re, Advent and Fairfax Brasil primarily due to holdings of
higher yielding bonds, partially offset by a non-cash impairment charge in 2016 of $4.4 related to an associate (Resolute).



The Runoff business segment was formed with the acquisition of the company's interest in The Resolution Group ("TRG") on August 11, 1999, and currently consists of two
groups: the U.S. Runoff group, consisting of TIG Insurance Company and its subsidiary, and the European Runoff group, consisting of RiverStone (UK), Syndicate 3500 and RiverStone
Insurance. The Runoff reporting segment also includes Resolution Group Reinsurance (Barbados) Limited and TIG Insurance (Barbados) Limited, formed to facilitate certain reinsurance
transactions. Both groups are managed by the dedicated RiverStone Runoff management operation which has 408 employees in the U.S. and the U.K.

On
December 31, 2016 U.S. Runoff agreed to reinsure a portfolio of casualty exposures associated with habitational risks (commercial residential properties such as apartment buildings,
and condominiums) relating to accident years 2011 through 2016 from a U.S.-based insurer (the "habitational casualty reinsurance transaction"). The U.S. Runoff results reflect premium of
$110.7 as consideration for the assumption of $90.2 of net loss reserves and net provision for unearned premiums of $19.9.

On
April 1, 2016 U.S. Runoff agreed to reinsure a portfolio of business comprised of construction defect exposures in various states in the western U.S. relating to accident years
2008 to 2013 (the "second quarter 2016 construction defect reinsurance transaction"). U.S. Runoff received a cash premium of $71.5 as consideration for the assumption of $70.5 of net
loss reserves and paid a commission of $1.0 to a third party for facilitating the transaction.

On
October 30, 2015 U.S. Runoff agreed to reinsure a portfolio of legacy asbestos, pollution and other hazards ("APH") exposures relating to accident years 1986 and prior
(the "fourth quarter 2015 APH reinsurance transaction"). U.S. Runoff received a cash premium of $86.5 as consideration for the assumption of $83.4 of net loss reserves.

On
July 13, 2015 U.S. Runoff agreed to reinsure a portfolio of Everest comprised of APH exposures relating to accident years 1985 and prior (the "Everest APH reinsurance
transaction"). U.S. Runoff received a cash premium of $140.3 as consideration for the assumption of $140.3 of net loss reserves.

On
March 9, 2015 RiverStone (UK) agreed to reinsure a portfolio of business comprised of APH exposures relating to accident years 1992 and prior (the "first quarter 2015 APH reinsurance
transaction"). RiverStone (UK) received a premium of $89.0 which was comprised of cash ($69.9) and a receivable ($19.1) as consideration for the assumption of $89.0 of net loss reserves. The net loss
reserves underlying this transaction are expected to be formally transferred

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to
RiverStone (UK) in the first quarter of 2017 by way of a Part VII transfer pursuant to the U.K. Financial Services and Markets Act 2000 at which time the consideration receivable will
be fully collected.

On
February 18, 2015 U.S. Runoff agreed to reinsure two Canadian branches of AXA which were already in runoff (the "AXA Canada reinsurance transaction"). The business reinsured
was primarily comprised of assumed reinsurance of commercial automobile, general liability, marine and property exposures relating to accident years 2007 and prior. Northbridge participated by
fronting this reinsurance arrangement on behalf of U.S. Runoff, receiving a cash premium of $56.6 as consideration for the assumption of $53.3 of gross loss reserves. Subsequently, Northbridge
fully retroceded those amounts to U.S. Runoff and received a commission of $1.4 for facilitating the transaction.

Set
out below is a summary of the operating results of Runoff for the years ended December 31, 2016 and 2015.

|                       |  | 2016   |   | 2015   |  
|---------------------- |  | ------ | - | ------ | -
|Gross premiums written |  | 183.9  |   | 381.2  |  
|                       |  |        |   |        |  
|Net premiums written   |  | 183.4  |   | 381.6  |  
|                       |  |        |   |        |  
|Net premiums earned    |  | 163.5  |   | 381.6  |  
|Losses on claims       |  | (236.2 | ) | (419.2 | )
|Operating expenses     |  | (112.4 | ) | (134.5 | )
|Interest and dividends |  | 35.7   |   | 98.0   |  
|                       |  |        |   |        |  
|Operating loss         |  | (149.4 | ) | (74.1  | )
|                       |  |        |   |        |  

Runoff reported an operating loss of $149.4 in 2016 compared to an operating loss of $74.1 in 2015. Net premiums earned of $163.5 and losses on claims of $236.2 in 2016
principally reflected the impact of the habitational casualty reinsurance transaction and the second quarter 2016 construction defect reinsurance transaction. Losses on claims in 2016 also reflected
net adverse prior year reserve development of $96.6 at U.S. Runoff, partially offset by net favourable prior year reserve development of $17.1 at European Runoff. Net adverse prior year reserve
development of $96.6 at U.S. Runoff was principally comprised of $149.1 related to APH exposures assumed from Crum & Forster and in the legacy portfolio of Clearwater Insurance
(including $50.0 related to a single assumed excess of loss contract with exposures to APH that was triggered and a loss of $18.8 incurred in connection with the commutation of certain assumed long
tail APH liabilities) and $30.2 of non-APH loss reserve strengthening, partially offset by $89.5 of net favourable prior year reserve development at TIG Insurance principally related to workers'
compensation loss reserves. Net favourable prior year reserve development at European Runoff was across various lines of business.

Net
premiums earned of $381.6 and losses on claims of $419.2 in 2015 principally reflected the impacts of the fourth quarter 2015 APH reinsurance transaction, the Everest APH reinsurance transaction,
the first quarter 2015 APH reinsurance transaction and the AXA Canada reinsurance transaction. Net premiums earned in 2015 also included premium adjustments at RiverStone Insurance ($8.2). Losses on
claims in 2015 also reflected net adverse prior year reserve development of $126.6 at U.S. Runoff, partially offset by net favourable prior year reserve development of $73.5 at European Runoff.
Net adverse prior year reserve development of $126.6 at U.S. Runoff was principally comprised of $87.7 related to APH exposures assumed from Crum & Forster and in the legacy portfolio of
Clearwater Insurance, and $36.1 at American Safety related to strengthening of environmental remediation, contractor and other long tail casualty loss reserves. Net favourable prior year reserve
development at European Runoff was across various lines of business.

Operating
expenses decreased from $134.5 in 2015 to $112.4 in 2016 principally reflecting a change in the manner of determining unallocated loss adjustment expense ("ULAE") (a greater
proportion of operating expenses are now allocated to ULAE, a component of losses on claims, to better reflect the economics of the claims settlement process) and lower compensation expense.

Interest
and dividends decreased from $98.0 in 2015 to $35.7 in 2016 reflecting lower share of profit of associates, a non-cash impairment charge in 2016 of $23.6 related to an associate (Resolute)
and lower interest income earned on municipal bond investments. Share of profit of associates in 2015 reflected Runoff's $6.8 share of a gain recognized by a Kennedy Wilson real estate partnership on
the disposition of investment properties.

During
2016 Runoff received net capital contributions from Fairfax of $236.2 comprised of marketable securities and an investment in Gulf Insurance ($209.1).

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Runoff's
cash flows may be volatile as to timing and amounts, with potential variability arising principally from the requirement to pay gross claims initially while third party reinsurance is only
collected subsequently in accordance with its terms and from the delay, until some time after claims are paid, of the release of assets pledged to secure the payment of those claims.



|                                       |  | 2016   |  
|-------------------------------------- |  | ------ | -
|
|Revenue                                |  | 978.3  |  
|Expenses                               |  | (897.0 | )
|Interest and dividends                 |  | 7.2    |  
|                                       |  |        |  
|Operating income                       |  | 88.5   |  
|Net gains (losses) on investments      |  | 8.8    |  
|                                       |  |        |  
|Pre-tax income before interest expense |  | 97.3   |  
|                                       |  |        |  

|                                       |  | 2015   |  
|-------------------------------------- |  | ------ | -
|
|Revenue                                |  | 782.7  |  
|Expenses                               |  | (731.2 | )
|Interest and dividends                 |  | 7.5    |  
|                                       |  |        |  
|Operating income                       |  | 59.0   |  
|Net gains on investments               |  | 3.4    |  
|                                       |  |        |  
|Pre-tax income before interest expense |  | 62.4   |  
|                                       |  |        |  

Subsequent to December 31, 2016

On February 17, 2017 the company acquired 22,715,394 multiple voting shares in a private placement and 2,500,000 subordinate voting shares as part of the
initial public offering of Fairfax Africa Holdings Corporation ("Fairfax Africa") for total cash consideration of $252.2. The company also contributed its 39.6% indirect interest in AFGRI Proprietary
Limited ("AFGRI") with a fair value of $72.8 to Fairfax Africa in exchange for 7,284,606 multiple voting shares. Through its initial public offering, private placements and exercise of the
over-allotment option by the underwriters, Fairfax Africa raised net proceeds of $494.2 after issuance costs and expenses, inclusive of the contribution of the investment in AFGRI. Following
those transactions, the company's $325.0 investment represented 98.8% of the voting rights and 64.2% of the equity interest in Fairfax Africa. Fairfax Africa was established, with the support of
Fairfax, to invest in public and private equity and debt instruments of African businesses or other businesses with customers, suppliers or business primarily conducted in, or dependent
on, Africa.

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On
February 14, 2017 Fairfax India acquired a 51.0% interest in Saurashtra Freight Private Limited ("Saurashtra Freight") for cash consideration of $30.0 (2.0 billion Indian rupees).
Saurashtra Freight operates a container freight station at the Mundra Port in the Indian state of Gujarat.

On
January 13, 2017 the company acquired 12,340,500 subordinate voting shares of Fairfax India for $145.0 in a private placement. Through that private placement and a contemporaneous
bought deal public offering, Fairfax India raised proceeds of $493.5 net of commissions and expenses. Combined with various open market purchases of Fairfax India subordinate voting shares, the
company's multiple voting shares and subordinate voting shares represented 93.6% of the voting rights and 30.2% of the equity interest in Fairfax India at the close of the offerings.

Year ended December 31, 2016

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

On
October 31, 2016 the company acquired a 60.0% indirect interest in Golf Town Limited ("Golf Town") for $31.4 (Cdn$42.0). Golf Town is a Canadian specialty retailer of golf equipment,
consumables, golf apparel and accessories.

On
September 2, 2016 Cara acquired a 100% interest in Groupe St-Hubert Inc. ("St-Hubert") for $414.9 (Cdn$540.2), comprised of cash consideration of $373.5 (Cdn$486.3) and the issuance
of $41.4 (Cdn$53.9) of Cara subordinate voting shares to St-Hubert shareholders. A portion of the cash consideration was financed through a private placement of 7,863,280 subordinate voting
shares at a price of Cdn$29.25 for gross proceeds of $179.2 (Cdn$230.0), of which 3,418,804 shares were acquired by Fairfax and its subsidiaries to maintain Fairfax's equity interest and voting
interest in Cara. St-Hubert is a Canadian full-service restaurant operator as well as a fully integrated food manufacturer in the province of Quebec.

On
August 26, 2016 Fairfax India acquired a 50.8% interest in Privi Organics Limited ("Privi Organics") for $55.0 (3.7 billion Indian rupees) through the purchase of newly issued shares
and shares acquired from existing shareholders. It is expected that Privi Organics will be merged with Fairchem Specialty Limited (described below) in the first quarter of 2017, subject to customary
closing conditions. After the merger is effective, Fairfax India will own approximately 49% of the merged business. Privi Organics is a supplier of aroma chemicals to the fragrance industry.

On
February 8, 2016 Fairfax India acquired a 44.9% interest in Adi Finechem Limited (subsequently renamed Fairchem Specialty Limited ("Fairchem")) for $19.4 (1.3 billion Indian rupees).
Fairchem is a specialty chemical manufacturer in India of oleo chemicals used in the paints, inks and adhesives industries, as well as intermediate nutraceutical and health products. Fairfax India's
investment in Fairchem is reported under the equity method of accounting.

The
year-over-year increases in the revenues and expenses of Restaurants and retail in 2016 primarily reflected the consolidation of Cara from April 10, 2015 and its subsidiaries
St. Hubert from September 2, 2016 and Original Joe's from November 28, 2016. The year-over-year increases in the revenues and expenses of Fairfax India in 2016 primarily reflected
the consolidation of NCML from August 19, 2015 and Privi Organics from August 26, 2016. The year-over-year increases in the revenues and expenses of Thomas Cook India in 2016 primarily
reflected the consolidation of Kuoni Hong Kong from November 9, 2015 and Kuoni India from December 16, 2015, and increased revenue and expenses at Quess driven by the growth in business.
The year-over-year decreases in the revenues and expenses of Other in 2016 reflected the sale of Ridley on June 18, 2015, partially offset by the consolidation of Boat Rocker from
July 17, 2015.

Year ended December 31, 2015

On November 9, 2015 and December 16, 2015 Thomas Cook India acquired 100% interests in Kuoni Travel (China) Limited ("Kuoni Hong Kong") and Kuoni Travel (India)
Pvt. Ltd. ("Kuoni India") for consideration of $32.3 (250.0 million Hong Kong dollars) and $47.9 (3.2 billion Indian rupees) respectively. Kuoni Hong Kong and Kuoni India are
travel and travel-related companies in Hong Kong and India, offering a broad range of services that include corporate and leisure travel.

On
August 19, 2015 Fairfax India acquired a 73.6% interest in National Collateral Management Services Limited ("NCML") for purchase consideration of $124.2 (8.1 billion
Indian rupees) and subsequently acquired a further

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14.5%
interest by September 28, 2015 for $24.5 (1.6 billion Indian rupees). NCML is a leading private-sector agricultural commodities storage company in India.

On
July 17, 2015 the company acquired a 55.0% interest in Temple Street Productions Incorporated (subsequently renamed Boat Rocker Media Inc. ("Boat Rocker")) for consideration of $29.3
(Cdn $38.0). Boat Rocker is a Canadian company engaged in the development, production, marketing and distribution of television programming.

On
June 18, 2015 the company completed the sale of its 73.6% interest in Ridley for Cdn$40.75 per common share. The company received cash proceeds of $313.2 (Cdn$383.5) and recognized a pre-tax
gain of $236.4 (including amounts previously recorded in accumulated other comprehensive income) and de-consolidated Ridley from the Other reporting segment.

On
April 10, 2015 the company acquired, directly and through its subsidiaries, a 52.6% and a 40.7% voting and economic interest respectively in Cara Operations Limited ("Cara") through an
exchange of its existing holdings (comprised of warrants, class A and class B preferred shares and subordinated debentures) for common shares of Cara pursuant to their respective terms
and also through the acquisition of additional common shares of Cara from existing Cara shareholders in a private transaction. The common shares were exchanged for multiple voting shares immediately
prior to Cara's initial public offering of subordinate voting shares at Cdn$23.00 per share, which closed on April 10, 2015. Cara is Canada's largest full-service restaurant company and
franchises, owns and operates numerous restaurant brands across Canada.

On
January 30, 2015 the company, through its subsidiaries, acquired 30,000,000 multiple voting shares of newly incorporated Fairfax India for $300.0 in a private placement. Through that
private placement and offerings of subordinate voting shares, Fairfax India raised net proceeds of $1,025.8 after issuance costs and expenses. The company's multiple voting shares represented 95.1% of
the voting rights and 28.1% of the equity interest in Fairfax India at the close of the offerings. Fairfax India was established, with the support of Fairfax, to invest in public and private equities
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.



An analysis of consolidated interest and dividend income is presented in the Investments section of this MD&A.



An analysis of consolidated net gains (losses) on investments is provided in the Investments section of this MD&A.



Consolidated interest expense increased from $219.0 in 2015 to $242.8 in 2016, reflecting the issuance on December 16, 2016 of Cdn$450.0 principal amount of 4.70%
unsecured senior notes due 2026, the issuance on March 22, 2016 of Cdn$400.0 principal amount of 4.50% unsecured senior notes due 2023, the issuance on March 3, 2015 of Cdn$350.0
principal amount of 4.95% unsecured senior notes due 2025 and the consolidation of the interest expense of Brit and Fairfax India, partially offset by the favourable impact of foreign currency
translation on the interest expense of the company's Canadian dollar denominated long term debt and the following repayments upon maturity: $125.0 principal amount of OdysseyRe 6.875% unsecured senior
notes on May 1, 2015 and $82.4 principal amount of Fairfax unsecured senior notes on October 1, 2015.

Consolidated
interest expense in 2016 of $242.8 (2015  $219.0) was primarily attributable to interest expense at the holding company of $188.4
(2015  $178.8). Interest expense by reporting segment is set out in the Sources of Net Earnings section of this MD&A.

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Corporate overhead and other consists of the expenses of all of the group holding companies, net of the company's investment management and administration fees and the interest
and dividend income earned on holding company cash and investments.

|                                                                        |  | 2016  |   | 2015  |  
|----------------------------------------------------------------------- |  | ----- | - | ----- | -
|Fairfax corporate overhead                                              |  | 106.4 |   | 112.1 |  
|Subsidiary holding companies' corporate overhead                        |  | 15.5  |   | 35.6  |  
|Subsidiary holding companies' non-cash intangible asset amortization(1) |  | 59.4  |   | 47.5  |  
|Holding company interest and dividends                                  |  | 38.7  |   | 11.5  |  
|Investment management and administration fees                           |  | (88.8 | ) | (74.2 | )
|                                                                        |  |       |   |       |  
|                                                                        |  | 131.2 |   | 132.5 |  
|                                                                        |  |       |   |       |  

Fairfax
corporate overhead decreased from $112.1 in 2015 to $106.4 in 2016, primarily as a result of lower expenses incurred in connection with business acquisitions (AIG Latin America of $7.7
in 2016 compared to Brit of $25.2 in 2015), partially offset by increased charitable donations.

Subsidiary
holding companies' corporate overhead decreased from $35.6 in 2015 to $15.5 in 2016, principally reflecting expenses incurred in connection with the acquisition of Brit ($10.6) in 2015.
Subsidiary holding companies' non-cash intangible asset amortization increased from $47.5 in 2015 to $59.4 in 2016 principally reflecting a goodwill impairment charge of $6.8 recorded by OdysseyRe,
the impact of the consolidation of Brit for the full year of 2016 and higher amortization at Crum due to various acquisitions in 2015.

Holding
company interest and dividends included total return swap expense ($27.9 in 2016 and $28.7 in 2015) and share of loss of associates of $27.2 in 2016 compared to share of profit of associates
of $6.4 in 2015. The
share of loss of associates of $27.2 in 2016 included a non-cash impairment charge of $34.8 related to an associate (Resolute). Prior to giving effect to the impacts of total return swap expense and
share of profit and loss of associates, interest and dividend income on holding company cash and investments increased from $10.8 in 2015 to $16.4 in 2016.

Investment
management and administration fees increased from $74.2 in 2015 to $88.8 in 2016, principally due to incremental investment management fees earned on the investment portfolios of Brit and
Fairfax India.

Net
gains (losses) on investments attributable to the Corporate and Other reporting segment are set out in the Investments section of this MD&A.



The $159.6 recovery of income taxes in 2016 differed from the recovery of income taxes that would be determined by applying the company's Canadian statutory income tax rate of
26.5% to the company's loss before income taxes primarily as a result of non-taxable investment income (including dividend income, non-taxable interest income, capital gains and the 50% of net capital
gains which are not taxable in Canada), losses incurred in jurisdictions where the corporate income tax rate is higher than the company's Canadian statutory income tax rate, partially offset by
deferred taxes not recorded in Canada.

The
$17.5 recovery of income taxes in 2015 differed from the provision for income taxes that would be determined by applying the company's Canadian statutory income tax rate of 26.5% to the company's
earnings before income taxes primarily as a result of non-taxable investment income (including dividend income, non-taxable interest income, capital gains and the 50% of net capital gains which are
not taxable in Canada) and the recognition in 2015 of a significant portion of Cara's deferred tax assets, partially offset by income earned in jurisdictions where the corporate income tax rate is
higher than the company's Canadian statutory income tax rate.

For
further details of the recovery of income taxes in 2016 and 2015, please refer to note 18 (Income Taxes) to the consolidated financial statements for the year ended
December 31, 2016.

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Non-controlling interests principally relate to Fairfax India, Brit, Cara and Thomas Cook India. For further details refer to note 16 (Total Equity) to the consolidated
financial statements for the year ended December 31, 2016.

Components of Consolidated Balance Sheets



The assets and liabilities reflected on the company's consolidated balance sheet at December 31, 2016 were primarily impacted by the acquisitions of Bryte Insurance,
AMAG, St. Hubert and Original Joe's (at Cara) and Privi Organics (at Fairfax India). Refer to note 23 (Acquisitions and Divestitures) to the consolidated financial
statements for the year ended December 31, 2016 for additional details related to these transactions.

Holding company cash and investmentsincreased to $1,371.6 ($1,329.4 net of $42.2 of holding company short sale and derivative obligations) at
December 31, 2016 from $1,276.5 at December 31, 2015 ($1,275.9 net of $0.6 of holding company short sale and derivative obligations). Significant cash movements at the Fairfax holding
company level during 2016 are as set out in the Financial Condition section of this MD&A under the heading Liquidity.

Insurance contract receivablesincreased by $371.0 to $2,917.5 at December 31, 2016 from $2,546.5 at December 31, 2015 primarily reflecting
the impact of the acquisitions of Bryte Insurance and AMAG, the timing of the settlements of outstanding balances and an increase in business volumes.

Portfolio investmentscomprise investments carried at fair value and equity accounted investments, the aggregate carrying value of which was $27,293.4 at
December 31, 2016 ($27,101.3 net of subsidiary short sale and derivative obligations) compared to an aggregate carrying value at December 31, 2015 of $27,832.5 ($27,740.2 net of
subsidiary short sale and derivative obligations). The decrease of $638.9 generally reflected net losses on derivatives, net unrealized depreciation of common stocks and dividends paid by the
operating companies to Fairfax, partially offset by net unrealized appreciation of bonds and the consolidation of the investment portfolios of Bryte Insurance and AMAG, in addition to the specific
factors which caused movements in portfolio investments as discussed in the subsequent paragraphs.

Subsidiary
cash and short term investments (including cash and short term investments pledged for short sale and derivative obligations) increased by $3,472.5, primarily reflecting cash received from
net sales of
U.S. government and U.S. state and municipal bonds, partially offset by net cash paid in connection with long and short equity and equity index total return swap derivative contracts,
the acquisitions of investments in associates, and dividends paid by the operating companies to Fairfax.

Bonds
(including bonds pledged for short sale derivative obligations) decreased by $3,122.8 primarily reflecting net sales of U.S. government and U.S. state and municipal bonds,
partially offset by the impact of consolidating U.S. government, corporate and other bonds owned at Brit that had previously been classified as common stocks in other funds and net unrealized
appreciation of the bond portfolio.

Common
stocks decreased by $1,221.4 primarily reflecting the impact of consolidating U.S. government, corporate and other bonds owned at Brit that had previously been classified as common
stocks in other funds, the unfavourable impact of foreign currency translation (principally the strengthening of the U.S. dollar relative to the euro and the Egyptian pound), net unrealized
depreciation, partially offset by the consolidation of the common stock portfolio of Bryte Insurance.

Investments
in associates increased by $700.6 primarily reflecting the purchase of an additional 9% ownership interest in ICICI Lombard on March 31, 2016, the additional investment in common
shares of APR Energy plc on January 5, 2016, the reclassification of Fairfax's pre-existing ownership interest in APR Energy from common stocks to investments in associates subsequent to
acquiring significant influence, the acquisition of a 44.9% ownership interest in Fairchem Speciality Limited ("Fairchem", formerly known as Adi Finechem Limited) on February 8, 2016, the
acquisition of a 40% indirect interest in Eurolife on August 4, 2016 and the acquisition of a 38.2% equity interest in Performance Sports on December 7, 2016, partially offset by a
non-cash impairment charge of $100.4 related to Resolute.

Derivatives
and other invested assets net of short sale and derivative obligations decreased by $420.8 primarily due to net unrealized losses on CPI-linked derivatives and increased payables to
counterparties to the company's short

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equity
and equity index total return swaps and U.S. treasury bond forward contracts (excluding the impact of collateral requirements).

Recoverable from reinsurersincreased by $119.4 to $4,010.3 at December 31, 2016 from $3,890.9 at December 31, 2015 primarily reflecting an
increase in reinsurers' share of unearned premium at Brit, an increase in business volumes and lower risk retention at Pacific Insurance, Storm Roanu losses recoverable from reinsurers at Union
Assurance and the impact of the acquisitions of Bryte Insurance and AMAG, partially offset by Runoff's continued progress reducing its recoverable from reinsurers (through normal cession and
collection activity, partially offset by adverse development on asbestos loss reserves ceded to reinsurers) and favourable prior year reserve development ceded to reinsurers by the company's insurance
and reinsurance operations.

Deferred income taxesincreased by $268.7 to $732.6 at December 31, 2016 from $463.9 at December 31, 2015 primarily due to unrealized
investment losses incurred in the U.S. and at Northbridge, and increased tax credits in the U.S., partially offset by deferred tax liabilities related to intangible assets arising from Cara's
acquisitions of St-Hubert and Original Joe's, and the continuing utilization of U.S. operating losses.

Goodwill and intangible assetsincreased by $632.6 to $3,847.5 at December 31, 2016 from $3,214.9 at December 31, 2015 primarily as a result
of the acquisitions of St-Hubert ($318.4) and Original Joe's ($70.5) by Cara, AMAG ($137.6), Privi Organics ($48.5) by Fairfax India and Bryte Insurance ($16.9). The aforementioned acquisitions, and
the allocation of goodwill of $1,633.7 and intangible assets of $2,213.8 at December 31, 2016 (December 31, 2015  $1,428.2 and $1,786.7) by
operating segment, are described in note 23 (Acquisitions and Divestitures) to the consolidated financial statements for the year ended December 31, 2016. Impairment tests for goodwill
and intangible assets not subject to amortization were completed in 2016. It was concluded that no impairments had occurred other than a non-cash goodwill impairment charge of $6.8 recognized
by OdysseyRe.

Other assetsincreased by $747.3 to $2,518.4 at December 31, 2016 from $1,771.1 at December 31, 2015 primarily as a result of increases in
premises and equipment, inventory and receivables of the Other reporting segment.

Provision for losses and loss adjustment expensesdecreased by $334.6 to $19,481.8 at December 31, 2016 from $19,816.4 at December 31, 2015
primarily as a result of Runoff's continued progress settling its claim liabilities and prior year reserve releases (principally at OdysseyRe, Northbridge, Zenith, Brit, Fairfax Asia, Group Re
and Advent); partially offset by the acquisitions of Bryte Insurance and transactions at Runoff and Fairfax Asia, respectively; the strengthening of asbestos reserves at Runoff; an increase at
Crum & Forster primarily due to recent acquisitions and organic growth in business and an increase at Brit due to timing of the inceptions and earning of premiums.

Non-controlling interestsincreased by $268.5 to $2,000.0 at December 31, 2016 from $1,731.5 at December 31, 2015 principally as a result of
the issuance of common stock by Cara to finance the acquisition of St-Hubert, net earnings attributable to non-controlling interests and the acquisitions of Privi Organics and AMAG, partially offset
by dividends paid to non-controlling interests. For further details refer to note 16 (Total Equity) to the consolidated financial statements for the year ended December 31, 2016.

Comparison of 2015 to 2014 Total assets of $36,131.2 at December 31, 2014 increased to $41,529.0 at
December 31, 2015 primarily due to the consolidation of Brit, Cara and NCML, partially offset by the de-consolidation of Ridley pursuant to the transactions described in note 23
(Acquisitions and Divestitures) to the consolidated financial statements for the year ended December 31, 2016.

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Since 1985, in order to ensure so far as possible that the company's provision for losses and loss adjustment expenses ("LAE") (often called "loss reserves" or "provision for
claims") is adequate, management has established procedures so that the provision for losses and loss adjustment expenses at the company's insurance, reinsurance and runoff operations are subject to
several reviews, including by one or more independent actuaries. The reserves are reviewed separately by, and must be acceptable to, internal actuaries at each operating company, the Chief Risk
Officer at Fairfax, and one or more independent actuaries.

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

2016

|                             | Insurance and Reinsurance |  |         |  |         |  |         |  |        
|---------------------------- | ------------------------- |  | ------- |  | ------- |  | ------- |  | -------
|
|Property                     | 251.3                     |  | 1,199.2 |  | 147.9   |  | 10.1    |  | 378.4  
|Casualty                     | 1,570.6                   |  | 3,312.5 |  | 3,140.5 |  | 1,193.7 |  | 2,280.0
|Specialty                    | 47.4                      |  | 328.3   |  | 210.8   |  | 8.7     |  | 703.5  
|                             |                           |  |         |  |         |  |         |  |        
|                             | 1,869.3                   |  | 4,840.0 |  | 3,499.2 |  | 1,212.5 |  | 3,361.9
|Intercompany                 | 5.7                       |  | 56.9    |  | 63.1    |  |        |  | 44.8   
|                             |                           |  |         |  |         |  |         |  |        
|Provision for losses and LAE | 1,875.0                   |  | 4,896.9 |  | 3,562.3 |  | 1,212.5 |  | 3,406.7
|                             |                           |  |         |  |         |  |         |  |        

2015

|                             | Insurance and Reinsurance |  |         |  |         |  |         |  |        
|---------------------------- | ------------------------- |  | ------- |  | ------- |  | ------- |  | -------
|
|Property                     | 195.5                     |  | 1,218.2 |  | 138.1   |  | 9.3     |  | 386.8  
|Casualty                     | 1,608.1                   |  | 3,425.6 |  | 3,063.4 |  | 1,234.8 |  | 2,198.9
|Specialty                    | 42.3                      |  | 305.3   |  | 167.2   |  | 8.3     |  | 692.4  
|                             |                           |  |         |  |         |  |         |  |        
|                             | 1,845.9                   |  | 4,949.1 |  | 3,368.7 |  | 1,252.4 |  | 3,278.1
|Intercompany                 | 6.3                       |  | 61.3    |  | 59.8    |  |        |  | 46.0   
|                             |                           |  |         |  |         |  |         |  |        
|Provision for losses and LAE | 1,852.2                   |  | 5,010.4 |  | 3,428.5 |  | 1,252.4 |  | 3,324.1
|                             |                           |  |         |  |         |  |         |  |        

In the ordinary course of carrying on business, the company's insurance, reinsurance and runoff companies may pledge their own assets as security for their own
obligations to pay claims or to make premium (and accrued interest) payments. Circumstances where assets may be pledged (either directly or to support letters of credit issued for the following
purposes) include: regulatory deposits (such as with U.S. states for workers' compensation business); deposits of funds at Lloyd's in support of London market underwriting; and by a
non-admitted company under U.S. insurance regulations as security for claims assumed or to support funds withheld obligations. Generally, the pledged assets are released as the underlying
payment obligation is fulfilled. The $5.5 billion of cash and investments pledged by the company's subsidiaries at December 31, 2016, as described in note 5 (Cash and Investments)
to the consolidated financial statements for the year ended December 31, 2016, represented the aggregate amount at that date that had been pledged in the ordinary course
of business to support each pledging subsidiary's respective obligations as previously described in this paragraph (these pledges do not involve the cross-collateralization by one group company of
another group company's obligations).

Claims
provisions are established by the company's primary insurance companies by the case method as claims are initially reported. The provisions are subsequently adjusted as additional information
on the estimated ultimate amount of a claim becomes known during the course of its settlement. The company's reinsurance companies rely on initial and subsequent claims reports received from ceding
companies to establish estimates of provision for claims.

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In
determining the provision to cover the estimated ultimate liability for all of the company's insurance and reinsurance obligations, a provision is also made for management's calculation of factors
affecting the future development of claims including incurred but not reported claims based on the volume of business currently in force, the historical experience on claims and potential changes,
such as changes in the underlying book of business, in law and in cost factors.

As
time passes, more information about the claims becomes known and provision estimates are consequently adjusted upward or downward. Because of the various elements of estimation encompassed in this
process and the time it takes to settle many of the more substantial claims, several years may be required before a meaningful comparison of actual losses to the original estimates of provision for
claims can be developed.

The
development of the provision for claims is often measured as the difference between estimates of reserves as of the initial year-end and the re-estimated liability at each subsequent year-end.
This is based on actual payments in full or partial settlement of claims, plus re-estimates of the reserves required for claims still open or claims still unreported. Favourable development
(or redundancies) means that subsequent reserve estimates are lower than originally indicated, while unfavourable development (or deficiencies) means that the original reserve estimates
were lower than subsequently indicated. The net favourable reserve development in the two tables that follow excludes the loss reserve development of a subsidiary in the year it is acquired. In the
second table below, a subsidiary's provision for claims balance at December 31 in the year of acquisition is included in the line 'Provision for claims of companies acquired during the year at
December 31', whereas the net favourable reserve development as set out in the Sources of Net Earnings section of this MD&A and the consolidated statement of earnings includes the loss reserve
development of a subsidiary from its acquisition date.

Aggregate
net favourable development for the years ended December 31, 2016 and 2015 were comprised as shown in the following table:

Favourable/(Unfavourable)2016(1)

2015(2)Insurance and ReinsuranceNorthbridge

112.8

93.9OdysseyRe

266.5

233.3Crum & Forster

8.3

Zenith National

101.0

89.6Brit

53.5

Fairfax Asia

50.7

35.5Other

60.4

68.3Operating companies

653.2

520.6Runoff

(79.5
)
(53.1
)573.7

467.5


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Changes
in provision for losses and loss adjustment expenses recorded on the consolidated balance sheets and the related impact on unpaid claims and allocated loss adjustment expenses for the years
ended December 31 were as shown in the following table:

Reconciliation of Provision for Claims  Consolidated

|                                                                          |                     | 2016     |          | 2015     |          | 2014     |          | 2013     |          | 2012     |         
|------------------------------------------------------------------------- | ------------------- | -------- | -------- | -------- | -------- | -------- | -------- | -------- | -------- | -------- | --------
|Provision for claims at January 1  net                                   |                     | 16,596.3 |          | 14,378.2 |          | 14,981.6 |          | 15,075.8 |          | 13,711.2 |         
|Foreign exchange effect of change in provision for claims                 |                     | (103.7   | )        | (559.3   | )        | (496.2   | )        | (128.0   | )        | 101.0    |         
|Provision for claims occurring:                                           |                     |          |          |          |          |          |          |          |          |          |         
|                                                                          | In the current year |          | 5,286.9  |          | 4,307.0  |          | 4,166.2  |          | 4,151.2  |          | 4,385.6 
|                                                                          | In the prior years  |          | (573.7   | )        | (467.5   | )        | (374.4   | )        | (476.0   | )        | (136.1  
|Paid on claims during the year related to:                                |                     |          |          |          |          |          |          |          |          |          |         
|                                                                          | The current year    |          | (1,304.5 | )        | (1,055.3 | )        | (1,076.7 | )        | (1,050.8 | )        | (946.5  
|                                                                          | The prior years     |          | (3,695.2 | )        | (2,688.4 | )        | (2,822.7 | )        | (3,068.7 | )        | (2,964.4
|Provision for claims of companies acquired during the year at December 31 |                     | 83.3     |          | 2,681.6  |          | 0.4      |          | 478.1    |          | 925.0    |         
|                                                                          |                     |          |          |          |          |          |          |          |          |          |         
|Provision for claims at December 31 before the undernoted                 |                     | 16,289.4 |          | 16,596.3 |          | 14,378.2 |          | 14,981.6 |          | 15,075.8 |         
|CTR Life(1)                                                               |                     | 12.8     |          | 14.2     |          | 15.2     |          | 17.9     |          | 20.6     |         
|                                                                          |                     |          |          |          |          |          |          |          |          |          |         
|Provision for claims at December 31  net                                 |                     | 16,302.2 |          | 16,610.5 |          | 14,393.4 |          | 14,999.5 |          | 15,096.4 |         
|Reinsurers' share of provision for claims at December 31                  |                     | 3,179.6  |          | 3,205.9  |          | 3,355.7  |          | 4,213.3  |          | 4,552.4  |         
|                                                                          |                     |          |          |          |          |          |          |          |          |          |         
|Provision for claims at December 31  gross                               |                     | 19,481.8 |          | 19,816.4 |          | 17,749.1 |          | 19,212.8 |          | 19,648.8 |         
|                                                                          |                     |          |          |          |          |          |          |          |          |          |         

The
foreign exchange effect of change in provision for claims principally related to the impact in 2016 of the strengthening of the U.S. dollar relative to the British pound sterling and the
Euro (principally at Brit, OdysseyRe and Runoff). In general, the company manages foreign currency risk on claims liabilities by investing in financial instruments and other assets denominated in the
same currency as the liabilities to which they relate.

The
company endeavours to establish adequate provisions for losses and loss adjustment expenses at the original valuation date, with the objective of achieving net favourable prior period reserve
development at subsequent valuation dates. The reserves will always be subject to upward or downward development in the future and future development could be significantly different from the past due
to many unknown factors.

Available
on Fairfax's website (www.fairfax.ca) in the Annual Financial Supplement for the year ended December 31, 2016 are tables that show the historical reserve reconciliation and the
reserve development of Northbridge, OdysseyRe, U.S. Insurance (comprised of Crum & Forster and Zenith National), Fairfax Asia and Insurance and
Reinsurance  Other (comprised of Group Re, Advent, Polish Re and Fairfax Brasil), and Runoff's reconciliation of provision for claims.



The company's exposure to asbestos claims, environmental pollution and other types of mass tort or health hazard claims (collectively "APH exposures") are described in more
detail in the following paragraphs.

A
number of the company's subsidiaries wrote general liability policies and reinsurance prior to their acquisition by Fairfax under which policyholders continue to present asbestos-related injury
claims. The vast majority of these claims are presented under policies written many years ago. There is a great deal of uncertainty surrounding these types of claims, which impacts the ability of
insurers and reinsurers to estimate the ultimate amount of unpaid claims and related settlement expenses. The majority of these claims differ from most other types of claims because there is
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

150

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of
coverage that in some cases have eroded the clear and express intent of the parties to the insurance contracts, and in others have expanded theories of liability. The insurance industry as a whole
is engaged in extensive litigation over these coverage and liability issues and is thus confronted with continuing uncertainty in its efforts to quantify asbestos exposures. Conventional actuarial
reserving techniques cannot be used to estimate the ultimate cost of such claims, due to inadequate loss development patterns and inconsistent legal doctrines that continue to emerge. Substantially
all of the company's exposure to asbestos losses are now under the management of Runoff.

The
company also faces exposure to other types of mass tort or health hazard claims including claims related to environmental pollution and exposure to potentially harmful products or substances such
as breast implants, pharmaceutical products, chemical products, lead-based pigments, tobacco, hepatitis C, head trauma and in
utero exposure to diethylstilbestrol ("DES"). Tobacco, although a significant potential risk to the company, has not presented significant actual exposure to date. Methyl tertiary butyl ether ("MTBE")
contamination of underground drinking water supplies was a significant potential health hazard, and while the company has resolved most of its potential MBTE exposures, some exposure lingers. Although
still a risk due to occasional unfavourable court decisions, lead pigment has had some favourable underlying litigation developments resulting in this hazard presenting less of a risk to the company.
The company is monitoring claims alleging breast cancer as a result of in utero exposure to DES, a synthetic estrogen supplement prescribed to prevent miscarriages or premature births. The company is
also monitoring an emerging body of claims by women who claim exposure to talc as an ingredient of consumer products such as powders and cosmetics resulted in ovarian cancer. A limited number of large
talc verdicts in the past year has resulted in dozens of similar lawsuits. As a result of its historical underwriting profile and focus on excess liability coverage for Fortune 500 type
entities, Runoff faces the bulk of these potential exposures within Fairfax. Establishing claim and claim adjustment expense reserves for mass tort claims is subject to uncertainties because of many
factors, including expanded theories of liability and disputes concerning medical causation with respect to certain diseases.



Tort reform in the first decade of the millennium, both legislative and judicial, has had a significant impact on the asbestos litigation landscape. The majority of claims now
being filed and litigated continue to be mesothelioma and lung cancer claims, with cases alleging less serious injury continuing to be brought in a small number of jurisdictions. With unimpaired and
non-malignant claims brought much less frequently, the litigation industry has focused on the more seriously injured plaintiffs, and the number of mesothelioma cases has not tailed off as expected.
Though there are fewer cases overall, the average number of defendants named in each case continues to rise, and each year more defendants not previously sued for asbestos liability are named in
lawsuits for the first time. Furthermore, there continues to be an increase in the settlement value of asbestos cases involving malignancies. Defense costs have also increased because the malignancy
cases often are more heavily litigated than the non-malignancy cases. Asbestos trial results have been mixed, with both plaintiff and defense verdicts having been rendered in courts throughout the
U.S. However, there have been a number of unfavourable appellate decisions relating to asbestos liabilities in key jurisdictions such as California, New York, and Pennsylvania during the
past year as courts continue to expand theories of liability and in some instances undermine prior reforms. The company continues to implement strategies and initiatives to address these issues and
will prudently evaluate and adjust its asbestos reserves as necessary as the litigation landscape continues to evolve. As set out in the table that follows, the company has strengthened asbestos
reserves by $219.9 or 15.9% in 2016.

In
November 2016 A.M. Best Company issued its Asbestos Review, where it estimated net ultimate asbestos losses in the U.S. property and casualty industry at $100 billion,
an increase of more than $15 billion from its previous review, citing "an unstable environment faced with evolving litigation, increasing secondary exposure cases, and an increase in life
expectancy." The asbestos claims experience in the Runoff portfolio has been consistent with the observations of A.M. Best.

151

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Following
is an analysis of the company's gross and net loss and ALAE reserves from asbestos exposures as at December 31, 2016 and 2015, and the movement in gross and net reserves for
those years:

|                                                                        |  | 2016    |   | 2015    |  
|----------------------------------------------------------------------- |  | ------- | - | ------- | -
|
|Asbestos                                                                |  |         |   |         |  
|Provision for asbestos claims and ALAE at January 1                     |  | 1,381.0 |   | 1,043.8 |  
|Asbestos losses and ALAE incurred during the year                       |  | 219.9   |   | 218.7   |  
|Asbestos losses and ALAE paid during the year                           |  | (253.2  | ) | (197.0  | )
|Provisions for asbestos losses and ALAE for acquisitions at December 31 |  |        |   |        |  
|                                                                        |  |         |   |         |  
|Provision for asbestos claims and ALAE at December 31                   |  | 1,347.7 |   | 1,065.5 |  
|                                                                        |  |         |   |         |  

The policyholders with the most significant asbestos exposure continue to be traditional defendants who manufactured, distributed or installed asbestos products on a nationwide
basis. The runoff companies are exposed to these risks and have the bulk of the direct asbestos exposure within Fairfax. While these insureds are relatively small in number, asbestos exposures for
such entities have increased over the past decade due to the rising volume of claims, the erosion of underlying limits, and the bankruptcies of target defendants. In addition, less prominent or
"peripheral" defendants, including a mix of manufacturers, distributors, and installers of asbestos-containing products, as well as premises owners continue to present with new reports. For the most
part, these insureds are defendants on a regional rather than nationwide basis. Reinsurance contracts entered into before 1984 also continue to present exposure to asbestos.

Reserves
for asbestos cannot be estimated using traditional loss reserving techniques that rely on historical accident year loss development factors. Because each insured presents different liability
and coverage issues, the company evaluates its asbestos exposure on an insured-by-insured basis. Since the mid-1990's Fairfax has utilized a sophisticated, non-traditional methodology that draws upon
company experience and asbestos claim data sets to assess asbestos liabilities on reported claims. The methodology utilizes a ground-up, exposure-based analysis that constitutes the industry "best
practice" approach for asbestos reserving. The methodology was initially critiqued by outside legal and actuarial consultants, and the results are reviewed annually by independent actuaries, all of
whom have consistently found the methodology comprehensive and the results reasonable.

In
the course of the insured-by-insured evaluation of exposure the following factors are considered: available insurance coverage, including any umbrella or excess insurance that has been issued to
the insured; limits, deductibles, and self-insured retentions; an analysis of each insured's potential liability; the jurisdictions involved; past and anticipated future asbestos claim filings against
the insured; loss development on pending claims; past settlement values of similar claims; allocated claim adjustment expenses; and applicable coverage defenses.



Management believes that the asbestos reserves reported at December 31, 2016 are reasonable estimates of the ultimate remaining liability for these claims based on facts
currently known, the present state of the law and coverage litigation, current assumptions, and the reserving methodologies employed. These asbestos reserves are continually monitored by management
and reviewed by independent actuaries. To the extent that future social, scientific, economic, legal, or legislative developments alter the volume of claims, the liabilities of policyholders, the
original intent of the policies and the ability to recover reinsurance, adjustments to loss reserves may emerge in future periods.



The company's subsidiaries purchase reinsurance to reduce their exposure on the insurance and reinsurance risks they underwrite. Credit risk associated with reinsurance is
managed through adherence to internal reinsurance guidelines whereby the company`s ongoing reinsurers generally must have high A.M. Best and/or Standard & Poor's financial strength
ratings and maintain capital and surplus exceeding $500.0. Most of the
reinsurance balances for reinsurers rated B++ and lower or which are not rated were inherited by the company on acquisition of a subsidiary.

152

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Recoverable from reinsurers of $4,010.3 on the consolidated balance sheet at December 31, 2016 consisted of future recoverables from reinsurers on unpaid claims ($3,210.0), reinsurance
receivable on paid losses ($432.2) and the unearned portion of premiums ceded to reinsurers ($539.8), net of provision for uncollectible balances ($171.7). Recoverables from reinsurers on unpaid
claims decreased by $49.8 to $3,210.0 at December 31, 2016 from $3,259.8 at December 31, 2015 primarily due to Runoff's continued progress reducing its recoverable from reinsurers
(through normal cession and collection activity), partially offset by the acquisitions of Bryte Insurance and AMAG (refer to note 23 (Acquisitions and Divestitures) to the consolidated
financial statements for the year ended December 31, 2016).

The
following table presents the company's top 25 reinsurance groups (ranked by gross recoverable from reinsurers) at December 31, 2016, which represented 72.2% (December 31,
2015  70.8%) of total recoverable from reinsurers.

|Reinsurance group                       |  | Principal reinsurers                    |  | A.M. Best
rating (or S&P
equivalent)(1) |   | Gross
recoverable
from
reinsurers(2) |   | Net unsecured
recoverable
from
reinsurers(3) | 
|--------------------------------------- |  | --------------------------------------- |  | --------------------------------------- | - | ------------------------------------ | - | -------------------------------------------- | 
|Munich                                  |  | Munich Reinsurance Company              |  | A+                                      |   | 488.9                                |   | 413.7                                        | 
|Lloyd's                                 |  | Lloyd's                                 |  | A                                       |   | 331.1                                |   | 299.4                                        | 
|Swiss Re                                |  | Swiss Reinsurance America Corporation   |  | A+                                      |   | 254.6                                |   | 223.9                                        | 
|Berkshire Hathaway                      |  | General Re Life Corporation             |  | A++                                     |   | 237.2                                |   | 207.9                                        | 
|Everest                                 |  | Everest Reinsurance (Bermuda), Ltd      |  | A+                                      |   | 159.4                                |   | 133.7                                        | 
|HDI                                     |  | Hannover Rück SE                        |  | A+                                      |   | 142.0                                |   | 128.0                                        | 
|Markel                                  |  | Markel CATCo Reinsurance Ltd            |  | A                                       |   | 132.7                                |   | 72.7                                         | 
|Alleghany                               |  | Transatlantic Reinsurance Company       |  | A+                                      |   | 120.3                                |   | 116.1                                        | 
|Chubb                                   |  | Chubb Tempest Reinsurance Ltd           |  | A++                                     |   | 117.8                                |   | 74.8                                         | 
|Zurich                                  |  | Zurich Insurance Company Ltd            |  | A+                                      |   | 101.4                                |   | 28.3                                         | 
|SCOR                                    |  | SCOR Canada Reinsurance Company         |  | A                                       |   | 97.1                                 |   | 91.4                                         | 
|Singapore Re                            |  | Singapore Reinsurance Corporation Ltd   |  | A-                                      |   | 84.0                                 |   | 56.2                                         | 
|India Govt                              |  | General Insurance Corporation of India  |  | A-                                      |   | 74.5                                 |   | 48.3                                         | 
|QBE                                     |  | QBE Reinsurance Corporation             |  | A                                       |   | 72.0                                 |   | 67.6                                         | 
|Nationwide                              |  | Nationwide Mutual Insurance Company     |  | A+                                      |   | 69.1                                 |   | 69.0                                         | 
|Aspen                                   |  | Aspen Insurance UK Ltd                  |  | A                                       |   | 64.8                                 |   | 62.8                                         | 
|Renaissance                             |  | Renaissance Reinsurance US Inc          |  | A                                       |   | 61.8                                 |   | 51.7                                         | 
|Enstar                                  |  | Arden Reinsurance Company Ltd           |  | NR                                      |   | 58.9                                 |   | 16.3                                         | 
|AIG                                     |  | Lexington Insurance Company             |  | A                                       |   | 58.6                                 |   | 41.0                                         | 
|ARAG Holding                            |  | ARAG Allgemeine Versicherungs-AG        |  | NR                                      |   | 56.1                                 |   | 52.0                                         | 
|EXOR                                    |  | Partner Reinsurance Company of the U.S. |  | A                                       |   | 54.7                                 |   | 50.8                                         | 
|WR Berkley                              |  | Berkley Insurance Company               |  | A+                                      |   | 49.8                                 |   | 45.5                                         | 
|Liberty Mutual                          |  | Liberty Mutual Insurance Company        |  | A                                       |   | 46.3                                 |   | 44.6                                         | 
|XL                                      |  | XL Reinsurance America Inc              |  | A                                       |   | 45.0                                 |   | 35.3                                         | 
|IRB                                     |  | IRB  Brasil Resseguros S.A.            |  | A-                                      |   | 42.9                                 |   | 27.3                                         | 
|                                        |  |                                         |  |                                         |   |                                      |   |                                              | 
|Top 25 reinsurance groups               |  |                                         |  | 3,021.0                                 |   | 2,458.3                              |  
|Other reinsurers                        |  |                                         |  |                                         |   | 1,161.0                              |   | 836.5                                        | 
|                                        |  |                                         |  |                                         |   |                                      |   |                                              | 
|Total recoverable from reinsurers       |  |                                         |  | 4,182.0                                 |   | 3,294.8                              |  
|Provision for uncollectible reinsurance |  |                                         |  | (171.7                                  | ) | (171.7                               | )
|                                        |  |                                         |  |                                         |   |                                      |   |                                              | 
|Recoverable from reinsurers             |  |                                         |  | 4,010.3                                 |   | 3,123.1                              |  
|                                        |  |                                         |  |                                         |   |                                      |   |                                              | 

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The following table presents the classification of the $4,010.3 gross recoverable from reinsurers according to the financial strength rating of the responsible reinsurers at December 31, 2016,
shown separately for the insurance and reinsurance operations and for the runoff operations. At December 31, 2016 approximately 19.3% (December 31,
2015  22.6%) of the consolidated recoverable from reinsurers related to runoff operations. Pools and associations, shown separately, generally consist of
government or similar insurance funds carrying limited credit risk.

Insurance and reinsurance

Runoff

ConsolidatedA.M. Best
rating
(or S&P
equivalent)

Gross
recoverable
from reinsurers

Balance
for which
security is
held

Net
unsecured
recoverable
from
reinsurers

Gross
recoverable
from
reinsurers

Balance
for which
security is
held

Net
unsecured
recoverable
from
reinsurers

Gross
recoverable
from
reinsurers

Balance
for which
security is
held

Net
unsecured
recoverable
from
reinsurersA++

294.9

79.6

215.3

95.1

2.4

92.7

390.0

82.0

308.0A+

1,246.5

217.5

1,029.0

304.5

35.3

269.2

1,551.0

252.8

1,298.2A

971.4

124.3

847.1

159.4

22.4

137.0

1,130.8

146.7

984.1A-

292.0

79.9

212.1

7.7

4.0

3.7

299.7

83.9

215.8B++

19.3

4.6

14.7

2.7

1.2

1.5

22.0

5.8

16.2B+

1.1

0.9

0.2

0.9

0.3

0.6

2.0

1.2

0.8B or lower

8.9

8.7

0.2

3.0

0.1

2.9

11.9

8.8

3.1Not rated

373.8

159.0

214.8

329.5

91.8

237.7

703.3

250.8

452.5Pools and associations

58.4

55.2

3.2

12.9



12.9

71.3

55.2

16.13,266.3

729.7

2,536.6

915.7

157.5

758.2

4,182.0

887.2

3,294.8Provision for uncollectible reinsurance

(31.9
)


(31.9
)
(139.8
)


(139.8
)
(171.7
)


(171.7
)Recoverable from reinsurers

3,234.4



2,504.7

775.9



618.4

4,010.3



3,123.1


To support gross recoverable from reinsurers balances, the company had the benefit of letters of credit, trust funds or offsetting balances payable totaling $887.2 at
December 31, 2016 as follows:



In
addition to the above security arrangements, Lloyd's is also required to maintain funds in Canada and the United States that are monitored by the applicable regulatory authorities in those
jurisdictions.

Substantially
all of the provision for uncollectible reinsurance of $171.7 at December 31, 2016 related to the $472.6 of net unsecured reinsurance recoverables from reinsurers rated B++ or
lower or which are unrated (which excludes pools and associations).

Based
on the preceding analysis of the company's recoverable from reinsurers and on the credit risk analysis performed by the company's reinsurance security department as described below, the company
believes that its provision for uncollectible reinsurance has reasonably estimated all incurred losses arising from uncollectible reinsurance at December 31, 2016.

The
company's reinsurance security department, with its dedicated specialized personnel and expertise in analyzing and managing credit risk, is responsible for the following with respect to
recoverable from reinsurers: evaluating the creditworthiness of all reinsurers and recommending to the company's reinsurance committee those reinsurers which should be included on the list of approved
reinsurers; on a quarterly basis, monitoring reinsurance recoverables by reinsurer, by operating company, and in aggregate, and recommending the appropriate provision for uncollectible reinsurance;
and pursuing collections from, and global commutations with, reinsurers which are either impaired or considered to be financially challenged.

The
insurance and reinsurance operating companies purchase reinsurance to achieve various objectives including protection from catastrophic financial loss resulting from a single event, such as the
total loss of a large manufacturing plant from a fire, protection against the aggregation of many smaller claims resulting from a single event, such as an earthquake or major hurricane, that may
affect many policyholders simultaneously and generally to protect capital by limiting loss exposure to acceptable levels. Consolidated net earnings included the pre-tax cost of ceded reinsurance of
$123.1 (2015  $237.9). The consolidated pre-tax impact of ceded reinsurance was comprised as follows: reinsurers' share of premiums earned (see tables
which follow this paragraph); commissions earned on

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reinsurers'
share of premiums earned of $267.4 (2015  $266.7); losses on claims ceded to reinsurers of $952.1
(2015  $711.9); and recovery of uncollectible reinsurance of $4.9 (2015  provision for uncollectible reinsurance
of $5.8).

Year ended December 31, 2016

|                                            |  | Insurance and Reinsurance |   |       |   |       |  |       |   |        |   |       |   |       |  
|------------------------------------------- |  | ------------------------- | - | ----- | - | ----- |  | ----- | - | ------ | - | ----- | - | ----- | -
|
|Reinsurers' share of premiums earned        |  | 113.5                     |   | 300.3 |   | 258.7 |  | 11.9  |   | 341.0  |   | 338.9 |   | 155.1 |  
|Pre-tax benefit (cost) of ceded reinsurance |  | (36.5                     | ) | (16.6 | ) | 128.0 |  | (12.5 | ) | (113.8 | ) | (11.2 | ) | (85.6 | )

Year ended December 31, 2015

|                                            |  | Insurance and Reinsurance |   |       |   |       |  |       |   |       |   |       |   |       |  
|------------------------------------------- |  | ------------------------- | - | ----- | - | ----- |  | ----- | - | ----- | - | ----- | - | ----- | -
|
|Reinsurers' share of premiums earned        |  | 171.8                     |   | 321.1 |   | 292.0 |  | 12.1  |   | 182.7 |   | 328.5 |   | 121.2 |  
|Pre-tax benefit (cost) of ceded reinsurance |  | (119.7                    | ) | (38.5 | ) | 60.5  |  | (32.1 | ) | (76.6 | ) | (97.2 | ) | (1.2  | )

Reinsurers'
share of premiums earned increased from $1,210.7 in 2015 to $1,347.5 in 2016 primarily reflecting the impact of the consolidation of Brit for the full year of 2016 and higher business
volume and corresponding cessions to reinsurers at Pacific Insurance, partially offset by increased premium retention at Crum & Forster and First Capital. Commissions earned on reinsurers'
share of premiums earned increased slightly from $266.7 in 2015 to $267.4 in 2016. Reinsurers' share of losses on claims increased from $711.9 in 2015 to $952.1 in 2016 primarily reflecting the impact
of the consolidation of Brit for the full year of 2016 and increases at Northbridge (principally related to Fort McMurray wildfire losses ceded to reinsurers and increased frequency of non-catastrophe
large losses), Fairfax Asia (primarily reflecting Storm Roanu losses ceded to reinsurers by Union Assurance and increased cessions by Pacific Insurance) and Runoff (due to higher adverse
development ceded to reinsurers in 2016 compared to 2015), partially offset by a decrease at Fairfax Brasil (consistent with the decrease in its gross losses on claims). The company recorded net
recoveries of uncollectible reinsurance of $4.9 in 2016 principally at OdysseyRe and Crum & Forster compared to net provisions of $5.8 in 2015 principally at Runoff.

The
use of reinsurance decreased cash provided by operating activities by approximately $152 in 2016 (2015  increased cash provided by operating activities by
approximately $111). The decrease year-over-year was primarily due to an increase in premiums paid to reinsurers ($1,445.9 in 2016 compared to $1,135.3 in 2015) while ceded losses collected from
reinsurers remained stable ($1,017.4 in 2016 compared to $992.6 in 2015).

Investments



Hamblin Watsa Investment Counsel Ltd. ("Hamblin Watsa") is a wholly owned subsidiary of the company that serves as the investment manager for Fairfax, its insurance,
reinsurance and runoff companies and Fairfax India. Following a long-term value-oriented investment philosophy with primary emphasis on the preservation of invested capital, Hamblin Watsa looks for
investments with a margin of safety by conducting thorough proprietary analysis of investment opportunities and markets to assess the financial strength of issuers, identifying attractively priced
securities selling at discounts to intrinsic value and hedging risks where appropriate. Hamblin Watsa is opportunistic and disciplined in seeking undervalued securities in the market, often investing
in out-of-favour securities when sentiment is negative, and willing to maintain a large proportion of its investment portfolio in cash and cash equivalents when it perceives markets to
be over-valued.

Hamblin
Watsa generally operates as a separate investment management entity, with Fairfax's CEO and one other corporate officer being members of Hamblin Watsa's investment committee. This investment
committee is responsible for making all investment decisions, subject to relevant regulatory guidelines and constraints, and

155

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oversight
by management of Hamblin Watsa. Fairfax's Board of Directors, its insurance, reinsurance and runoff companies and Fairfax India are kept apprised of significant investment decisions through
the financial reporting process as well as periodic presentations by Hamblin Watsa management.



Investments at their year-end carrying values (including at the holding company) for Fairfax's first year and for the past ten years are presented in the following table.
Included in bonds are U.S. treasury bond forward contracts, CPI-linked derivatives and credit default swaps and included in common stocks are investments in associates and equity derivatives.

|Year(1) |  | Cash and
short term
investments |  | Bonds(2) |  | Preferred
stocks |  | Common
stocks |  | Real
estate(3) |  | Total(4) |  | Per share
($)
|------- |  | ------------------------------- |  | -------- |  | ---------------- |  | ------------- |  | -------------- |  | -------- |  | -------------
|1985    |  | 6.4                             |  | 14.1     |  | 1.0              |  | 2.5           |  |               |  | 24.0     |  | 4.80         
|--      |  |                                 |  |          |  |                  |  |               |  |                |  |          |  |              
|2007    |  | 3,965.7                         |  | 11,669.1 |  | 19.9             |  | 3,339.5       |  | 6.5            |  | 19,000.7 |  | 1,075.50     
|2008    |  | 6,343.5                         |  | 9,069.6  |  | 50.3             |  | 4,480.0       |  | 6.4            |  | 19,949.8 |  | 1,140.85     
|2009    |  | 3,658.8                         |  | 11,550.7 |  | 357.6            |  | 5,697.9       |  | 8.0            |  | 21,273.0 |  | 1,064.24     
|2010    |  | 4,073.4                         |  | 13,353.5 |  | 627.3            |  | 5,095.3       |  | 150.5          |  | 23,300.0 |  | 1,139.07     
|2011    |  | 6,899.1                         |  | 12,074.7 |  | 608.3            |  | 4,448.8       |  | 291.6          |  | 24,322.5 |  | 1,193.70     
|2012    |  | 8,085.4                         |  | 11,545.9 |  | 651.4            |  | 5,397.6       |  | 413.9          |  | 26,094.2 |  | 1,288.89     
|2013    |  | 7,988.0                         |  | 10,710.3 |  | 764.8            |  | 4,951.0       |  | 447.5          |  | 24,861.6 |  | 1,172.72     
|2014    |  | 6,428.5                         |  | 12,660.3 |  | 520.6            |  | 5,968.1       |  | 615.2          |  | 26,192.7 |  | 1,236.90     
|2015    |  | 7,368.7                         |  | 14,905.0 |  | 116.9            |  | 6,124.4       |  | 501.1          |  | 29,016.1 |  | 1,306.22     
|2016    |  | 11,214.4                        |  | 10,358.3 |  | 70.6             |  | 6,281.1       |  | 506.3          |  | 28,430.7 |  | 1,231.11     

Investments
per share decreased by $75.11 from $1,306.22 at December 31, 2015 to $1,231.11 at December 31, 2016 primarily due to the increase in Fairfax common shares effectively
outstanding (23,093,566 at December 31, 2016 compared to 22,213,859 at December 31, 2015) and net losses on the company's equity hedges, partially offset by net gains on bonds and the
consolidation of the investment portfolios of Bryte Insurance and AMAG. Since 1985, investments per share have compounded at a rate of 19.6% per year, including the impact of acquisitions.



The majority of interest and dividend income is earned by the insurance, reinsurance and runoff companies. Interest and dividend income on holding company cash and investments
was $16.4 in 2016 (2015  $10.8) prior to giving effect to total return swap expense of $27.9 (2015  $28.7) and share of
loss of associates of $27.2 (2015  share of

156

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profit
of associates of $6.4). Interest and dividend income earned in Fairfax's first year and for the past ten years is presented in the following table.

|     |  |          |  | Consolidated interest and dividend income
|---- |  | -------- |  | -----------------------------------------
|
|
|1986 |  | 46.3     |  | 3.4                                      
|--   |  |          |  |                                          
|2007 |  | 17,898.0 |  | 761.0                                    
|2008 |  | 19,468.8 |  | 626.4                                    
|2009 |  | 20,604.2 |  | 712.7                                    
|2010 |  | 22,270.2 |  | 711.5                                    
|2011 |  | 23,787.5 |  | 705.3                                    
|2012 |  | 25,185.2 |  | 409.3                                    
|2013 |  | 25,454.7 |  | 376.9                                    
|2014 |  | 25,527.2 |  | 403.8                                    
|2015 |  | 27,604.4 |  | 512.2                                    
|2016 |  | 28,723.4 |  | 555.2                                    

Consolidated interest and dividend income increased from $512.2 in 2015 to $555.2 in 2016 reflecting higher interest income earned (primarily due to increased holdings of higher
yielding government and corporate bonds for most of 2016, partially offset by lower holdings of U.S. state and municipal bonds), lower total return swap expense and lower interest on funds
withheld expense. Total return swap expense decreased from $160.5 in 2015 to $146.4 in 2016, primarily due to the closure of the Russell 2000 short equity index total return swaps in the fourth
quarter of 2016.

The
company's pre-tax consolidated interest and dividend income yield increased from 1.86% in 2015 to 1.93% in 2016 and the company's after-tax consolidated interest and dividend income yield
increased from 1.36% in 2015 to 1.42% in 2016. Prior to giving effect to the interest expense which accrued to reinsurers on funds withheld and total return swap expense (described in the two
subsequent paragraphs), consolidated interest and dividend income in 2016 of $700.7 (2015  $688.5) produced a pre-tax gross portfolio yield of 2.44%
(2015  2.49%). The modest decline in the pre-tax gross portfolio yield was primarily due to an increase in the average carrying value of investments in 2016
(principally as a result of the consolidation of the investment portfolios of AMAG and Bryte Insurance and new or incremental investments in associates including Eurolife, ICICI Lombard and APR Energy
which do not contribute to the pre-tax gross portfolio yield), partially offset by higher interest income earned as described in the preceding paragraph.

Funds
withheld payable to reinsurers shown on the consolidated balance sheets represent funds to which the company's reinsurers are entitled (principally premiums and accumulated accrued interest on
aggregate stop loss reinsurance treaties) but which Fairfax retains as collateral for future obligations of those reinsurers. Claims payable under such reinsurance treaties are paid first out of the
funds withheld balances. When the company acts as the reinsurer of third parties in such contracts, funds withheld receivable is included in insurance contract receivables on the consolidated balance
sheets. The company's consolidated interest and dividend income in 2016 included net interest income on funds withheld of $0.9 (2015  net interest expense of
$15.8). The decrease in funds withheld interest expense in 2016 principally reflected the impact of the significant commutation described in more detail in the Components of Net Earnings section of
this MD&A under the heading Crum & Forster.

157

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Share
of profit of associates decreased from $172.9 in 2015 to $24.2 in 2016 primarily reflecting the non-cash impairment charge of $100.4 recognized on the company's investment in Resolute and a
lower share of profit from the company's investments in KWF LPs (a Kennedy Wilson real estate partnership recognized a significant gain on disposition of its investment properties in
2015), partially offset by a higher share of profit of ICICI Lombard. Details of the company's associates and transactions related to associates are described in note 6 (Investments in
Associates) to the consolidated financial statements for the year ended December 31, 2016.

Upon
initial application of the equity method of accounting to its investment in Resolute, the company was required to determine its proportionate share of the fair value of Resolute's assets and
liabilities at that date. Differences between fair value and Resolute's carrying value were identified (collectively, fair value adjustments) primarily with respect to Resolute's fixed assets,
deferred income tax assets and pension benefit obligations. These fair value adjustments have been and will be recognized in Fairfax's share of profit (loss) of Resolute in any period where Resolute
adjusts the carrying value of those particular assets and liabilities. As a result, in any such period the company's share of profit (loss) of Resolute will differ, potentially significantly, from
what would be determined by applying Fairfax's ownership percentage to Resolute's reported net earnings (loss).



Net losses on investments of $1,203.6 in 2016 (2015  net losses on investments of $259.2) were comprised as shown in the following table:

|                                                     |                                                     | 2016     |          | 2015    |        
|---------------------------------------------------- | --------------------------------------------------- | -------- | -------- | ------- | -------
|
|                                                     | Common stocks                                       |          | (151.2)  | (1),(2) | 73.2   
|                                                     | Preferred stocks  convertible                      |          | (68.0)   | (1),(3) | 61.4   
|                                                     | Bonds  convertible                                 |          | 35.0     |         | (74.4  
|                                                     | Gain on disposition of subsidiary and associates(5) |          |         |         |       
|                                                     | Other equity derivatives(6)(7)                      |          |         |         | 19.3   
|                                                     |                                                     |          |          |         |        
|Long equity exposures                                |                                                     | (184.2   | )        | 79.5    |        
|                                                     | Equity hedges and short equity exposures(7)         |          | (2,634.8 | )       | 1,441.9
|                                                     |                                                     |          |          |         |        
|Net equity exposure and financial effects            |                                                     | (2,819.0 | )        | 1,521.4 |        
|                                                     | Bonds                                               |          | 648.7    |         | (326.0 
|                                                     | CPI-linked derivatives                              |          |         |         | (196.2 
|                                                     | U.S. treasury bond forward contracts                |          | 96.7     |         | (49.7  
|                                                     | Other derivatives                                   |          | (70.6    | )       | 63.2   
|                                                     | Foreign currency                                    |          | 80.6     |         | (210.1 
|                                                     | Other                                               |          | (7.8     | )       | 65.2   
|                                                     |                                                     |          |          |         |        
|Net gains (losses) on investments                    |                                                     | (2,071.4 | )        | 867.8   |        
|                                                     |                                                     |          |          |         |        
|Net gains (losses) on bonds is comprised as follows: |                                                     |          |          |         |        
|                                                     | Government bonds                                    |          | 334.3    |         | (77.5  
|                                                     | U.S. states and municipalities                      |          | 321.4    |         | (350.9 
|                                                     | Corporate and other                                 |          | (7.0     | )       | 102.4  
|                                                     |                                                     |          |          |         |        
|                                                     |                                                     | 648.7    |          | (326.0  | )      
|                                                     |                                                     |          |          |         |        

158

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Net equity exposure and financial effects:Throughout 2015 and most of 2016, the company had 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
significant decline in equity markets by way of short positions effected through equity and equity index total return swaps (including short positions in certain equity indexes and individual
equities) and equity index put options (S&P 500). The company's equity hedges were structured to provide a return that was inverse to changes in the fair values of the indexes and certain
individual equities. As a result of fundamental changes in the U.S. that may bolster economic growth and business development in the future, the company discontinued its economic equity hedging
strategy during the fourth quarter of 2016. Accordingly, the company closed out $6,350.6 notional amount of short positions effected through equity index total return swaps (comprised of Russell 2000,
S&P 500 and S&P/TSX 60 short equity index total return swaps). During 2016 the company's net equity exposure (long equity exposures net of short equity exposures) produced net losses of
$1,297.6 (2015  net gains of $76.8).

Bonds:Net gains on bonds of $322.7 in 2016 were primarily comprised of net gains on U.S. treasury bonds ($138.1), Indian government
bonds ($105.2) and corporate and other bonds ($95.4), partially offset by net losses on U.S. state and municipal bonds ($29.5).

CPI-linked derivatives:The company has purchased derivative contracts referenced to consumer price indexes ("CPI") in the geographic regions
in which it operates to serve as an economic hedge against the potential adverse financial impact on the company of decreasing price levels. Details of these contracts are presented in the tables
below. During 2016 the company purchased $3,185.7 (2015  $2,907.3) notional amount of CPI-linked derivative contracts at a cost of $11.2
(2015  $14.6) and paid additional premiums of $3.3 (2015  $4.8) to increase the strike prices of certain CPI-linked
derivative contracts (primarily the European CPI-linked derivatives). The company's CPI-linked derivative contracts produced net unrealized losses of $196.2 in 2016
(2015  net unrealized gains of $35.7).

Net
unrealized gains (losses) on CPI-linked derivative contracts typically reflect decreases (increases) in the values of the CPI indexes underlying those contracts during the periods presented (those
contracts are structured to benefit the company during periods of decreasing CPI index values). Refer to the analysis in note 7 (Short Sales and Derivatives) under the heading CPI-linked
derivatives in the company's consolidated financial statements for the

159

---



year
ended December 31, 2016 for a discussion of the company's economic hedge against the potential adverse financial impact of decreasing price levels.

|               |  | December 31, 2016 | 
|-------------- |  | ----------------- | 
|
|
|
|United States  |  | 0.0%              | 
|United States  |  | 0.5%              | 
|European Union |  | 0.0%              | 
|United Kingdom |  | 0.0%              | 
|France         |  | 0.0%              | 
|               |  |                   | 
|               |  |                   | 
|               |  |                   | 

|               |  | December 31, 2015 | 
|-------------- |  | ----------------- | 
|
|
|
|United States  |  | 0.0%              | 
|United States  |  | 0.5%              | 
|European Union |  | 0.0%              | 
|United Kingdom |  | 0.0%              | 
|France         |  | 0.0%              | 
|               |  |                   | 
|               |  |                   | 
|               |  |                   | 

160

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Net gains (losses) on investments by reporting segment:Net gains (losses) on investments by reporting segment for 2016 and 2015
were comprised as shown in the following tables:

Year ended December 31, 2016

|                                  |                        | Insurance and Reinsurance |        |        |        |        |        |        |        |      |       |      |     
|--------------------------------- | ---------------------- | ------------------------- | ------ | ------ | ------ | ------ | ------ | ------ | ------ | ---- | ----- | ---- | ----
|
|                                  | Long equity exposures  |                           | 42.6   |        | (16.1  | )      | 31.1   |        | (43.2  | )    | (36.9 | )    | 5.2 
|                                  | Short equity exposures |                           | (181.8 | )      | (389.0 | )      | (155.0 | )      | (107.0 | )    | (13.1 | )    |    
|                                  | Bonds                  |                           | 67.6   |        | 90.9   |        | (27.9  | )      | 19.8   |      | 110.6 |      | 0.4 
|                                  | CPI-linked derivatives |                           | (20.3  | )      | (43.8  | )      | (16.7  | )      | (15.5  | )    | (20.6 | )    |    
|                                  | Foreign currency       |                           | (67.8  | )      | 27.8   |        | (35.1  | )      | (20.7  | )    | 41.5  |      | (7.0
|                                  | Other                  |                           | (1.6   | )      | 11.5   |        | 18.9   |        | (1.6   | )    | 5.8   |      | (0.3
|                                  |                        |                           |        |        |        |        |        |        |        |      |       |      |     
|Net gains (losses) on investments |                        | (161.3                    | )      | (318.7 | )      | (184.7 | )      | (168.2 | )      | 87.3 |       | (1.7 | )   
|                                  |                        |                           |        |        |        |        |        |        |        |      |       |      |     

Year ended December 31, 2015

|                                  |                          | Insurance and Reinsurance |       |        |        |        |        |       |       |       |       |       |      
|--------------------------------- | ------------------------ | ------------------------- | ----- | ------ | ------ | ------ | ------ | ----- | ----- | ----- | ----- | ----- | -----
|
|                                  | Long equity exposures(2) |                           | (45.5 | )      | (285.4 | )      | (101.6 | )     | (59.3 | )     | 15.4  |       | (23.7
|                                  | Equity hedges            |                           | 113.6 |        | 162.0  |        | 63.0   |       | 26.5  |       | (7.2  | )     |     
|                                  | Bonds                    |                           | (22.9 | )      | (180.8 | )      | (64.4  | )     | (30.1 | )     | (42.3 | )     | (7.8 
|                                  | CPI-linked derivatives   |                           | (0.8  | )      | 12.2   |        | 4.5    |       | 2.5   |       | 1.6   |       |     
|                                  | Foreign currency         |                           | 92.4  |        | 22.2   |        | (8.4   | )     | 1.4   |       | (21.9 | )     | 7.1  
|                                  | Other                    |                           | (4.9  | )      | 2.6    |        | 1.3    |       | 0.2   |       | (20.9 | )     | (0.1 
|                                  |                          |                           |       |        |        |        |        |       |       |       |       |       |      
|Net gains (losses) on investments |                          | 131.9                     |       | (267.2 | )      | (105.6 | )      | (58.8 | )     | (75.3 | )     | (24.5 | )    
|                                  |                          |                           |       |        |        |        |        |       |       |       |       |       |      



The following table presents the performance of the investment portfolio since Fairfax's inception in 1985. For the years 1986 to 2006, the calculation of total return on
average investments included consolidated interest and dividends, net realized gains (losses) and changes in net unrealized gains (losses) as the majority of the company's investment portfolio was
carried at cost or amortized cost under Canadian GAAP. For the years 2007 to 2009, Canadian GAAP required the company to carry the majority of its investments at fair value and as a result, the
calculation of total return on average investments during this period included consolidated interest and dividends, net investment gains (losses) recorded in net earnings, net unrealized gains
(losses) recorded in other comprehensive income and changes in net unrealized gains (losses) on equity accounted investments in associates. Effective January 1, 2010 the company adopted IFRS
and was required to carry the majority of its investments at FVTPL and as a result, the calculation of total return on average investments for the years 2010 to 2016 includes consolidated interest and
dividends, net investment gains (losses) recorded in net earnings and changes in net unrealized gains (losses) on equity accounted investments in associates. All noted amounts above are included on a
pre-tax basis in the calculation of total return on average investments.

161

---



|                          |  |          |  |         |  |       |     |         |   | Net gains (losses)
recorded in: |     |         |   |        |   |          |    
|------------------------- |  | -------- |  | ------- |  | ----- | --- | ------- | - | ------------------------------- | --- | ------- | - | ------ | - | -------- | ---
|
|
|
|1986                      |  | 46.3     |  | 3.4     |  | 0.7   |     | (0.2    | ) |                                |     |        |   |       |   | 3.9      |    
|1987                      |  | 81.2     |  | 6.2     |  | 7.1   |     | (6.1    | ) |                                |     |        |   |       |   | 7.2      |    
|1988                      |  | 102.6    |  | 7.5     |  | 6.5   |     | 9.5     |   |                                |     |        |   |       |   | 23.5     |    
|1989                      |  | 112.4    |  | 10.0    |  | 13.4  |     | (5.1    | ) |                                |     |        |   |       |   | 18.3     |    
|1990                      |  | 201.2    |  | 17.7    |  | 2.0   |     | (28.5   | ) |                                |     |        |   |       |   | (8.8     | )  
|1991                      |  | 292.3    |  | 22.7    |  | (3.9  | )   | 24.0    |   |                                |     |        |   |       |   | 42.8     |    
|1992                      |  | 301.8    |  | 19.8    |  | 2.8   |     | (8.3    | ) |                                |     |        |   |       |   | 14.3     |    
|1993                      |  | 473.1    |  | 18.1    |  | 21.6  |     | 22.2    |   |                                |     |        |   |       |   | 61.9     |    
|1994                      |  | 871.5    |  | 42.6    |  | 14.6  |     | (30.7   | ) |                                |     |        |   |       |   | 26.5     |    
|1995                      |  | 1,163.4  |  | 65.3    |  | 52.5  |     | 32.7    |   |                                |     |        |   |       |   | 150.5    |    
|1996                      |  | 1,861.5  |  | 111.0   |  | 96.3  |     | 82.1    |   |                                |     |        |   |       |   | 289.4    |    
|1997                      |  | 3,258.6  |  | 183.8   |  | 149.3 |     | (6.9    | ) |                                |     |        |   |       |   | 326.2    |    
|1998                      |  | 5,911.2  |  | 303.7   |  | 314.3 |     | (78.3   | ) |                                |     |        |   |       |   | 539.7    |    
|1999                      |  | 10,020.3 |  | 532.7   |  | 63.8  |     | (871.4  | ) |                                |     |        |   |       |   | (274.9   | )  
|2000                      |  | 11,291.5 |  | 534.0   |  | 259.1 |     | 584.1   |   |                                |     |        |   |       |   | 1,377.2  |    
|2001                      |  | 10,264.3 |  | 436.9   |  | 121.0 |     | 194.0   |   |                                |     |        |   |       |   | 751.9    |    
|2002                      |  | 10,377.9 |  | 436.1   |  | 465.0 |     | 263.2   |   |                                |     |        |   |       |   | 1,164.3  |    
|2003                      |  | 11,527.5 |  | 331.9   |  | 826.1 |     | 142.4   |   |                                |     |        |   |       |   | 1,300.4  |    
|2004                      |  | 12,955.8 |  | 375.7   |  | 300.5 | (4) | 165.6   |   |                                |     |        |   |       |   | 841.8    |    
|2005                      |  | 14,142.4 |  | 466.1   |  | 385.7 |     | 73.0    |   |                                |     |        |   |       |   | 924.8    |    
|2006                      |  | 15,827.0 |  | 746.5   |  | 789.4 | (5) | (247.8  | ) |                                |     |        |   |       |   | 1,288.1  |    
|2007                      |  | 17,898.0 |  | 761.0   |  |      |     |        |   | 1,639.5                         |     | 304.5   |   | (131.2 | ) | 2,573.8  |    
|2008                      |  | 19,468.8 |  | 626.4   |  |      |     |        |   | 2,718.6                         |     | (426.7  | ) | 278.3  |   | 3,196.6  |    
|2009                      |  | 20,604.2 |  | 712.7   |  |      |     |        |   | 904.3                           | (6) | 1,076.7 |   | (185.2 | ) | 2,508.5  |    
|2010                      |  | 22,270.2 |  | 711.5   |  |      |     |        |   | 28.7                            |     |        |   | 98.2   |   | 838.4    |    
|2011                      |  | 23,787.5 |  | 705.3   |  |      |     |        |   | 737.7                           |     |        |   | 78.5   |   | 1,521.5  |    
|2012                      |  | 25,185.2 |  | 409.3   |  |      |     |        |   | 639.4                           |     |        |   | 79.6   |   | 1,128.3  |    
|2013                      |  | 25,454.7 |  | 376.9   |  |      |     |        |   | (1,579.8                        | )   |        |   | (44.6  | ) | (1,247.5 | )  
|2014                      |  | 25,527.2 |  | 403.8   |  |      |     |        |   | 1,682.7                         |     |        |   | 70.3   |   | 2,156.8  |    
|2015                      |  | 27,604.4 |  | 512.2   |  |      |     |        |   | (341.3                          | )   |        |   | 20.9   |   | 191.8    |    
|2016                      |  | 28,723.4 |  | 555.2   |  |      |     |        |   | (1,223.3                        | )   |        |   | 160.1  |   | (508.0   | )  
|                          |  |          |  |         |  |       |     |         |   |                                 |     |         |   |        |   |          |    
|Cumulative from inception |  | 10,446.0 |  | 3,887.8 |  |       |     | 5,206.5 |   |                                 |     |         |   |        |   | 8.3      | (7)
|                          |  |          |  |         |  |       |     |         |   |                                 |     |         |   |        |   |          |    

162

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Investment
gains have been an important component of Fairfax's financial results since 1985, having contributed an aggregate $10,153.0 (pre-tax) to total equity since inception. The contribution has
fluctuated significantly from period to period; the amount of investment gains (losses) for any period has no predictive value and variations in amount from period to period have no practical
analytical value. From inception in 1985 to 2016, total return on average investments has averaged 8.3%.

The
company has a long term, value-oriented investment philosophy. It continues to expect fluctuations in the global financial markets for common stocks, bonds, derivatives and other securities.



Credit Risk

At December 31, 2016, 79.2% (December 31, 2015  86.7%) of the fixed income portfolio carrying value was rated investment
grade or better, with 61.9% (December 31, 2015  71.8%) being rated AA or better (primarily consisting of government obligations).

Refer
to note 24 (Financial Risk Management) under the heading Investments in Debt Instruments in the consolidated financial statements for the year ended December 31, 2016 for a
discussion of the company's exposure to the credit risk of individual issuers, sovereign and U.S. state and municipal governments.

Interest Rate Risk

Hypothetical parallel upward shifts in the term structure of interest rates by 100 basis points and 200 basis points would potentially decrease net earnings by
$148.2 and $295.1 respectively. The company's exposure to interest rate risk decreased significantly during 2016 compared to 2015 as a result of meaningful actions taken by the company. As a result of
fundamental changes to the macroeconomic outlook for the U.S. and the ensuing potential for a significant increase in market interest rates, during the fourth quarter of 2016 the company sold
the majority of its long dated U.S. treasury bonds, realizing net proceeds of $4,753.5, and to further reduce its exposure to interest rate risk (specifically exposure to U.S. state and
municipal bonds and any remaining long dated U.S. treasury bonds held in its fixed income portfolio), the company entered into forward contracts to sell long dated U.S. treasury bonds
with a notional amount of $3,013.4 as at December 31, 2016 (December 31, 2015  nil). These contracts have an average term to maturity of less than
one year and may be renewed at market rates.

The
company's exposure to interest rate risk is discussed further in note 24 (Financial Risk Management) to the consolidated financial statements for the year ended
December 31, 2016.



The company owns significant investments in equity and equity-related holdings, which the company believes will significantly appreciate in value over time. The market value and
the liquidity of these investments are
volatile and may vary dramatically either up or down in short periods, and their ultimate value will therefore only be known over the long term or on disposition.

Throughout
2015 and most of 2016 the company economically hedged its equity and equity-related holdings against a potential significant decline in equity markets by way of short positions effected
through equity and equity index total return swaps. As a result of fundamental changes in the U.S. that may bolster economic growth and business development in the future, the company
discontinued its economic equity hedging strategy during the fourth quarter of 2016. Accordingly, the company closed out $6,350.6 notional amount of short positions effected through equity index total
return swaps (comprised of Russell 2000, S&P 500 and S&P/TSX 60 short equity index total return swaps). At December 31, 2016, the company continues to maintain short equity and
equity index total return swaps for investment purposes. Refer to note 7 (Short Sales and Derivatives) in the company's consolidated financial statements for the year ended December 31,
2016, under the heading Equity Contracts, for a tabular analysis of equity derivatives held by the company.

As
a result of discontinuing its economic equity hedging strategy, a hypothetical decrease in global equity markets of 5% and 10% at December 31, 2016 would potentially decrease the company's
net earnings by $106.7 and $204.5 respectively. The company's net equity exposure and exposure to market price fluctuations are discussed further in note 24 (Financial Risk Management) to the
consolidated financial statements for the year ended December 31, 2016.

163

---



The
company's holdings of common stocks and long equity total return swaps at December 31, 2016 and 2015 are summarized by the issuer's primary industry in the table below.

|                                |  | December 31,
2016(1) |  | December 31,
2015(1)
|------------------------------- |  | -------------------- |  | --------------------
|Financials and investment funds |  | 2,988.2              |  | 3,312.8             
|Consumer products and other     |  | 834.8                |  | 638.6               
|Commercial and industrial       |  | 571.5                |  | 670.3               
|                                |  |                      |  |                     
|                                |  | 4,394.5              |  | 4,621.7             
|                                |  |                      |  |                     

The
company's holdings of common stocks and long equity total return swaps at December 31, 2016 and 2015 are summarized by the issuer's country of domicile in the table below.

|               |  | December 31,
2016(1) |  | December 31,
2015(1)
|-------------- |  | -------------------- |  | --------------------
|United States  |  | 1,266.9              |  | 1,130.9             
|Canada         |  | 755.6                |  | 793.0               
|Egypt          |  | 331.5                |  | 402.0               
|Greece         |  | 297.0                |  | 444.7               
|India          |  | 247.8                |  | 177.7               
|Netherlands    |  | 231.9                |  | 234.4               
|Singapore      |  | 182.3                |  | 59.7                
|China          |  | 167.2                |  | 198.1               
|Ireland        |  | 102.8                |  | 300.7               
|Nigeria        |  | 74.4                 |  | 69.9                
|Kuwait         |  | 70.3                 |  | 80.7                
|Hong Kong      |  | 66.8                 |  | 54.9                
|United Kingdom |  | 35.8                 |  | 62.1                
|Germany        |  | 30.3                 |  | 41.7                
|All other      |  | 533.9                |  | 571.2               
|               |  |                      |  |                     
|               |  | 4,394.5              |  | 4,621.7             
|               |  |                      |  |                     



The company endeavours to limit counterparty risk through diligent selection of counterparties to its derivative contracts and through the terms of negotiated agreements.
Pursuant to these agreements, counterparties are contractually required to deposit eligible collateral in collateral accounts (subject to certain minimum
thresholds) for the benefit of the company based on the then daily fair value of the derivative contracts. Agreements negotiated with counterparties provide for a single net settlement of all
financial instruments covered by the agreement in the event of default by the counterparty, thereby permitting obligations owed by the company to a counterparty to be offset to the extent of the
aggregate amount receivable by the company from that counterparty. The company's exposure to derivative counterparty risk at December 31, 2016 was estimated to be $105.8 (December 31,
2015  $314.4).

164

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Refer to note 24 (Financial Risk Management) under the heading Credit Risk  Counterparties to Derivative Contracts in the company's consolidated financial
statements for the year ended December 31, 2016 for a discussion and tabular analysis of the company's exposure to derivative counterparty risk.



Fairfax's float (a non-IFRS measure) is the sum of its loss reserves, including loss adjustment expense reserves, unearned premium reserves and other insurance contract
liabilities, less insurance contract receivables, recoverable from reinsurers and deferred premium acquisition costs. The annual benefit (cost) of float is calculated by dividing the underwriting
profit (loss) by the average float in that year. Float arises as an insurance or reinsurance business receives premiums in advance of the payment of claims.

The
following table presents the accumulated float and the cost of generating that float for Fairfax's insurance and reinsurance operations. The average float from those operations increased by 8.8%
in 2016 to $13,748.6, at no cost.

|Year                                                                  |  | Underwriting
profit (loss)(1) |  | Average
float |  | Cost (benefit)
of float |  | Average long
term Canada
treasury
bond yield
|--------------------------------------------------------------------- |  | ----------------------------- |  | ------------- |  | ----------------------- |  | --------------------------------------------
|1986                                                                  |  | 2.5                           |  | 21.6          |  | (11.6)%                 |  | 9.6%                                        
|--                                                                    |  |                               |  |               |  |                         |  |                                             
|2012                                                                  |  | 6.1                           |  | 11,906.0      |  | (0.1)%                  |  | 2.4%                                        
|2013                                                                  |  | 440.0                         |  | 12,045.7      |  | (3.7)%                  |  | 2.8%                                        
|2014                                                                  |  | 552.0                         |  | 11,707.4      |  | (4.7)%                  |  | 2.8%                                        
|2015                                                                  |  | 704.5                         |  | 12,634.9      |  | (5.6)%                  |  | 2.2%                                        
|2016                                                                  |  | 575.9                         |  | 13,748.6      |  | (4.2)%                  |  | 1.9%                                        
|Weighted average since inception                                      |  |                               |  |               |  | 0.4%                    |  | 3.8%                                        
|Fairfax's weighted average net benefit of float since inception: 3.4% |  |                              

The following table presents a breakdown of total year-end float for the most recent five years.

|     |  | Insurance and Reinsurance |  |         |  |         |  |        
|---- |  | ------------------------- |  | ------- |  | ------- |  | -------
|
|2012 |  | 2,314.1                   |  | 4,905.9 |  | 2,354.9 |  | 1,154.2
|2013 |  | 2,112.0                   |  | 4,673.5 |  | 2,338.7 |  | 1,202.3
|2014 |  | 1,910.8                   |  | 4,492.3 |  | 2,562.7 |  | 1,195.2
|2015 |  | 1,626.1                   |  | 4,172.2 |  | 2,593.6 |  | 1,217.1
|2016 |  | 1,670.7                   |  | 4,024.6 |  | 2,706.5 |  | 1,179.1

During 2016 the company's total float decreased by $398.7 to $16,672.9.

165

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Financial Condition



The company manages its capital based on the following financial measurements and ratios:

|                                                                                    |  | December 31, |  
|----------------------------------------------------------------------------------- |  | ------------ | -
|
|Holding company cash and investments (net of short sale and derivative obligations) |  | 1,329.4      |  
|                                                                                    |  |              |  
|Borrowings  holding company                                                        |  | 3,472.5      |  
|Borrowings  insurance and reinsurance companies                                    |  | 435.5        |  
|Borrowings  non-insurance companies                                                |  | 859.6        |  
|                                                                                    |  |              |  
|Total debt                                                                          |  | 4,767.6      |  
|                                                                                    |  |              |  
|Net debt(1)                                                                         |  | 3,438.2      |  
|                                                                                    |  |              |  
|Common shareholders' equity                                                         |  | 8,484.6      |  
|Preferred stock                                                                     |  | 1,335.5      |  
|Non-controlling interests                                                           |  | 2,000.0      |  
|                                                                                    |  |              |  
|Total equity                                                                        |  | 11,820.1     |  
|                                                                                    |  |              |  
|Net debt/total equity                                                               |  | 29.1         | %
|Net debt/net total capital(2)                                                       |  | 22.5         | %
|Total debt/total capital(3)                                                         |  | 28.7         | %
|Interest coverage(4)                                                                |  | n/a          |  
|Interest and preferred share dividend distribution coverage(5)                      |  | n/a          |  

Holding
company borrowings at December 31, 2016 increased by $873.5 to $3,472.5 from $2,599.0 at December 31, 2015, primarily reflecting the issuances of holding company unsecured senior
notes (Cdn$400.0 principal amount due 2023 issued on March 22, 2016 and Cdn$450.0 principal amount due 2026 issued on December 16, 2016), borrowings on a short term basis of $200.0 on
Fairfax's revolving credit facility and the impact of foreign currency translation on the company's Canadian dollar denominated long term debt.

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Subsidiary
borrowings (comprised of borrowings of the insurance and reinsurance companies and borrowings of the non-insurance companies) at December 31, 2016 increased by $542.6 to $1,295.1
from $752.5 at December 31, 2015, primarily reflecting Fairfax India's term loan of $225.0 to fund additional investments and Cara's aggregate borrowings of $292.4 (Cdn$392.0) principally
related to funding its acquisitions of St-Hubert and Original Joe's.

Common
shareholders' equity at December 31, 2016 decreased by $467.9 to $8,484.6 from $8,952.5 at December 31, 2015, primarily reflecting the net loss attributable to shareholders of
Fairfax ($512.5), the payment of dividends on the company's common and preferred shares ($271.8) and other comprehensive loss of $183.9 (primarily $98.9 related to net unrealized foreign currency
translation losses of foreign operations), partially offset by net proceeds from the issuance of 1.0 million subordinate voting shares on March 2, 2016 ($523.5).

The
changes in holding company borrowings, subsidiary borrowings and common shareholders' equity affected the company's leverage ratios as follows: the consolidated net debt/net total capital ratio
increased to 22.5% at December 31, 2016 from 14.7% at December 31, 2015 primarily as a result of increased net debt, partially offset by increased net total capital. The increase in net
debt was due to increased total debt (primarily the issuance of holding company unsecured senior notes, borrowings on Fairfax's revolving credit facility and an increase in subsidiary borrowings as
described above). The increase in net total capital was primarily due to increases in non-controlling interests and net debt, partially offset by decreased common shareholders' equity
(as described in the preceding paragraph). The consolidated total debt/total capital ratio increased to 28.7% at December 31, 2016 from 21.8% at December 31, 2015 primarily as a
result of increased total debt, partially offset by increased total capital (primarily reflecting increases in non-controlling interests and total debt, partially offset by decreased common
shareholders' equity).

The
company believes that holding company cash and investments, net of short sale and derivative obligations, at December 31, 2016 of $1,329.4 (December 31,
2015  $1,275.9) provide adequate liquidity to meet the holding company's known commitments in 2017. Refer to the Liquidity section of this MD&A for a discussion
of the holding company's available sources of liquidity and known significant commitments for 2017.

The
company's insurance and reinsurance operating companies continue to maintain capital above minimum regulatory levels, at levels adequate to support their issuer credit and financial strength
ratings, and above internally calculated risk management levels as discussed below. A common non-IFRS measure of capital adequacy in the property and casualty industry is the ratio of net premiums
written to statutory surplus (or total equity). This ratio is shown for the insurance and reinsurance operating companies for the most recent five years in the following table:

|                            |                        | Net premiums written to statutory
surplus (total equity)
|--------------------------- | ---------------------- | --------------------------------------------------------
|
|Insurance and Reinsurance   |                        |                                                         
|                            | Northbridge (Canada)   |                                                         
|                            | OdysseyRe (U.S.)       |                                                         
|                            | Crum & Forster (U.S.)  |                                                         
|                            | Zenith National (U.S.) |                                                         
|                            | Brit(1)                |                                                         
|                            | Fairfax Asia(2)        |                                                         
|                            | Other(3)               |                                                         
|Canadian insurance industry |                        | 1.0                                                     
|U.S. insurance industry     |                        | 0.7                                                     

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

167

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quantify
the risk of a company's insurance and reinsurance, investment and other business activities. At December 31, 2016 OdysseyRe, Crum & Forster, Zenith National and
U.S. runoff subsidiaries had capital and surplus in excess of the regulatory minimum requirement of two times the authorized control level; each subsidiary had capital and surplus of at least
3.4 times (December 31, 2015  3.6 times) the authorized control level, except for TIG Insurance which had 2.2 times
(December 31, 2015  3.0 times).

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, 2016 Northbridge's subsidiaries had a weighted average MCT ratio of 211% of the minimum statutory capital required, compared to 198% at
December 31, 2015.

The
Lloyd's market is subject to the solvency and capital adequacy requirements of the Prudential Regulatory Authority in the U.K. The capital requirements of Brit are based on the output of an
internal model which reflects the risk profile of the business. At December 31, 2016 Brit's available capital consisted of net tangible assets (total assets less any intangible assets
and all liabilities), subordinated debt and contingent funding in the form of letters of credit and amounted to $1,457.3 (December 31, 2015  $1,495.5).
This represented a surplus of $297.1 (December 31, 2015  $329.5) over the management capital requirements (capital required for business strategy and
regulatory requirements), compared to Brit's minimum targeted surplus of $200.0 (December 31, 2015  $185.0).

In
countries other than the U.S. and Canada where the company operates (the United Kingdom, Barbados, Singapore, Malaysia, Sri Lanka, Hong Kong, Poland, Brazil, South Africa, Indonesia
and other jurisdictions), the company met or exceeded the applicable regulatory capital requirements at December 31, 2016.

The
issuer credit ratings and financial strength ratings of Fairfax and its insurance and reinsurance operating companies at December 31, 2016 were as follows:

|Issuer Credit Ratings                        |  | A.M. Best |  | Standard
& Poor's |  | Moody's |  | DBRS   
|-------------------------------------------- |  | --------- |  | ----------------- |  | ------- |  | -------
|Fairfax Financial Holdings Limited           |  | bbb       |  | BBB-              |  | Baa3    |  | BBB    
|Financial Strength Ratings                   |  |           |  |                   |  |         |  |        
|Crum & Forster Holdings Corp.(1)             |  | A         |  | A-                |  | Baa1    |  |       
|Zenith National Insurance Corp.(1)           |  | A         |  | A-                |  | Baa1    |  |       
|Odyssey Re Holdings Corp.(1)                 |  | A         |  | A-                |  | A3      |  |       
|Brit Limited(2)                              |  | A         |  | A+                |  |        |  |       
|Northbridge Commercial Insurance Corp.       |  | A         |  | A-                |  |        |  |       
|Northbridge General Insurance Corp.          |  | A         |  | A-                |  | A3      |  | A (low)
|Federated Insurance Company of Canada        |  | A         |  | A-                |  |        |  | A (low)
|Wentworth Insurance Company Ltd.             |  | A         |  |                  |  |        |  |       
|First Capital Insurance Limited              |  | A         |  |                  |  |        |  |       
|Falcon Insurance Company (Hong Kong) Limited |  |          |  | A-                |  |        |  |       
|Advent Capital (Holdings) Ltd.(2)            |  | A         |  | A+                |  |        |  |       
|Polish Re                                    |  | A-        |  |                  |  |        |  |       

During
2016 Standard & Poor's upgraded the Financial Strength Ratings of Zenith National's operating companies from a rating of "BBB+" at December 31, 2015 to a rating of "A-" at
December 31, 2016.



Common shareholders' equity at December 31, 2016 of $8,484.6 or $367.40 per basic share (excluding the unrecorded $1,001.7 excess of fair value over the carrying value of
investments in associates and certain consolidated non-insurance subsidiaries) compared to $8,952.5 or $403.01 per basic share (excluding the unrecorded $1,040.9 excess of fair value over the carrying
value of investments in associates and certain consolidated non-insurance subsidiaries) at December 31, 2015, representing a decrease per basic share in 2016 of 8.8% (without adjustment for the
$10.00 per common share dividend paid in the first quarter of 2016, or a decrease of 6.4% adjusted to include that dividend). During 2016 the number of basic shares increased primarily as a result of
the issuance of 1.0 million

168

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subordinate
voting shares, partially offset by net repurchases of 89,561 subordinate voting shares for treasury (for use in the company's share-based payment awards) and purchases of
30,732 subordinate voting shares for cancellation. At December 31, 2016 there were 23,093,566 common shares effectively outstanding.

The
company has issued and repurchased common shares in the most recent five years as follows:

|Date                        |  | Number of
subordinate
voting shares |   | Average
issue/repurchase
price per share |  | Net proceeds/
(repurchase cost) |  
|--------------------------- |  | ----------------------------------- | - | ---------------------------------------- |  | ------------------------------- | -
|2013  issuance of shares   |  | 1,000,000                           |   | 399.49                                   |  | 399.5                           |  
|2013  repurchase of shares |  | (36                                 | ) | 402.78                                   |  |                                |  
|2014  repurchase of shares |  | (8                                  | ) | 430.98                                   |  |                                |  
|2015  issuance of shares   |  | 1,169,294                           |   | 502.01                                   |  | 587.0                           |  
|2016  issuance of shares   |  | 1,000,000                           |   | 523.50                                   |  | 523.5                           |  
|2016  repurchase of shares |  | (30,732                             | ) | 458.81                                   |  | (14.1                           | )

On September 28, 2016 the company commenced its normal course issuer bid by which it is authorized, until expiry of the bid on September 27, 2017, to acquire up to
800,000 subordinate voting shares, 601,538 Series C preferred shares, 356,601 Series D preferred shares, 396,713 Series E preferred shares,
357,204 Series F preferred shares, 743,295 Series G preferred shares, 256,704 Series H preferred shares, 1,046,555 Series I preferred shares,
153,444 Series J preferred shares, 950,000 Series K preferred shares and 920,000 Series M preferred shares, representing at that date approximately 3.5% of
the public float in respect of the subordinate voting shares and
10% of the public float in respect of each series of preferred shares. Decisions regarding any future repurchases will be based on market conditions, share price and other factors including
opportunities to invest capital for growth. The Notice of Intention to Make a Normal Course Issuer Bid is available by contacting the Corporate Secretary of the company.

Virtually
all of the share issuances in 2013, 2015 and 2016 were pursuant to public offerings. During 2012, 2013, 2014 and 2015 the company did not repurchase for cancellation any subordinate voting
shares under the terms of normal course issuer bids. During 2013 and 2014 the company repurchased 36 shares and 8 shares respectively for cancellation from former employees. During 2016
the company repurchased 30,732 shares for cancellation.

The
company's indirect ownership of its own shares through The Sixty Two Investment Company Limited results in an effective reduction of shares outstanding by 799,230, and this reduction has been
reflected in the earnings per share and book value per share figures.

The
table below presents the excess (deficiency) of fair value over carrying value of investments in associates and certain non-insurance subsidiaries the company considers to be portfolio investments
but that are required to be consolidated under IFRS. The aggregate excess of fair value over carrying value of these investments is not included in the calculation of book value per share.

|                                     |  | December 31, 2016 |  | December 31, 2015 | 
|------------------------------------ |  | ----------------- |  | ----------------- | 
|
|Insurance and reinsurance associates |  | 1,514.8           |  | 940.5             | 
|Non-insurance associates(2)          |  | 1,440.6           |  | 1,452.5           | 
|Cara                                 |  | 433.9             |  | 454.9             | 
|Fairfax India                        |  | 355.7             |  | 290.4             | 
|Thomas Cook India                    |  | 691.2             |  | 296.2             | 
|                                     |  |                   |  |                   | 
|                                     |  | 4,436.2           |  | 3,434.5           | 
|                                     |  |                   |  |                   | 

169

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Holding company cash and investments at December 31, 2016 totaled $1,371.6 ($1,329.4 net of $42.2 of holding company short sale and derivative obligations) compared to
$1,276.5 at December 31, 2015 ($1,275.9 net of $0.6 of holding company short sale and derivative obligations).

Significant
cash and investment movements at the Fairfax holding company level during 2016 included the following significant outflows: the payment of $271.8 common and preferred shares dividends, the
purchase of an additional 9% ownership interest in ICICI Lombard, the acquisition of a 40% indirect interest in Eurolife, the payment of $165.8 of interest on long term debt, net consideration paid of
$151.9 to acquire an 80% interest in AMAG and net consideration paid of $79.9 to acquire Bryte Insurance. Significant inflows during 2016 included the following: net proceeds from the company's
underwritten public offerings ($523.5 from the issuance of 1.0 million subordinate voting shares and $303.2 from the issuance of Cdn $400.0 principal amount of 4.50% unsecured senior notes due
2023 (to finance the investments in ICICI Lombard, AMAG and Eurolife) and $334.5 from the issuance of Cdn$450.0 principal amount of 4.70% unsecured senior notes due 2026 (intended to finance
the tender offers for certain of the company's senior notes)), borrowings of $200.0 on Fairfax's revolving credit facility and dividends from subsidiaries (primarily OdysseyRe ($200.0), Zenith
National ($119.5), Brit ($61.3), and Crum and Forster ($50.0)). The carrying value of holding company cash and investments was also affected by the following: receipt of investment management and
administration fees, disbursements associated with corporate overhead expenses and costs in connection with the repurchase of subordinate voting shares for treasury. The carrying values of holding
company investments vary with changes in the fair values of those investments.

The
company believes that holding company cash and investments, net of holding company short sale and derivative obligations at December 31, 2016 of $1,329.4 provides adequate liquidity to meet
the holding company's known commitments in 2017. 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
$1.0 billion unsecured revolving credit facility (for further details related to the credit facility, refer to note 15 (Borrowings) to the consolidated financial statements for
the year ended December 31, 2016).

The
holding company's known significant commitments for 2017 consist of payment of the $237.4 ($10.00 per share) dividend on common shares (paid January 2017), interest and corporate overhead
expenses, preferred
share dividends, income tax payments, potential cash outflows related to derivative contracts (described below), the anticipated acquisitions of Allied World, Tower and certain AIG operations in Latin
America and Central and Eastern Europe, investments in Fairfax India (completed January 13, 2017) and Fairfax Africa (completed February 17, 2017), and up to Cdn$250 of funding for
tender offers for certain of the company's senior notes. The net proceeds from an underwritten public offering of Cdn$450.0 principal amount of 4.70% unsecured senior notes due December 16,
2026, which closed on December 16, 2016, will be used to finance the tender offers (for further details related to the tender offers and the senior notes offerings, refer to
note 15 (Borrowings) to the consolidated financial statements for the year ended December 31, 2016).

The
closure in the fourth quarter of 2016 of all of the company's short positions effected through total return swaps in the Russell 2000, S&P 500 and S&P/TSX 60 equity indexes should
significantly reduce cash flow volatility in future periods notwithstanding the discussion in the subsequent three paragraphs.

The
holding company may experience cash inflows or outflows (which at times could be significant) related to its derivative contracts, including collateral requirements and cash settlements of market
value movements of total return swaps which have occurred since the most recent reset date. During 2016 the holding company paid net cash of $91.0
(2015  received net cash of $34.9) in connection with long and short equity and equity index total return swap derivative contracts (excluding the impact of
collateral requirements).

During
2016 subsidiary cash and short term investments (including cash and short term investments pledged for short sale and derivative obligations) increased by $3,472.5 primarily reflecting cash
received from net sales of U.S. government and U.S. state and municipal bonds, partially offset by net cash paid in connection with long and short equity and equity index total return
swap derivative contracts, the acquisitions of investments in associates, and dividends paid by the operating companies to Fairfax.

The
insurance and reinsurance subsidiaries may experience cash inflows or outflows (which at times could be significant) related to their derivative contracts including collateral requirements and
cash settlements of market

170

---



value
movements of total return swaps which have occurred since the most recent reset date. During 2016 the insurance and reinsurance subsidiaries paid net cash of $814.4
(2015  received net cash of $225.4) 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 any such obligations from cash provided by operating activities. In addition, obligations incurred in respect of
short equity and equity index total return swaps may be funded from sales of equity-related investments, the market values of which will generally vary inversely with the market values of the short
equity and equity index total return swaps.

The
following table presents major components of cash flow for the years ended December 31, 2016 and 2015:

|                                                      |                                                                                        | 2016    |         | 2015  |         
|----------------------------------------------------- | -------------------------------------------------------------------------------------- | ------- | ------- | ----- | --------
|Operating activities                                  |                                                                                        |         |         |       |         
|                                                      | Cash provided by operating activities before the undernoted                            |         | 138.9   |       | 629.0   
|                                                      | Net sales (purchases) of investments classified as FVTPL                               |         | 1,119.3 |       | (484.3  
|Investing activities                                  |                                                                                        |         |         |       |         
|                                                      | Net purchases of investments in associates                                             |         | (689.5  | )     | (112.0  
|                                                      | Purchases of subsidiaries, net of cash acquired                                        |         | (779.1  | )     | (1,455.6
|                                                      | Sales of subsidiaries, net of cash divested                                            |         |        |       | 304.4   
|                                                      | Net purchases of premises and equipment and intangible assets                          |         | (208.3  | )     | (201.3  
|                                                      | Decrease (increase) in restricted cash for purchase of subsidiary                      |         | 6.5     |       | (6.5    
|Financing activities                                  |                                                                                        |         |         |       |         
|                                                      | Net proceeds from borrowings  holding company and insurance and reinsurance companies |         | 637.7   |       | 275.7   
|                                                      | Repayment of borrowings  holding company and insurance and reinsurance companies      |         | (5.4    | )     | (212.4  
|                                                      | Net borrowings from holding company revolving credit facility                          |         | 200.0   |       |        
|                                                      | Net proceeds from borrowings  non-insurance companies                                 |         | 360.5   |       | 54.2    
|                                                      | Repayment of borrowings  non-insurance companies                                      |         | (38.9   | )     | (5.8    
|                                                      | Net borrowings from revolving credit facilities  non-insurance companies              |         | 193.6   |       | 18.4    
|                                                      | Issuances of subordinate voting shares                                                 |         | 523.5   |       | 575.9   
|                                                      | Issuance of preferred shares                                                           |         |        |       | 179.0   
|                                                      | Repurchases of preferred shares for cancellation                                       |         |        |       | (4.8    
|                                                      | Purchases of subordinate voting shares for treasury                                    |         | (64.2   | )     | (95.5   
|                                                      | Purchases of subordinate voting shares for cancellation                                |         | (14.1   | )     |        
|                                                      | Issuances of subsidiary common shares to non-controlling interests                     |         | 157.1   |       | 725.8   
|                                                      | Increase in restricted cash related to financing activities                            |         | (18.9   | )     |        
|                                                      | Net sales (purchases) of subsidiary common shares to (from) non-controlling interests  |         | (74.5   | )     | 430.0   
|                                                      | Common and preferred share dividends paid                                              |         | (271.8  | )     | (265.4  
|                                                      | Dividends paid to non-controlling interests                                            |         | (41.2   | )     | (5.0    
|                                                      |                                                                                        |         |         |       |         
|Increase in cash and cash equivalents during the year |                                                                                        | 1,131.2 |         | 343.8 |         
|                                                      |                                                                                        |         |         |       |         

Cash provided by operating activities (excluding net purchases of investments classified as FVTPL) decreased from $629.0 in 2015 to $138.9 in 2016, primarily as a result of
higher net paid losses, partially offset by higher net premiums collected. Refer to note 27 (Supplementary Cash Flow Information) to the consolidated financial statements for the year ended
December 31, 2016 for details of net purchases of securities classified as FVTPL.

Net
purchases of investments in associates of $689.5 in 2016 primarily reflected the purchase of additional ownership interests in ICICI Lombard (ownership increased 9%) and APR Energy, Fairfax
India's investment in Fairchem (44.9%), and the acquisition of indirect interests in Eurolife (40.0%) and Performance Sports (38.2%), partially offset by distributions from the
company's insurance and non-insurance associates. Net purchases of investment in associates of $112.0 in 2015 primarily reflected Fairfax India's investment in IIFL (21.9%), Fairfax Asia's
investment in BIC Insurance (35%) and Brit's investment in Ambridge Partners (50%), partially offset by distributions from the company's non-insurance associates. Purchases of
subsidiaries, net of cash acquired of $779.1 in 2016 primarily related to Cara's acquisitions of St-Hubert (100%) and Original Joe's (89.2%), Fairfax Asia's acquisition of AMAG (80%), Fairfax India's
acquisition of Privi Organics (50.8%) and the acquisitions of Bryte Insurance (100%) and Golf Town (60%). Purchases of subsidiaries, net of cash acquired of $1,455.6 in 2015 primarily related to the
acquisition of Brit (97.0%), Fairfax India's acquisition of NCML, Thomas Cook India's acquisitions of

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Kuoni
Hong Kong and Kuoni India, Fairfax Asia's acquisition of Union Assurance (78.0%), Crum's acquisition of Redwoods, and Pacific Insurance's acquisition of MCIS.

Net
proceeds from borrowings  holding company and insurance and reinsurance companies of $637.7 reflected net proceeds from the issuance of Cdn $400.0 principal
amount of 4.50% unsecured senior notes due March 22, 2023 and Cdn$450.0 principal amount of 4.70% unsecured senior notes due December 16, 2026. Issuance of subordinate voting shares of
$523.5 in 2016 reflected net proceeds received from the underwritten public offering of 1.0 million subordinate voting shares. In 2015 the company completed three underwritten public offerings:
the issuance of 1.15 million subordinate voting shares of $575.9 (Cdn$717.1), the issuance of long term debt of $275.7 (net proceeds from the issuance of Cdn$350.0 principal amount of
4.95% unsecured senior notes due March 3, 2025) and the issuance of 9,200,000 cumulative five-year reset preferred shares, Series M of $179.0 (Cdn$222.9) which formed part of the
financing for the acquisition of Brit. Repayment of borrowings  holding company and insurance and reinsurance companies of $212.4 in 2015 primarily reflected the
repayment upon maturity of OdysseyRe and Fairfax unsecured senior notes ($125.0 and $82.4 principal amounts respectively). Net proceeds from
borrowings  non-insurance of $360.5 in 2016 reflected net proceeds from Cara's floating rate term loan of $115.2 (Cdn $150.0) maturing on
September 2, 2019 to finance its acquisition of St-Hubert and Fairfax India's use of its term loan ($225.0) to fund its investments. Net proceeds from
borrowings  non-insurance of $54.2 in 2015 principally reflected additional financing at Thomas Cook India in respect of its acquisitions and the issuance of
$15.2 (1.0 billion Indian rupees) principal amount of its debentures due 2020. Net borrowings from revolving credit facilities  non-insurance companies of
$193.6 in 2016 principally reflected Cara's borrowing on its floating rate revolving credit facility to finance its acquisitions of St-Hubert and Original Joe's. Purchases of subordinate voting shares
for treasury in 2016 of $64.2 (2015  $95.5) were for the company's share-based payment awards. Issuance of subsidiary common shares to non-controlling interests
of $157.1 in 2016 primarily reflected Cara's issuance of subordinate common shares to finance its acquisition of St-Hubert and the issuance of common shares by Quess as a result of its initial public
offering. Issuance of subsidiary common shares of $725.8 in 2015 reflected the offerings of Fairfax India's common shares. Net purchases of subsidiary common shares from non-controlling interests of
$74.5 in 2016 primarily reflected the repurchase by Brit of its common shares from OMERS and the repurchase of common shares for cancellation by Fairfax India. Net sales of subsidiary common shares to
non-controlling interests of $430.0 in 2015 primarily reflected the sale of a 29.9% interest in Brit to OMERS. The company paid common and preferred share dividends of $227.8 and $44.0 in 2016
respectively (2015  $216.1 and $49.3).



The following table sets out the expected payment schedule of the company's significant contractual obligations as at December 31, 2016:

|                                                  |  | Less than
1 year |  | 1-3 years |  | 3-5 years |  | More than
5 years |  | Total   
|------------------------------------------------- |  | ---------------- |  | --------- |  | --------- |  | ----------------- |  | --------
|Provision for losses and loss adjustment expenses |  | 5,273.5          |  | 5,664.4   |  | 3,428.0   |  | 5,115.9           |  | 19,481.8
|Borrowings  principal                            |  | 715.7            |  | 650.8     |  | 1,299.6   |  | 2,117.4           |  | 4,783.5 
|Borrowings  interest                             |  | 249.1            |  | 443.1     |  | 334.5     |  | 610.0             |  | 1,636.7 
|Operating leases                                  |  | 142.7            |  | 255.8     |  | 208.6     |  | 328.1             |  | 935.2   
|                                                  |  |                  |  |           |  |           |  |                   |  |         
|                                                  |  | 6,381.0          |  | 7,014.1   |  | 5,270.7   |  | 8,171.4           |  | 26,837.2
|                                                  |  |                  |  |           |  |           |  |                   |  |         

For further detail on the maturity profile of the company's financial liabilities, please see the heading Liquidity Risk in note 24 (Financial Risk Management) to the
consolidated financial statements for the year ended December 31, 2016.



For a full description of these matters, please see note 20 (Contingencies and Commitments) to the consolidated financial statements for the year ended
December 31, 2016.

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Accounting and Disclosure Matters



Under the supervision and with the participation of the company's management, including the company's CEO and CFO, the company conducted an evaluation of the effectiveness of
its disclosure controls and procedures as of December 31, 2016, as required by Canadian securities legislation. Disclosure controls and procedures are designed to ensure that the information
required to be disclosed by the company in the reports it files or submits under securities legislation is recorded, processed, summarized and reported on a timely basis and that such information is
accumulated and reported to management, including the company's CEO and CFO, as appropriate, to allow required disclosures to be made in a timely fashion. Based on their evaluation, the CEO and CFO
have concluded that as of December 31, 2016, the company's disclosure controls and procedures were effective.



The company's management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the
Securities Exchange Act of 1934 and under National Instrument 52-109). The company's internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with International Financial Reporting Standards as issued by the International
Accounting Standards Board. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.

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

The
company's management assessed the effectiveness of the company's internal control over financial reporting as of December 31, 2016. In making this assessment, the company's management used
the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") inInternal Control  Integrated
Framework (2013).The company's management, including the CEO and CFO, concluded that, as of December 31, 2016, the company's internal control over financial reporting
was effective based on the criteria inInternal Control  Integrated Framework (2013)issued by COSO.

Pursuant
to the requirements of the U.S. Securities Exchange Act, the effectiveness of the company's internal control over financial reporting as of December 31, 2016, has been audited
by PricewaterhouseCoopers LLP, an independent auditor, as stated in its report which appears within this Annual Report.



Please refer to note 4 (Critical Accounting Estimates and Judgments) to the consolidated financial statements for the year ended December 31, 2016.



There were no significant accounting policy changes during 2016. Please refer to note 3 (Summary of Significant Accounting Policies) to the consolidated financial
statements for the year ended December 31, 2016 for a detailed description of the company's accounting policies.



Certain new IFRS may have a significant impact on the company's consolidated financial reporting in the future. Each of those standards will require a moderate to high degree of
implementation effort within the next four years as

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described
below. The company does not expect to adopt any of these new standards in advance of their respective effective dates. New standards and amendments that have been issued but are not
yet effective are also described in note 3 (Summary of Significant Accounting Policies) to the consolidated financial statements for the year ended December 31, 2016.

IFRS 9 Financial Instruments ("IFRS 9")

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

The
company has commenced evaluating the impact of IFRS 9 by assessing its business models and the cash flow characteristics of its financial assets to determine their appropriate
classifications under the new standard. The company expects equities and derivative instruments held within the company's investment portfolio to continue to be classified as FVTPL under
IFRS 9, and the classification of financial liabilities to also remain largely unchanged from IFRS 9 (2010). Upon adopting IFRS 9 on January 1, 2018 the company does not
expect to restate comparative periods, and will record any necessary adjustments to opening retained earnings as permitted by the standard.

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

In May of 2014 the IASB issued 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. In April of 2016 the IASB issued amendments to clarify certain aspects of IFRS 15 and to provide additional
practical expedients upon transition. The standard is effective for annual periods beginning on or after January 1, 2018, with retrospective application.

During
2016 the company developed a detailed project plan for the implementation of IFRS 15 and conducted an impact assessment involving all of its significant operating companies that focused
on identifying potential differences under IFRS 15 compared to current accounting policies, by industry and key revenue streams. Based on the results of that assessment, the company does not
expect IFRS 15 to have a significant impact on its consolidated financial reporting, and has commenced further study of a limited number of potential issues for certain of the non-insurance
companies, particularly in the restaurant, travel and hospitality industries. Upon adopting IFRS 15 on January 1, 2018 the company does not expect to restate comparative periods, and
will record any necessary adjustments to opening retained earnings as permitted by the standard.

IFRS 16 Leases ("IFRS 16")

In January of 2016 the IASB issued IFRS 16 which largely eliminates the current distinction between finance and operating leases for lessees. With limited exceptions,
lessees will be required to recognize a right-of-use asset and a liability for its obligation to make lease payments. The standard is effective for annual periods beginning on or after
January 1, 2019, with modified retrospective application.

The
company is currently developing a detailed implementation plan for IFRS 16 and expects to have each of its operating companies undertake a detailed inventory of leases during 2017 to
determine completeness of detailed historic lease data required for IFRS 16 transition calculations and to address any further data requirements. A study will also be undertaken in 2017 to
identify enhancements to current processes and information systems that may be required to embed IFRS 16 lease liability calculations within the company's financial reporting.

IFRS 17 Insurance Contracts ("IFRS 17")

An initial exposure draft ofInsurance Contractswas issued by the IASB in July of 2010 followed by a revised exposure draft in
June of 2013. The proposed standard is comprehensive in scope and addresses recognition, measurement, presentation and disclosure for insurance contracts. The measurement approach is based on the
following building blocks: (i) a current, unbiased probability-weighted estimate of future cash flows expected to arise as the insurer fulfills the contract; (ii) the effect of the time
value of money; (iii) a risk adjustment that measures the effects of uncertainty about the amount and timing of future cash flows; and (iv) a contractual service margin which represents
the unearned profit in a contract (that is recognized in net earnings as the insurer fulfills its performance

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obligations
under the contract). Estimates are required to be re-measured each reporting period. In addition, a simplified measurement approach is permitted for short-duration contracts in which the
coverage period is approximately one year or less. The final standard is expected to be published in May of 2017, with an effective date of January 1, 2021. Retrospective application will be
required with some practical expedients available on adoption.

The
company has commenced evaluating the impact of the proposed standard on its financial reporting, and potentially, its business activities. The building block approach and the need for current
estimates could significantly increase operational complexity compared to existing practice. The use of different measurement models depending on whether an insurance contract is considered
short-duration or long-duration under the proposed standard presents certain implementation challenges and the presentation requirements significantly alter the disclosure of profit and loss from
insurance contracts in the consolidated financial statements. The company expects to devote significant effort to analyzing IFRS 17 upon its publication and to conduct more extensive impact
assessments and implementation planning shortly thereafter.

Risk Management



The primary goals of the company's financial risk management program are to ensure that the outcomes of activities involving elements of risk are consistent with the company's
objectives and risk tolerance, while maintaining an appropriate balance between risk and reward and protecting the company's consolidated balance sheet from events that have the potential to
materially impair its financial strength. Please refer to note 24 (Financial Risk Management) to the consolidated financial statements for the year ended December 31, 2016 for a detailed
discussion of the company's risk management policies.



The following issues and risks, among others, should be considered in evaluating the outlook of the company. For further detail about the issues and risks relating to the
company, please see Risk Factors in Fairfax's most recent Short Form Base Shelf Prospectus and Supplements filed with the securities regulatory authorities in Canada, which are available on SEDAR at
www.sedar.com.

Claims Reserves

Reserves are maintained to cover the estimated ultimate unpaid liability for losses and loss adjustment expenses with respect to reported and unreported claims incurred as of
the end of each accounting period. The company's success is dependent upon its ability to accurately assess the risks associated with the businesses being insured or reinsured. Failure to accurately
assess the risks assumed may lead to the setting of inappropriate premium rates and establishing reserves that are inadequate to cover losses. This could adversely affect the company's net earnings
and financial condition.

Reserves
do not represent an exact calculation of liability, but instead represent estimates at a given point in time involving actuarial and statistical projections of the company's expectations of
the ultimate settlement and administration costs of claims incurred. Establishing an appropriate level of claims reserves is an inherently uncertain process. Both proprietary and commercially
available actuarial models, as well as historical insurance industry loss development patterns, are utilized in the establishment of appropriate claims reserves. The company's management of pricing
risk is discussed in note 24 (Financial Risk Management), and management of claims reserves is discussed in note 4 (Critical Accounting Estimates and Judgments) and note 8
(Insurance Contract Liabilities), to the consolidated financial statements for the year ended December 31, 2016.

Catastrophe Exposure

The company's insurance and reinsurance operations are exposed to claims arising out of catastrophes. Catastrophes can be caused by various events, including natural events such
as hurricanes, windstorms, earthquakes, hailstorms, severe winter weather and fires, and unnatural events such as terrorist attacks and riots. The incidence and severity of catastrophes are inherently
unpredictable.

The
extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event. Most catastrophes are restricted to
small geographic areas; however, hurricanes, windstorms and earthquakes may produce significant damage in large, heavily populated areas.

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Catastrophes
can cause losses in a variety of property and casualty lines, including losses relating to business interruptions occurring in the same geographic area as the catastrophic event or in the
other geographic areas. It is possible that a catastrophic event or multiple catastrophic events could have a material adverse effect upon the company's financial condition, profitability or cash
flows. The company believes that increases in the value and geographic concentration of insured property, higher construction costs due to labour and raw material shortages following a significant
catastrophe event, and climate change could increase the severity of claims from catastrophic events in the future. The company's management of catastrophe risk is discussed in note 24
(Financial Risk Management) to the consolidated financial statements for the year ended December 31, 2016.

Cyclical Nature of the Property & Casualty Business

The financial performance of the insurance and reinsurance industries has historically tended to fluctuate due to competition, frequency of occurrence or severity of
catastrophic events, levels of capacity, general economic conditions and other factors. Demand for insurance and reinsurance is influenced significantly by underwriting results of primary insurers and
prevailing general economic conditions. Factors such as changes in the level of employment, wages, consumer spending, business investment and government spending, the volatility and strength of the
global capital markets and inflation or deflation all affect the business and economic environment and, ultimately, the demand for insurance and reinsurance products, and therefore may affect the
company's net earnings, financial position or cash flows.

The
property and casualty insurance business historically has been characterized by periods of intense price competition due to excess underwriting capacity, as well as periods when shortages of
underwriting capacity have permitted attractive premium levels. The company expects to continue to experience the effects of this cyclicality, which, during down periods, could harm its financial
position, profitability or cash flows.

In
the reinsurance industry, the supply of reinsurance is related to prevailing prices and levels of surplus capacity that, in turn, may fluctuate in response to changes in rates of return being
realized. It is possible that premium rates or other terms and conditions of trade could vary in the future, that the present level of demand will not continue because insurers, including the larger
insurers created by industry consolidation, may require less reinsurance or that the present level of supply of reinsurance could increase as a result of capital provided by existing reinsurers or
alternative forms of reinsurance capacity entering the market from recent or future market entrants. If any of these events transpire, the profitability of the company's reinsurance business could be
adversely affected.

The
company actively manages its operations to withstand the cyclical nature of the property and casualty business by maintaining sound liquidity and strong capital management as discussed in
note 24 (Financial Risk Management) to the consolidated financial statements for the year ended December 31, 2016.

Investment Portfolio

Investment returns are an important part of the company's overall profitability as the company's operating results depend in part on the performance of its investment portfolio.
The company's investment portfolio includes bonds and other debt instruments, common stocks, preferred stocks, equity-related securities and derivative instruments. Accordingly, fluctuations in the
fixed income or equity markets could impair the company's financial condition, profitability or cash flows. Investment income is derived from interest and dividends, together with net gains or losses
on investments. The portion derived from net gains or losses on investments generally fluctuates from year to year and is typically a less predictable source of investment income than interest and
dividends, particularly in the short term. The return on the portfolio and the risks associated with the investments are affected by the asset mix, which can change materially depending on market
conditions.

The
ability of the company to achieve its investment objectives is affected by general economic conditions that are beyond its control. General economic conditions can adversely affect the markets for
interest-rate-sensitive securities, including the extent and timing of investor participation in such markets, the level and volatility of interest rates and, consequently, the value of fixed income
securities. Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond the
company's control. General economic conditions, stock market conditions and many other factors can also adversely affect the equity markets and, consequently, the value of the equities owned. In
addition, defaults by third parties who fail to pay or perform on their obligations could reduce the company's investment income and net gains on investment or result in investment losses. The
company's management of credit

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risk,
liquidity risk, market risk and interest rate risk is discussed in note 24 (Financial Risk Management) to the consolidated financial statements for the year ended
December 31, 2016.

Derivative Instruments

The company may hold significant investments in derivative instruments, primarily for general protection against declines in the fair value of the company's financial assets.
Derivative instruments may be used to manage or reduce risks or as a cost-effective way to synthetically replicate the investment characteristics of an otherwise permitted investment. The market value
and liquidity of these investments are volatile or extremely volatile and may vary dramatically up or down in short periods, and their ultimate value will therefore only be known upon their
disposition or settlement.

Use
of derivative instruments is governed by the company's investment policies and exposes the company to a number of risks, including credit risk, interest rate risk, liquidity risk, inflation risk,
market risk and counterparty risk. The company endeavors to limit counterparty risk through diligent selection of counterparties to its derivative instruments and through the terms of agreements
negotiated with counterparties. Pursuant to these agreements, both parties are required to deposit eligible collateral in collateral accounts for either the benefit of the company or the counterparty
depending on the then current fair value or change in the fair value of the derivative contract.

The
company may not be able to realize its investment objectives with respect to derivative instruments, which could have a material adverse effect upon its financial position, profitability or cash
flows. The company's use of derivatives is discussed in note 7 (Short Sales and Derivatives) and management of credit risk, liquidity risk, market risk and interest rate risk is discussed in
note 24 (Financial Risk Management) to the consolidated financial statements for the year ended December 31, 2016.

Economic Hedging Strategies

The company may use derivative instruments to manage or reduce its exposure to credit risk and various market risks, including interest rate risk, equity market risk,
inflation/deflation risk and foreign currency risk. Hedging strategies may be implemented from time to time by the company to hedge risks associated with a specific financial instrument, asset or
liability or at a macro level to hedge systemic financial risk and the impact of potential future economic crisis and credit related problems on its operations and the value of its financial assets.
Credit default swaps, total return swaps and consumer price index-linked derivative instruments have typically been used to hedge macro level risks. The company's use of derivatives is discussed in
note 7 (Short Sales and Derivatives) to the consolidated financial statements for the year ended December 31, 2016.

The
company's derivative instruments may expose it to basis risk, counterparty risk, credit risk and liquidity risk, notwithstanding that the company's principal use of derivative instruments is to
hedge exposures to various risks. Basis risk is the risk that the fair value or cash flows of derivative instruments applied as economic hedges will not experience changes in exactly the opposite
directions from those of the underlying hedged exposure. This imperfect correlation between the derivative instrument and underlying hedged exposure creates the potential for excess gains or losses in
a hedging strategy which may adversely impact the net effectiveness of the hedge and may diminish the financial viability of maintaining the hedging strategy and therefore adversely impact the
company's financial condition, profitability or cash flows.

The
company regularly monitors the prospective and retrospective effectiveness of any hedging instruments and will adjust the amount and/or type of hedging instruments as required to achieve its risk
management goals. The management of credit risk and various market risks is discussed in note 24 (Financial Risk Management) to the consolidated financial statements for the year ended
December 31, 2016.

Latent Claims

The company has established loss reserves for asbestos, environmental and other latent claims that represent its best estimate of ultimate claims and claims adjustment expenses
based upon known facts and current law. As a result of significant issues surrounding liabilities of insurers, risks inherent in major litigation and diverging legal interpretations and judgments in
different jurisdictions, actual liability for these types of claims could exceed the loss reserves set by the company by an amount that could be material to the company's financial condition,
profitability or cash flows in future periods.

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The company's exposure to asbestos, environmental and other latent claims is discussed in the Asbestos, Pollution and Other Hazards section of this MD&A. The company's management of reserving risk is
discussed in note 24 (Financial Risk Management) and in note 8 (Insurance Contract Liabilities) to the consolidated financial statements for the year ended
December 31, 2016.

Recoverable from Reinsurers and Insureds

Most insurance and reinsurance companies reduce their exposure to any individual claim by reinsuring amounts in excess of their maximum desired retention. Reinsurance is an
arrangement in which an insurer, called the cedant, transfers insurance risk to another insurer, called the reinsurer, which accepts the risk in return for a premium payment. This third party
reinsurance does not relieve the company, as a cedant, of its primary obligation to the insured. Recoverable from reinsurers balances may become an issue mainly due to reinsurer solvency and credit
concerns, due to the potentially long time period over which claims may be paid and the resulting recoveries are received from the reinsurers, or due to policy disputes. If reinsurers are unwilling or
unable to pay amounts due under reinsurance contracts, the company will incur unexpected losses and its cash flows will be adversely affected. The credit risk associated with the company's reinsurance
recoverable balances is described in note 24 (Financial Risk Management) to the consolidated financial statements for the year ended December 31, 2016 and in the Recoverable from
Reinsurers section of this MD&A.

The
company's insurance and reinsurance companies write certain insurance policies, such as large deductible policies (policies where the insured retains a specific amount of any potential loss), in
which the insured must reimburse the company's insurance and reinsurance companies for certain losses. Accordingly, the company's insurance and reinsurance companies bear credit risk on these policies
as there is no assurance that the insureds will provide reimbursement on a timely basis or at all.

Acquisitions and Divestitures

The company may periodically and opportunistically acquire other insurance and reinsurance companies or execute other strategic initiatives developed by management. Although the
company undertakes due diligence prior to the completion of an acquisition, it is possible that unanticipated factors could arise and there is no assurance that the anticipated financial or strategic
objectives following an integration effort or the
implementation of a strategic initiative will be achieved which could adversely affect the company's financial condition, profitability or cash flows.

The
strategies and performance of operating companies, and the alignment of those strategies throughout the organization, are regularly assessed through various processes involving senior management
and the company's Board of Directors.

Ratings

Financial strength and credit ratings by the major North American rating agencies are important factors in establishing competitive position for insurance and reinsurance
companies. The claims-paying ability ratings assigned by rating agencies to reinsurance or insurance companies represent independent opinions of financial strength and ability to meet policyholder
obligations. A downgrade in these ratings could lead to a significant reduction in the number of insurance policies the company's insurance subsidiaries write and could cause early termination of
contracts written by the company's reinsurance subsidiaries or a requirement for them to post collateral at the direction of their counterparts. A downgrade of the company's long term debt ratings by
the major rating agencies could require the company and/or its subsidiaries to accelerate their cash settlement obligations for certain derivative transactions to which they are a party, and could
result in the termination of certain other derivative transactions. In addition, a downgrade of the company's credit rating may affect the cost and availability of unsecured financing. Ratings are
subject to periodic review at the discretion of each respective rating agency and may be revised downward or revoked at their sole discretion. Rating agencies may also increase their scrutiny of rated
companies, revise their rating standards or take other action. The company has dedicated personnel that manage the company's relationships with its various rating agencies.

Competition

The property and casualty insurance industry and the reinsurance industry are both highly competitive, and will likely remain highly competitive in the foreseeable future.
Competition in these industries is based on many factors, including premiums charged and other terms and conditions offered, products and services provided, commission

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structure,
financial ratings assigned by independent rating agencies, speed of claims payment, reputation, selling effort, perceived financial strength and the experience of the insurer or reinsurer
in the line of insurance or reinsurance to be written. The company competes with a large number of Canadian, U.S. and foreign insurers and reinsurers, as well as certain underwriting syndicates, some
of which have greater financial, marketing and management resources than the company. In addition, some financial institutions, such as banks, are now able to offer services similar to those offered
by the company's reinsurance subsidiaries while in recent years, capital market participants have also created alternative products that are intended to compete with reinsurance products.

Consolidation
within the insurance industry could result in insurance and reinsurance market participants using their market power to implement price reductions. If competitive pressures compel the
company to reduce its prices, the company's operating margins could decrease. As the insurance industry consolidates,
competition for customers could become more intense and the importance of acquiring and properly servicing each customer could become greater, causing the company to incur greater expenses relating to
customer acquisition and retention and further reducing operating margins. The company's management of pricing risk is discussed in note 24 (Financial Risk Management) to the consolidated
financial statements for the year ended December 31, 2016.

Emerging Claim and Coverage Issues

The provision for claims is an estimate and may be found to be deficient, perhaps very significantly, in the future as a result of unanticipated frequency or severity of claims
or for a variety of other reasons including unpredictable jury verdicts, expansion of insurance coverage to include exposures not contemplated at the time of policy issue (as was the case with
asbestos and pollution exposures) and extreme weather events. Unanticipated developments in the law as well as changes in social and environmental conditions could result in unexpected claims for
coverage under insurance and reinsurance contracts. With respect to casualty lines of business, these legal, social and environmental changes may not become apparent until some time after their
occurrence.

The
full effects of these and other unforeseen emerging claim and coverage issues are extremely hard to predict. As a result, the full extent of the company's liability under its coverages, and in
particular its casualty insurance policies and reinsurance contracts, may not be known until many years after a policy or contract is issued. The company's exposure to this uncertainty is greatest in
its "long-tail" casualty lines of business where claims can typically be made for many years, rendering them more susceptible to these trends than in the property insurance lines of business, which is
more typically "short-tail".

The
company seeks to limit its loss exposure by employing a variety of policy limits and other terms and conditions and through prudent underwriting of each program written. Loss exposure is also
limited by geographic diversification. The company's management of reserving risk is discussed in note 24 (Financial Risk Management) and in note 8 (Insurance Contract Liabilities) to
the consolidated financial statements for the year ended December 31, 2016 and in the Asbestos, Pollution and Other Hazards section of this MD&A.

Cost of Reinsurance and Adequate Protection

The company uses reinsurance arrangements, including reinsurance of its own reinsurance business purchased from other reinsurers, referred to as retrocessionaires, to help
manage its exposure to property and casualty risks. The availability of reinsurance and the rates charged by reinsurers are subject to prevailing market conditions, both in terms of price and
available capacity, which can affect the company's business volume and profitability. Reinsurance companies can also add or exclude certain coverages from, or alter terms in, the policies they offer.
Reinsurers may also impose terms, such as lower per occurrence and aggregate limits, on primary insurers that are inconsistent with corresponding terms in the policies written by these primary
insurers. In the future, alleviation of risk through reinsurance arrangements may become increasingly difficult or cost prohibitive.

The
rates charged by reinsurers and the availability of reinsurance to the company's subsidiaries will generally reflect the recent loss experience of the company and of the industry in general. For
example, the significant hurricane losses in 2004 and 2005 caused the prices for catastrophe reinsurance protection in Florida to increase significantly in 2006. In 2011 the insurance industry
experienced the second highest number of insured losses in history, primarily due to numerous catastrophes. The significant catastrophe losses incurred by reinsurers worldwide resulted in higher costs
for reinsurance protection in 2012. Currently there exists excess capital within the reinsurance market due to favourable operating results of reinsurers, no significant catastrophe losses in the last
number of years and alternative forms of reinsurance capacity entering the market. As a result, the market has become very competitive with prices decreasing for most lines of business. Each of the
company's subsidiaries continue to evaluate the relative costs and

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benefits
of accepting more risk on a net basis, reducing exposure on a direct basis, and paying additional premiums for reinsurance.

Holding Company Liquidity

Fairfax is a holding company that conducts substantially all of its business through its subsidiaries and receives substantially all of its earnings from them. The holding
company controls the operating insurance and reinsurance companies, each of which must comply with applicable insurance regulations of the jurisdictions in which it operates. Each operating company
must maintain reserves for losses and loss adjustment expenses to cover the risks it has underwritten.

Although
substantially all of the holding company's operations are conducted through its subsidiaries, none of its subsidiaries are obligated to make funds available to the holding company for payment
of its outstanding debt. Accordingly, the holding company's ability to meet financial obligations, including the ability to make payments on outstanding debt, is dependent on the distribution of
earnings from its subsidiaries. The ability of subsidiaries to pay dividends in the future will depend on their statutory surplus, on earnings and on regulatory restrictions. Dividends, distributions
or returns of capital to the holding company are subject to restrictions set forth in the insurance laws and regulations of Canada, the United States, the United Kingdom, Barbados,
Poland, Hong Kong, Indonesia, Singapore, Malaysia, Sri Lanka, Brazil, South Africa and other jurisdictions (in each case, including the provinces, states or other jurisdictions therein) and is
affected by the subsidiaries' credit agreements, indentures, rating agencies, the discretion of insurance regulatory authorities and capital support agreements with subsidiaries. The holding company
strives to be soundly financed and maintains high levels of liquid assets as discussed in note 24 (Financial Risk Management) to the consolidated financial statements for the year ended
December 31, 2016 and in the Liquidity section of this MD&A.

Access to Capital

The company's future capital requirements depend on many factors, including its ability to successfully write new business and to establish premium rates and reserves at levels
sufficient to cover losses. To the extent that the funds generated by the company's business are insufficient to fund future operations, additional funds may need to be raised through equity or debt
financings. If the company requires additional capital or liquidity but cannot obtain it on reasonable terms or at all, its business, financial condition and profitability would be materially
adversely affected.

The
company's ability and/or the ability of its subsidiaries to obtain additional financing for working capital, capital expenditures or acquisitions in the future may also be limited under the terms
of its credit facility discussed in note 15 (Borrowings) to the consolidated financial statements for the year ended December 31, 2016. The credit facility contains various covenants
that may restrict, among other things, the company's ability or the ability of its subsidiaries to incur additional indebtedness, to create liens or other encumbrances and to sell or otherwise dispose
of assets and merge or consolidate with another entity. In addition, the credit facility contains certain financial covenants that require the company to maintain a ratio of consolidated debt to
consolidated capitalization of not more than 0.35:1 and to maintain consolidated shareholders' equity of not less than $7.5 billion. A failure to comply with the obligations and covenants under
the credit facility could result in an event of default under such agreement which, if not cured or waived, could prevent the company from drawing on the credit facility and permit acceleration of
indebtedness, including other indebtedness of Fairfax or its subsidiaries. If such indebtedness were to be accelerated, there can be no assurance that our assets would be sufficient to repay that
indebtedness in full. This risk is mitigated by maintaining high levels of liquid assets at the holding company. The company's management of liquidity risk is discussed further in note 24
(Financial Risk Management) to the consolidated financial statements for the year ended December 31, 2016 and in the Liquidity section of this MD&A.

Key Employees

The company is substantially dependent on a small number of key employees, including its Chairman, Chief Executive Officer and significant shareholder, Mr. Prem Watsa,
and the senior management of the company and its operating subsidiaries. The industry experience and reputations of these individuals are important factors in the company's ability to attract new
business. The company's success has been, and will continue to be, dependent on its ability to retain the services of existing key employees and to attract and retain additional qualified personnel in
the

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future.
At the operating subsidiaries, employment agreements have been entered into with key employees. The company does not maintain key employee insurance with respect to any of
its employees.

Regulatory, Political and other Influences

The insurance and reinsurance industries are highly regulated and are subject to changing political, economic and regulatory influences. These factors affect the practices and
operation of insurance and reinsurance organizations. Federal, state and provincial governments in the United States and Canada, as well as governments in foreign jurisdictions in which the
company operates, have periodically considered programs to reform or amend the insurance systems at both the federal and local levels. For example, in recent years the company has had to implement the
following: new regulatory capital guidelines for the company's European operations due to Solvency II; the Dodd-Frank Act created a new framework for regulation of over-the-counter derivatives
in the United States which could increase the cost of the company's use of derivatives for investment and hedging purposes; the activities of the International Association of Insurance
Supervisors has resulted in additional regulatory oversight of the company; and the Canadian and U.S. insurance regulators' Own Risk and Solvency Assessment ("ORSA") initiatives have required
the company's North American operations to perform self-assessments of the capital available to support their business risks. Such initiatives could adversely affect the financial results of the
company's subsidiaries, including their ability to pay dividends, cause unplanned modifications of products or services, or result in delays or cancellations of sales of products and services by
insurers or reinsurers. Insurance industry participants may respond to changes by reducing their investments or
postponing investment decisions, including investments in the company's products and services. The company's management of the risks associated with its capital within the various regulatory regimes
in which it operates (Capital Management) is discussed in note 24 (Financial Risk Management) to the consolidated financial statements for the year ended December 31, 2016 and in the
Capital Resources and Management section of this MD&A.

Information Requests or Proceedings by Government Authorities

Each of the company's insurance and reinsurance companies is subject to insurance legislation in the jurisdiction in which it operates. From time to time, the insurance industry
has been subject to investigations, litigation and regulatory activity by various insurance, governmental and enforcement authorities, concerning certain practices within the industry. From time to
time, consumer advocacy groups or the media also focus attention on certain insurance industry practices. The existence of information requests or proceedings by government authorities could have
various adverse effects. The company's internal and external legal counsels coordinate with operating companies in responding to information requests and government proceedings.

Regional or Geographical Limitations and Risks

The company's international operations are regulated in various jurisdictions with respect to licensing requirements, currency, amount and type of security deposits, amount and
type of reserves, amount and type of local investment and other matters. International operations and assets held abroad may be adversely affected by political and other developments in foreign
countries, including possibilities of tax changes, nationalization and changes in regulatory policy, as well as by consequences of hostilities and unrest. The risks of such occurrences and their
overall effect upon the company vary from country to country and cannot easily be predicted.

The
company regularly monitors for political and other changes in each country where it operates. The decentralized nature of the company's operations permits quick adaptation to, or mitigation of,
evolving regional risks. Furthermore, the company's international operations are widespread and therefore not dependent on the economic stability of any one particular region.

Lawsuits

The company may, from time to time, become party to a variety of legal claims and regulatory proceedings. The existence of such claims against the company or its affiliates,
directors or officers could have various adverse effects, including the incurrence of significant legal expenses defending claims, even those without merit.

Operating
companies manage day-to-day regulatory and legal risk primarily by implementing appropriate policies, procedures and controls. Internal and external legal counsels also work closely with the
operating companies to identify and mitigate areas of potential regulatory and legal risk. The company's legal and regulatory matters are

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discussed
in note 20 (Contingencies and Commitments) to the consolidated financial statements for the year ended December 31, 2016.

Significant Shareholder

The company's Chairman and Chief Executive Officer, Mr. Prem Watsa, owns, directly or indirectly, or exercises control or direction over shares representing 42.6% of the
voting power of the company's outstanding shares. Mr. Watsa has the ability to substantially influence certain actions requiring shareholder approval, including approving a business combination
or consolidation, liquidation or sale of assets, electing members of the Board of Directors and adopting amendments to articles of incorporation and by-laws.

Amendments
were made to the terms of the company's multiple voting shares, which are controlled by Mr. Watsa, in August of 2015 having the effect of preserving the voting power
represented by the multiple voting shares at 41.8% even if additional subordinate voting shares are issued in the future. The amendments are described in note 16 (Total Equity) to the
consolidated financial statements for the year ended December 31, 2015 and in the company's annual information form filed with the securities regulatory authorities in Canada, which are
available on SEDAR at www.sedar.com.

Foreign Exchange

The company's reporting currency is the U.S. dollar. A portion of the company's premiums and expenses are denominated in foreign currencies and a portion of assets
(including investments) and loss reserves are also denominated in foreign currencies. The company may, from time to time, experience losses resulting from fluctuations in the values of foreign
currencies (including when certain foreign currency assets and liabilities are hedged) which could adversely affect the company's financial condition, profitability or cash flows. The company's
management of foreign currency risk is discussed in note 24 (Financial Risk Management) to the consolidated financial statements for the year ended December 31, 2016.

Reliance on Distribution Channels

The company uses brokers to distribute its business and in some instances will distribute through agents or directly to customers. The company may also conduct business through
third parties such as managing general agents where it is cost effective to do so and where the company can control the underwriting process to ensure its risk management criteria are met. Each of
these channels has its own distinct distribution characteristics and customers. A large majority of the company's business is generated by brokers (including international
reinsurance brokers with respect to the company's reinsurance operations), with the remainder split among the other distribution channels. This is substantially consistent across the company's
insurance and reinsurance subsidiaries.

The
company's insurance operations have relationships with many different types of brokers including independent retail brokers, wholesale brokers and national brokers depending on the particular
jurisdiction, while the company's reinsurance operations are dependent primarily on a limited number of international reinsurance brokers. The company transacts business with these brokers on a
non-exclusive basis. These independent brokers also transact the business of the company's competitors and there can be no assurance as to their continuing commitment to distribute the company's
insurance and reinsurance products. The continued profitability of the company depends, in part, on the marketing efforts of independent brokers and the ability of the company to offer insurance and
reinsurance products and maintain financial ratings that meet the requirements and preferences of such brokers and their policyholders.

Because
the majority of the company's brokers are independent, there is limited ability to exercise control over them. In the event that an independent broker exceeds its authority by binding the
company on a risk which does not comply with the company's underwriting guidelines, the company may be at risk for that policy until the application is received and a cancellation effected. Although
to date the company has not experienced a material loss from improper use of binding authority by its brokers, any improper use of such authority may result in losses that could have a material
adverse effect on the business, financial condition, profitability or cash flows of the company. The company's insurance and reinsurance subsidiaries closely manage and monitor broker relationships
and regularly audit broker compliance with the company's established underwriting guidelines.

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Goodwill and Intangible Assets

The goodwill and intangible assets on the company's consolidated balance sheet originated from various acquisitions made by the company or its operating subsidiaries. Continued
profitability of acquired businesses is a key driver for there to be no impairment in the carrying value of goodwill and intangible assets. An intangible asset may be impaired if the economic benefit
to be derived from its use is unexpectedly diminished.

Management
regularly reviews the current and expected profitability of the operating companies relative to plan in assessing the carrying value of goodwill. The intended use, expected life, and
economic benefit to be derived from intangible assets are evaluated by the company when there are potential indicators of impairment. The carrying values of goodwill and indefinite-lived intangible
assets are tested for impairment at least annually or more often if events or circumstances indicate there may be potential impairment.

Taxation

Realization of deferred income tax assets is dependent upon the generation of taxable income in those jurisdictions where the relevant tax losses and temporary differences
exist. Failure to achieve projected levels of profitability could lead to a reduction in the company's deferred income tax asset if it is no longer probable that the amount of the asset will
be realized.

The
company is subject to income taxes in Canada, the U.S. and many foreign jurisdictions where it operates, and the company's determination of its tax liability is subject to review by applicable
domestic and foreign tax authorities. While the company believes its tax positions to be reasonable, where the company's interpretations differ from those of tax authorities or the timing of
realization is not as expected, the provision for income taxes may increase or decrease in future periods to reflect actual experience.

The
company has specialist tax personnel responsible for assessing the income tax consequences of planned transactions and events and undertaking the appropriate tax planning. The company also
consults with external tax professionals as needed. Tax legislation of each jurisdiction in which the company operates is interpreted to determine the provision for income taxes and expected timing of
the reversal of deferred income tax assets and liabilities.

Guaranty Funds and Shared Markets

Virtually all U.S. states require insurers licensed to do business in their state to bear a portion of the loss suffered by some insureds as a result of impaired or
insolvent insurance companies. Many states also have laws that establish second-injury funds to provide compensation to injured employees for aggravation of a prior condition or injury, which are
funded by either assessments based on paid losses or premium surcharge mechanisms. In addition, as a condition to the ability to conduct business in various jurisdictions, the company's
U.S. insurance subsidiaries are required to participate in mandatory property and casualty shared market mechanisms or pooling arrangements, which provide various types of insurance coverage to
individuals or other entities that otherwise are unable to purchase that coverage from private insurers. The effect of these assessments and mandatory shared-market mechanisms or changes in them could
reduce the profitability of the company's U.S. insurance subsidiaries in any given period or limit their ability to grow their business. Similarly, the company's Canadian insurance subsidiaries
contribute to a mandatory guaranty fund that protects insureds in the event of a Canadian property and casualty insurer becoming insolvent.

Technological Changes

Technological changes could have unpredictable effects on the insurance and reinsurance industries. It is expected that new services and technologies will continue to emerge
that will affect the demand for insurance and reinsurance products and services, the premiums payable, the profitability of such products and services and the risks associated with underwriting
certain lines of business, including new lines of business. Failure to understand evolving technologies, or to position the company in the appropriate direction, or to deploy new products and services
in a timely way that considers customer demand and competitor activities could have an adverse impact on the company's business, financial condition, profitability or cash flows. The company
maintains an innovation working group comprised of members with diverse backgrounds from across its global subsidiaries to regularly assess new services and technologies that that may be applicable or
disruptive to the insurance and reinsurance industries.

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Technology Infrastructure

Third parties provide certain of the key components of the company's business infrastructure such as voice and data communications and network access. Given the high volume of
transactions processed daily, the company is reliant on such third party provided services to successfully deliver its products and services. Despite the contingency plans of the company and those of
its third party service providers, failure of these systems could interrupt the company's operations and impact its ability to rapidly evaluate and commit to new business opportunities.

In
addition, a security breach of the company's computer systems could damage its reputation or result in liability. The company retains confidential information regarding its business dealings in its
computer systems, including, in some cases, confidential personal information regarding its insureds. Therefore, it is critical that the company's facilities and infrastructure remain secure and are
perceived by the marketplace to be secure.

The
company has highly trained information technology staff that are committed to the continual development and maintenance of its business infrastructure. Operational availability, integrity and
security of the company's information, systems and infrastructure are actively managed through threat and vulnerability assessments, strict security policies and disciplined change management
practices.

Other



Years ended December 31

|     |                                                             | First
Quarter |   | Second
Quarter |   | Third
Quarter |         | Fourth
Quarter |   | Full
Year |  
|---- | ----------------------------------------------------------- | ------------- | - | -------------- | - | ------------- | ------- | -------------- | - | --------- | -
|2016 |                                                             |               |   |                |   |               |         |                |   |           |  
|     | Revenue                                                     |               |   | 2,186.5        |   |               | 2,907.0 |                |   | 2,431.4   |  
|     | Net earnings (loss)                                         |               |   | (16.7          | ) |               | 293.5   |                |   | 32.7      |  
|     | Net earnings (loss) attributable to shareholders of Fairfax |               |   | (51.0          | ) |               | 238.7   |                |   | 1.3       |  
|     | Net earnings (loss) per share                               |               | $ | (2.76          | ) | $             | 9.81    |                | $ | (0.42     | )
|     | Net earnings (loss) per diluted share                       |               | $ | (2.76          | ) | $             | 9.58    |                | $ | (0.42     | )
|2015 |                                                             |               |   |                |   |               |         |                |   |           |  
|     | Revenue                                                     |               |   | 2,387.9        |   |               | 1,769.0 |                |   | 2,976.3   |  
|     | Net earnings (loss)                                         |               |   | 236.1          |   |               | (178.6  | )              |   | 451.4     |  
|     | Net earnings (loss) attributable to shareholders of Fairfax |               |   | 225.2          |   |               | (185.7  | )              |   | 424.8     |  
|     | Net earnings (loss) per share                               |               | $ | 9.92           |   | $             | (8.87   | )              | $ | 18.57     |  
|     | Net earnings (loss) per diluted share                       |               | $ | 9.71           |   | $             | (8.87   | )              | $ | 18.16     |  

Revenue of $1,774.7 in the fourth quarter of 2016 decreased from $2,447.2 in 2015 principally as a result of increased net losses on investments and lower interest and dividends
(primarily related to a decrease in share of profit of associates), partially offset by higher net premiums earned and increased other revenue.

The
company reported a net loss attributable to shareholders of Fairfax of $701.5 (net loss of $30.77 per basic and diluted share) in the fourth quarter of 2016 compared to net earnings
attributable to shareholders of Fairfax
of $103.4 (net earnings of $4.19 per basic share and $4.10 per diluted share) in the fourth quarter of 2015. The year-over-year decreases in profitability primarily reflected increased net
losses on investments, lower interest and dividends (primarily related to a decrease in share of profit of associates) and a decrease in underwriting profit, partially offset by an increase in the
recovery of income taxes.

Operating
results at the company's insurance and reinsurance operations continue to be affected by a difficult competitive environment. Individual quarterly results have been (and may in the
future be) affected by losses from significant natural or other catastrophes, by reserve releases and strengthenings and by settlements or commutations, the occurrence of which are not predictable,
and have been (and are expected to continue to be) significantly impacted by net gains or losses on investments, the timing of which are not predictable.

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As at March 10, 2017, Fairfax had 22,324,191 subordinate voting shares and 1,548,000 multiple voting shares outstanding (an aggregate of 23,072,961 shares
effectively outstanding after an intercompany holding). Each subordinate voting share carries one vote per share at all meetings of shareholders except for separate meetings of holders of another
class of shares. The multiple voting shares cumulatively carry 41.8% voting power at all meetings of shareholders except in certain circumstances (which have not occurred) and except for separate
meetings of holders of another class of shares. The multiple voting shares are not publicly traded.

The
table that follows presents the Toronto Stock Exchange high, low and closing Canadian dollar prices of subordinate voting shares of Fairfax for each quarter of 2016 and 2015.

|      |  | First
Quarter |  | Second
Quarter |  | Third
Quarter |  | Fourth
Quarter
|----- |  | ------------- |  | -------------- |  | ------------- |  | --------------
|
|2016  |  |               |  |                |  |               |  |               
|High  |  | 780.13        |  | 736.54         |  | 774.90        |  | 777.45        
|Low   |  | 646.03        |  | 637.17         |  | 673.00        |  | 586.00        
|Close |  | 727.07        |  | 695.83         |  | 768.72        |  | 648.50        
|2015  |  |               |  |                |  |               |  |               
|High  |  | 739.00        |  | 720.50         |  | 669.43        |  | 692.00        
|Low   |  | 591.50        |  | 604.00         |  | 563.34        |  | 577.00        
|Close |  | 710.00        |  | 615.88         |  | 607.74        |  | 656.91        



Fairfax is a Canadian reporting issuer with securities listed on the Toronto Stock Exchange and trading in Canadian dollars under the symbol FFH and in U.S. dollars under
the symbol FFH.U. It has in place corporate governance practices that comply with all applicable rules and substantially comply with all applicable guidelines and policies of the Canadian Securities
Administrators and the practices set out therein.

The
company's Board of Directors has adopted a set of Corporate Governance Guidelines (which include a written mandate of the Board), established an Audit Committee, a Governance and Nominating
Committee and a Compensation Committee, approved written charters for all of its committees, approved a Code of Business Conduct and Ethics applicable to all directors, officers and employees of the
company and established, in conjunction with the Audit Committee, a Whistleblower Policy. The company continues to monitor developments in the area of corporate governance as well as its
own procedures.



Certain statements contained herein may constitute forward-looking statements and are made pursuant to the "safe harbour" provisions of the United States Private
Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to known and unknown risks, uncertainties and other factors which may cause the actual results, performance or
achievements of Fairfax to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.

Such
factors include, but are not limited to: a reduction in net earnings if our loss reserves are insufficient; underwriting losses on the risks we insure that are higher or lower than expected; the
occurrence of catastrophic events with a frequency or severity exceeding our estimates; changes in market variables, including interest rates, foreign exchange rates, equity prices and credit spreads,
which could negatively affect our investment portfolio; the cycles of the insurance market and general economic conditions, which can substantially influence our and our competitors' premium rates and
capacity to write new business; insufficient reserves for asbestos, environmental and other latent claims; exposure to credit risk in the event our reinsurers fail to make payments to us under our
reinsurance arrangements; exposure to credit risk in the event our insureds, insurance producers or reinsurance intermediaries fail to remit premiums that are owed to us or failure by our insureds to
reimburse us for deductibles that are paid by us on their behalf; our inability to maintain our long term debt ratings, the inability of our subsidiaries to maintain financial or claims paying ability
ratings and the impact of a downgrade of such ratings on derivative transactions that we or our subsidiaries have entered into; risks associated with implementing our business

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strategies;
the timing of claims payments being sooner or the receipt of reinsurance recoverables being later than anticipated by us; risks associated with our use of derivative instruments; the
failure of our hedging methods to achieve their desired risk management objective; a decrease in the level of demand for insurance or reinsurance products, or increased competition in the insurance
industry; the impact of emerging claim and coverage issues or the failure of any of the loss limitation methods we employ; our inability to access cash of our subsidiaries; our inability to obtain
required levels of capital on favourable terms, if at all; the loss of key employees; our inability to obtain reinsurance coverage in sufficient amounts, at reasonable prices or on terms that
adequately protect us; the passage of legislation subjecting our businesses to additional supervision or regulation, including additional tax regulation, in the United States, Canada or other
jurisdictions in which we operate; risks associated with government investigations of, and litigation and negative publicity related to, insurance industry practice or any other conduct; risks
associated with political and other developments in foreign jurisdictions in which we operate; risks associated with legal or regulatory proceedings or significant litigation; failures or security
breaches of our computer and data processing systems; the influence exercisable by our significant shareholder; adverse fluctuations in foreign currency exchange rates; our dependence on independent
brokers over whom we exercise little control; an impairment in the carrying value of our goodwill and indefinite-lived intangible assets; our failure to realize deferred income tax assets;
technological or other change which adversely impacts demand, or the premiums payable, for the insurance coverages we offer; and assessments and shared market mechanisms which may adversely affect our
U.S. insurance subsidiaries. Additional risks and uncertainties are described in this Annual Report, which is available at www.fairfax.ca, and in our Supplemental
and Base Shelf Prospectus (under "Risk Factors") filed with the securities regulatory authorities in Canada, which is available on SEDAR at www.sedar.com. Fairfax
disclaims any intention or obligation to update or revise any forward-looking statements.

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