Fairfax Financial Holdings Limited: Third Quarter Financial Results

Market Wire, October, 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 $467.6 million in the third quarter of 2008 ($25.40 per share, $25.27 per diluted share) compared to $253.2 million in the third quarter of 2007 ($14.12 per share, $13.47 per diluted share). These third quarter results include net gains on investments of $856.8 million and $274.6 million of net catastrophe losses ($256.9 million related to Hurricanes Ike and Gustav). In the first nine months of 2008, net earnings were $1,127.0 million ($60.63 per share, $59.89 per diluted share) compared to $532.2 million ($29.54 per share, $28.27 per diluted share) in the first nine months of 2007. Results in the first nine months include net gains on investments of $1,904.0 million and net catastrophe losses (including net losses related to Hurricanes Ike and Gustav) of $366.2 million. Highlights for the third quarter include the following:

- The combined ratio of the company's insurance and reinsurance operations in the third quarter of 2008 was 115.5% on a consolidated basis, and on an individual company basis was as follows: Northbridge - 113.3%, Crum & Forster - 128.5%, Fairfax Asia - 85.0%, OdysseyRe - 113.0% and Other Reinsurance - 111.9%. Included in third quarter underwriting results were $256.9 million of net catastrophe losses related to Hurricanes Ike and Gustav. Prior to giving effect to these losses, the combined ratio of the company's insurance and reinsurance operations in the third quarter was 93.2%.

- Total interest and dividend income earned decreased to $135.6 million in the third quarter of 2008 from $202.5 million in the third quarter of 2007, primarily due to the year-over-year decline in short term treasury bill rates, despite a $2.2 billion increase in the average investment portfolio in the third quarter of 2008 compared to the third quarter of 2007.

- Primarily as a result of the hurricane losses and reduced interest and dividend income, the company's insurance and reinsurance operations had an operating loss (excluding net gains on investments) in the third quarter of 2008 of $73.8 million compared to operating income of $222.3 million in the third quarter of 2007.

- Net gains on investments in the third quarter of 2008 were $856.8 million (including net gains of $651.8 million related to short equity and equity index positions and $531.6 million related to credit default swaps, partially offset by $176.7 million of other than temporary impairments recorded on common stock and bond investments and net losses on bonds of $158.0 million) compared to net gains on investments of $363.6 million in the third quarter of 2007 (including $380.2 million of net gains related to credit default swaps, $27.5 million of net gains on common stocks and $22.7 million of net gains related to short equity and equity index positions, partially offset by $70.2 million of other than temporary impairments recorded on common stock and bond investments).

- Cash and short term investments held by the holding company and in subsidiary portfolios at September 30, 2008 totalled $5,581.3 million and consisted principally of short term government debt securities. Of the company's $20,431.4 million (net of short sale and derivative obligations) cash and investments at September 30, 2008, $10,526.5 million or 51.5% consisted of bonds, with government debt securities representing $9,619.0 million or 91.4% of the bond portfolio. Cash and short term investments and bonds consequently comprised $16,107.8 million or 78.8% of Fairfax's cash and investments at September 30, 2008.

- At September 30, 2008, the company had aggregate equity holdings (common stocks and investments, at equity) with a fair value of $3,596.0 million and had short positions in various global equity indices and listed common stocks, through equity index total return swaps and equity total return swaps, with a total notional amount of $4,196.2 million.

- During the third quarter of 2008 the company sold $3,580.9 million notional amount (2007 - $230.0 million) of credit default swaps for proceeds of $595.7 million (2007 - $47.4 million) and recorded net gains on sale of $279.3 million (2007 - $38.9 million) and net mark-to-market gains of $252.3 million (2007 - $341.3 million) on credit default swaps, for total net gains in respect of credit default swaps of $531.6 million.

- The following table and accompanying commentary summarize the sales of credit default swaps since the inception of this investment position, and show the cumulative realized and unrealized gains on credit default swaps as at October 24, 2008. Note that non-GAAP measures are used in this illustrative summary, as explained below.

                                           ($ millions)
                                                               Excess of
                                     Orig-                          sale
                                      inal                 proceeds over
                                    acqui-                      original
                       Notional     sition         Sale      acquisition
                         amount       cost     Proceeds             cost

FY 2007                   965.5       25.7        199.3            173.6
Q1 2008                 3,830.0       95.5        885.0            789.5
Q2 2008                   855.0       22.8        190.0            167.2
Q3 2008                 3,580.9       59.4        595.7            536.3
Q4 to October 24        1,793.2       38.1        179.7            141.6
                        -------       ----        -----           ------
Cumulative sales
 since inception       11,024.6      241.5      2,049.7          1,808.2

Remaining credit
 default swap
 positions at
 October 24, 2008       9,834.7      191.5        596.1 (1)        404.6(2)
                        -------      -----        -----            -----

Total realized and
 unrealized
 from inception        20,859.3      433.0      2,645.8          2,212.8
                       --------      -----      -------          -------
                       --------      -----      -------          -------

(1) Market value as of October 24, 2008
(2) Unrealized gain (measured using original acquisition cost) as of
    October 24, 2008