2002 Annual Report Contents Five Year Financial Highlights 1 Corporate Profile 2 Chairman’s Letter to Shareholders 5 Fairfax Consolidated Financial Statements 24 Auditors’ Report to the Shareholders 29 Comment by Auditors for U.S. Readers 29 Valuation Actuary’s Report 29 Notes to Consolidated Financial Statements 30 Management’s Discussion and Analysis of Financial Condition and Results of Operations 51 Supplementary Financial Information 117 Fairfax Insurance and Reinsurance Companies – Combined Financial Statements 118 Fairfax with Equity Accounting of Lindsey Morden – Consolidated Financial Statements 120 Fairfax – Unconsolidated Financial Statements 122 Appendix A – November 8, 2002 Letter to Shareholders 124 Appendix B – Fairfax Guiding Principles 128 Consolidated Financial Summary 129 Corporate Information 130 2002 Annual Report Five Year Financial Highlights (in Cdn$ millions except share and per share data) 2002 2001 2000 1999 1998 Revenue *************** 7,962.3 6,125.7 6,188.5 5,788.5 3,574.3 Net earnings (loss) ***** 415.7 (346.0) 137.4 124.2 387.5 Total assets ************ 35,110.5 35,438.7 31,833.3 31,979.1 20,886.7 Common shareholders’ equity *************** 3,351.5 3,042.7 3,180.3 3,116.0 2,238.9* Common shares outstanding – year- end (millions) ******** 14.1 14.4 13.1 13.4 12.1* Return on average equity *************** 12.8% (11.9%) 4.1% 4.3% 20.1% Per share Net earnings (loss) *** 28.78 (28.04) 9.41 9.20 32.63 Common shareholders’ equity 237.01 213.06 242.75 231.98 184.54 Market prices per share High **************** 195.00 289.00 246.00 610.00 603.00 Low ***************** 104.99 160.00 146.75 180.00 253.00 Close **************** 121.11 164.00 228.50 245.50 540.00 * not including share subscription receipts issued December 22, 1998 or their proceeds 1 FAIRFAX FINANCIAL HOLDINGS LIMITED Corporate Profile Fairfax Financial Holdings Limited is a financial services holding company whose corporate objective is to achieve a high rate of return on invested capital and build long term shareholder value. The company has been under present management since September 1985. Canadian insurance subsidiaries Commonwealth Insurance, based in Vancouver, offers commercial property, oil, gas and petrochemicals and marine insurance in Canada, the United States and internationally, and commercial casualty insurance in Canada. The company has been in business since 1947. In 2002, Commonwealth’s net premiums written were $343.6 million. At year-end, the company had capital and surplus of $207.2 million and there were 164 employees. Federated Insurance, based in Winnipeg, markets a broad range of insurance products in Canada primarily for commercial customers. The company has been in business since 1920. In 2002, Federated’s net premiums written were $87.5 million, consisting of $71.6 million of property and casualty business and $15.9 million of life and group health and disability products. At year-end, the company had capital and surplus of $52.7 million and there were 275 employees. Lombard Insurance, based in Toronto, writes a complete range of commercial and personal insurance products in Canada. The company has been in business since 1904. In 2002, Lombard’s net premiums written were $691.1 million. At year-end, the company had capital and surplus of $190.1 million and there were 751 employees. Markel Insurance, based in Toronto, is the leading trucking insurance company in Canada and has provided the Canadian trucking industry with a continuous market for this class of insurance since 1951. In 2002, Markel’s net premiums written were $126.9 million. At year- end, the company had capital and surplus of $51.0 million and there were 152 employees. CRC (Bermuda) Reinsurance, based in Bermuda, is the principal reinsurer of Lombard Insurance, Federated Insurance, Markel Insurance and Commonwealth Insurance’s Canadian operations. Cessions to CRC (Bermuda) are included in the net premiums written of those companies. At year-end, the company had capital and surplus of $132.3 million. U.S. insurance subsidiaries Crum & Forster (C&F), based in Morristown, New Jersey, is a national commercial property and casualty insurance company in the United States writing a broad range of commercial coverages. Its subsidiary Seneca Insurance provides property and casualty insurance to small businesses and certain specialty coverages. The company has been in business since 1824. In 2002, C&F’s net premiums written were US$779.0 million. At year-end, the company had capital and surplus of US$1,039.5 million and there were 879 employees. Fairmont Insurance is the proposed name under which the continuing operations of TIG Specialty Insurance – the Ranger, Hawaii (commercial and personal lines) and Accident and 2 Health businesses – will be carried on in 2003. In 2002, the net premiums written of these continuing operations were US$213.9 million. Old Lyme Insurance, based in New York, writes multi-line commercial and personal property and casualty insurance. Old Lyme was acquired from Hub International Limited on May 30, 2002. In 2002, Old Lyme’s net premiums written were US$38.5 million. At year-end, the company had capital and surplus of US$46.6 million and there were four employees. Falcon Insurance, based in Hong Kong, writes property and casualty insurance to niche markets in Hong Kong. In 2002, Falcon’s net premiums written were HK$337.8 million (approximately HK$5 = C$1). At year-end, the company had capital and surplus of HK$156.6 million and there were 122 employees. OdysseyRe reinsurance group OdysseyRe, based in Stamford, Connecticut, underwrites treaty and facultative reinsurance as well as certain insurance business, with branches in London, Paris, Singapore and Toronto and affiliated offices in New York, Miami, Mexico City, Santiago, Cologne, Stockholm and Tokyo. In 2002, OdysseyRe’s net premiums written were US$1,584.3 million. At year-end, the company had capital and surplus of US$1,020.7 million and there were 424 employees. Runoff subsidiaries The Resolution Group (TRG) was formed in 1993 to manage the runoff of International Insurance Company and other discontinued lines of business written by the former Talegen group of insurance companies. The runoff required effective management of major direct excess and surplus lines insurance and reinsurance liabilities, the resolution of complex litigation and the collection and management of reinsurance assets. RiverStone Group (RiverStone), run by TRG management, was established following the acquisition of TRG, primarily to manage the runoff of certain Fairfax insurance subsidiaries and other discontinued lines of business written by other Fairfax companies. RiverStone Management (UK) manages the Sphere Drake and RiverStone Insurance (UK) runoff operations. In 2002, RiverStone Stockholm and Sphere Drake Bermuda and the non-life operations of Compagnie Transcontinentale de R´eassurance (prior to the wind-up of that company) were consolidated into RiverStone Insurance (UK). TIG Specialty Insurance merged with International Insurance, TRG’s runoff subsidiary, on December 16, 2002 and was placed in runoff under RiverStone’s management. At year-end, the merged company, constituting the U.S. runoff group, had capital and surplus of US$1,936.1 million and there were 736 employees located in Dallas and Manchester, New Hampshire. ORC Re, based in Ireland, was established in 1997. It reinsures the reinsurance portfolios of Fairfax’s other European runoff operations, provides consolidated investment and liquidity management services to the European runoff group, participates in the reinsurance programs for the U.S. insurance companies with third party reinsurers, and has provided post-acquisition 3 FAIRFAX FINANCIAL HOLDINGS LIMITED reinsurance protection for the U.S. insurance companies. RiverStone Management (UK), with 243 employees and offices in London, Brighton, Paris and Stockholm, manages ORC Re’s insurance and reinsurance liabilities and the collection and management of its reinsurance assets. Sphere Drake, RiverStone Insurance (UK) and ORC Re constitute the European runoff group. At year-end, ORC Re had capital and surplus of US$2.0 billion, of which US$1.6 billion is related to equity and debt financing for the acquisition of the U.S. insurance and reinsurance companies, and there were eight employees. Wentworth Insurance, based in Barbados, was incorporated in 1990. It writes selected long term property and casualty reinsurance. At year-end, the company had capital and surplus of US$82.1 million and there were seven employees. Claims adjusting and insurance brokerage Lindsey Morden Group provides claims adjusting, appraisal and claims and risk management services to a wide variety of insurance companies and self-insured organizations in Canada, the United States, the United Kingdom, continental Europe, the Far East, Latin America and the Middle East. In 2002, revenue totalled $457.9 million. The company was established in 1923, and at year-end the group had 3,659 employees located in 320 offices. Hub International is an insurance brokerage company selling a broad range of commercial, personal and life insurance products. The company was established in 1998, and at year-end had 2,340 employees in 122 offices in Canada and the United States. In 2002, the company had total revenue of US$220.0 million. Investment management subsidiary Hamblin Watsa Investment Counsel was founded in 1984 and provides investment management to the insurance, reinsurance and runoff subsidiaries of Fairfax. Notes: (1) All companies are wholly owned except OdysseyRe, a public company of which Fairfax owned 73.8% at the end of 2002; Lindsey Morden Group, a public company of which Fairfax owns 75.0% of the equity and 89.5% of the votes; Hub International, a public company of which Fairfax owns 28.7%; and Advent Capital (Holdings) PLC, of which Fairfax owns 46.8%. (2) The foregoing lists all of Fairfax’s operating groups.