Fairfax Financial Holdings Limited: Financial Results for the Year Ended December 31, 2008

Market Wire, February, 2009

(Unaudited - All dollar amounts are expressed in U.S. dollars, except as otherwise indicated.)

Fairfax Financial Holdings Limited (TSX: FFH)(NYSE: FFH) announces net earnings of $346.8 million for the fourth quarter of 2008 and $1,473.8 million for the 2008 year ($19.62 and $79.53 per diluted share, respectively), reflecting record investment gains of $2,720.5 million in 2008.

"Our results in 2008 were the best in our twenty-three year history," said Prem Watsa, Chairman and Chief Executive Officer. "As a result of exceptional performance by our management teams, and in spite of challenging industry and economic conditions, we achieved record earnings of approximately $1.5 billion, resulting in a 21% increase in our book value per share to $278.28. We also ended the year with in excess of $1.5 billion in cash and marketable securities at the holding company level."

Challenging industry conditions for commercial lines insurers and reinsurers and an active year for catastrophe losses impacted 2008 underwriting results. Fairfax's insurance and reinsurance operations had an underwriting loss of $457.7 million and a combined ratio of 110.1% in 2008, compared to an underwriting profit of $281.3 million and a combined ratio of 94.0% in 2007. Underwriting results in 2008 included 7.2 combined ratio points related to catastrophe losses from Hurricane Ike, the third most destructive U.S. hurricane on record, and Hurricane Gustav ($326.3 million, net of reinstatement premiums). Total catastrophe losses, net of reinstatement premiums, increased to $462.0 million in 2008 (10.3 combined ratio points) from $120.8 million in 2007 (2.6 combined ratio points). Underwriting results in 2008 also included the adverse impact on claims reserves of 4.2 combined ratio points ($189.2 million) arising from U.S. dollar strengthening relative to other currencies, compared to a benefit from foreign currency movements in 2007 of 0.9 combined ratio points ($41.3 million). The company generally mitigates the impact of foreign currency movements on its foreign currency-denominated claims liabilities by holding foreign currency-denominated investments. As a result, the impact of foreign currency translation gains and losses included in underwriting results is generally mitigated in whole or in part by foreign currency translation gains and losses on investment assets included in net earnings or other comprehensive income. Underwriting results in 2008 benefited from 0.3 combined ratio points ($14.2 million) of net favourable development of prior years' reserves (excluding the effect of foreign currency movements), compared to a benefit of 1.5 combined ratio points ($69.4 million) in 2007 (excluding the effect of foreign currency movements). Prior to giving effect to the Hurricane Ike and Gustav losses and Crum & Forster's commutation loss ($84.2 million) and lawsuit settlement ($25.5 million) in 2008 and the impact of foreign currency movements in 2008 and 2007, the combined ratio for Fairfax's insurance and reinsurance operations was 96.2% in 2008 compared to 94.8% in 2007.

Record net earnings principally resulted from net gains on investments of $816.5 million in the fourth quarter of 2008 and $2,720.5 million in the year, compared to $947.0 million in the fourth quarter of 2007 and $1,639.4 million in 2007. Fourth quarter net investment gains of $816.5 million included net gains on equity hedges of $1,055.0 million, net gains on sales of bonds (principally U.S. Treasury bonds) of $484.0 million and net gains related to credit default swaps of $49.9 million, partially offset by other than temporary impairments recorded on common stock and bond investments of $612.8 million and net losses recorded on bonds of $195.0 million (principally net losses on convertible bonds of $343.0 million, partially offset by net gains on municipal bonds designated as held for trading and other bonds of $148.0 million). Net investment gains in 2008 of $2,720.5 million included net gains on equity hedges of $2,079.6 million, net gains related to credit default swaps of $1,290.5 million and net gains on sales of bonds (principally U.S. Treasury bonds) of $629.8 million, partially offset by other than temporary impairments recorded on common stock and bond investments of $996.4 million and net losses recorded on bonds of $356.1 million (composed of net mark-to-market losses, primarily on convertible bonds, of $504.2 million, offset by net gains on municipal bonds designated as held for trading and other bonds of $148.1 million). During the fourth quarter of 2008, the company removed the hedges on its equity portfolio investments by closing out its equity and equity index total return swap contracts, and invested approximately $2.3 billion in common stocks.

The significant realized investment gains allowed Fairfax to strengthen its financial position during 2008. Corporate liquidity was strengthened by 2008 financial performance, as Fairfax ended 2008 with $1,564.2 million of cash, short term investments and marketable securities at the holding company level, increased from $971.8 million at the end of 2007. Fairfax reduced holding company debt by $198.5 million during the year to $1,057.3 million and, by virtue thereof and of its increased equity, improved its total debt to total capital ratio to 23.7% at the end of 2008 from 27.1% at the end of 2007.