Fairfax Financial Holdings Limited: First Quarter Financial Results

Market Wire, May, 2008

(Note: All dollar amounts in this press release are expressed in U.S. dollars.)

Fairfax Financial Holdings Limited (TSX: FFH) (NYSE: FFH) announces that it had net earnings of $631.8 million for the first quarter of 2008 ($34.72 per share, $33.78 per diluted share) compared to net earnings of $110.9 million for the first quarter of 2007 ($6.10 per share, $5.88 per diluted share). Highlights for the first quarter included the following:

- The combined ratio of the company's insurance and reinsurance operations for the first quarter of 2008 was 100.7% on a consolidated basis, and on an individual company basis was as follows: Northbridge - 98.9%, Crum & Forster - 108.3%, Fairfax Asia - 82.1%, OdysseyRe - 98.5% and Group Re - 96.9% . Included in first quarter underwriting results was a $25.5 million pre-tax charge associated with the settlement of an asbestos lawsuit by Crum & Forster, representing 9.4 combined ratio points for Crum & Forster and 2.3 combined ratio points for Fairfax. This charge led to an underwriting loss at the company's insurance and reinsurance operations for the first quarter of 2008 of $7.7 million compared to underwriting profit of $49.5 million for the first quarter of 2007.

- Total interest and dividend income earned decreased to $180.1 million in the first quarter of 2008 from $198.6 million in the first quarter of 2007, primarily due to the year-over-year decline in average short term interest rates, despite a $2.2 billion increase in the average investment portfolio for the first quarter of 2008 compared to the first quarter of 2007.

- Operating income of the company's insurance and reinsurance operations (excluding net gains on investments) for the first quarter of 2008 was $122.3 million compared to $203.8 million for the first quarter of 2007 as a result of the above-described declines in underwriting results and interest and dividend income.

- Net premiums written during the first quarter of 2008 declined by 0.5% to $1,064.0 million from $1,069.4 million in the first quarter of 2007, reflecting the operating companies' disciplined response to increasingly competitive conditions in global insurance and reinsurance markets.

- Net gains on investments in the first quarter of 2008 were $1,092.8 million compared to $98.8 million in the first quarter of 2007. During the first quarter of 2008 the company sold $3.8 billion (2007 - nil) notional amount of credit default swaps for proceeds of $885.0 million (2007 - nil) and recorded net gains on sales of $230.7 million and net mark-to-market gains of $467.4 million (2007 - $62.1 million). Increased net gains on investments also reflect net mark-to-market gains on short equity and equity index positions and net gains on sales of bonds and common stocks, partially offset by impairments recorded for certain common stock and bond investments. For the April 1 to April 25, 2008 period, the net loss related to credit default swaps was $304.6 million. The fair value of the $17.5 billion notional amount of credit default swaps held at April 25, 2008 (including insignificant purchases and sales of credit default swaps during this period) was $684.9 million, compared to the fair value of $990.9 million at March 31, 2008 of the $17.5 billion notional amount of credit default swaps held on that date. The credit default swaps are extremely volatile, with the result that their market value and their liquidity may vary dramatically either up or down in short periods, and their ultimate value will therefore only be known upon their disposition.

- The company's runoff operations reported a modest operating loss of $4.4 million in the first quarter of 2008 and produced pre-tax income of $173.4 million after the inclusion of net investment gains of $177.8 million (including $146.5 million related to credit default swaps), compared to an operating loss of $2.2 million and pre-tax income of $9.8 million in the first quarter of 2007.

- The company held $1,154.6 million of cash, short term investments and marketable securities at the holding company level ($1,132.8 million net of short sale and derivative obligations) at March 31, 2008, compared to $971.8 million at December 31, 2007 ($963.4 million net of short sale and derivative obligations).

- Holding company debt declined during the first quarter of 2008 by $135.0 million to $1,120.8 million, reflecting the conversion of $188.5 million principal amount of the company's 5% convertible senior debentures due July 15, 2023 on February 13, 2008 into 886,888 subordinate voting shares of the company. The company's total debt to total capital ratio declined to 24.1% at March 31, 2008 from 27.1% at December 31, 2007.

- At March 31, 2008, common shareholders' equity was $4,672.6 million, or $253.63 per basic share, compared to $4,063.5 million, or $230.01 per basic share at December 31, 2007.

Following is a summary of Fairfax's financial results for the first quarter:

                                               THREE MONTHS ENDED MARCH 31
                                              -----------------------------
                          (unaudited - $ millions except per share amounts)
                                                2008                  2007
                                               ------                ------
Total revenue                                2,390.8               1,535.0
Earnings before income taxes and
 non-controlling interests                   1,151.5                 242.1
Net earnings                                   631.8                 110.9
Net earnings per share                        $34.72                 $6.10
Net earnings per diluted share
                                              $33.78                 $5.88