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Fairfax Financial Holdings Limited: First Quarter Financial Results

TORONTO, ONTARIO -- (Marketwired) -- 05/01/14 --

(Note: All dollar amounts in this news release are expressed in U.S. dollars, except as otherwise noted. The financial results are reported under International Financial Reporting Standards, except as otherwise noted.)

Fairfax Financial Holdings Limited (TSX:FFH)(TSX:FFH.U) announces net earnings of $784.6 million in the first quarter of 2014 ($35.72 per diluted share after payment of preferred share dividends) compared to net earnings of $161.6 million in the first quarter of 2013 ($7.12 per diluted share after payment of preferred share dividends), reflecting realized and unrealized gains on its investment portfolio, together with improved underwriting results. Book value per basic share increased to $368.53 at March 31, 2014 from $339.00 at December 31, 2013 (an increase of 11.7% adjusted for the $10 per common share dividend paid in the first quarter of 2014).

"Our insurance companies have begun the year 2014 with a strong underwriting result with a consolidated combined ratio of 93.0%. All of our major insurance companies had a combined ratio less than 100% with OdysseyRe at 85.6% and Zenith at 90.6%. We also realized gains from our equity and equity-related investments of $393 million in the quarter," said Prem Watsa, Chairman and Chief Executive Officer of Fairfax. "We are maintaining our defensive equity hedges as we remain concerned about the financial markets and the economic outlook. We continue to be soundly financed, with quarter-end cash and marketable securities in the holding company in excess of $1.1 billion."

Highlights in the first quarter of 2014 (with comparisons to the first quarter of 2013 except as otherwise noted) included the following:

--  The combined ratio of the insurance and reinsurance operations was 93.0%
    on a consolidated basis, producing an underwriting profit of $98.7
    million, compared to a combined ratio and underwriting profit of 94.0%
    and $86.0 million respectively in 2013.

--  Net premiums written by the insurance and reinsurance operations
    increased by 0.4% to $1,611.5 million compared to $1,605.8 million in
    2013. 

--  The insurance and reinsurance operations produced operating income
    (excluding net gains or losses on investments) of $190.8 million,
    compared to $158.1 million in 2013, primarily as a result of increased
    share of profit of associates and the improved underwriting.

--  Interest and dividend income of $90.5 million decreased from $99.5
    million in 2013, primarily because of large holdings of cash and short
    term investments ($7,666.9 million at March 31, 2014). As of March 31,
    2014, subsidiary cash and short term investments accounted for 28.8% of
    the company's portfolio investments. Interest income as reported is
    unadjusted for the positive tax effect of the company's significant
    holdings of tax-advantaged debt securities (holdings of $4,985.0 million
    at March 31, 2014 and $5,191.3 million at March 31, 2013).

--  Net investment gains of $1,006.1 million in 2014 (net investment gains
    of $9.4 million in 2013) consisted of the following:

                                                                            
                                               First quarter of 2014        
                                        ----------------------------------  
                                                   ($ millions)             
                                          Realized  Unrealized         Net  
                                             gains       gains       gains  
                                          (losses)    (losses)    (losses)  
                                        ----------------------------------  
Net gains (losses) on:                                                      
 Equity and equity-related investments       393.1       240.6       633.7  
 Equity hedges                                10.2       (81.7)      (71.5) 
                                        ----------------------------------  
 Equity and equity-related investments                                      
  after equity hedges                        403.3       158.9       562.2  
 Bonds                                         4.6       474.4       479.0  
 CPI-linked derivatives                          -       (21.9)      (21.9) 
 Other                                       (18.0)        4.8       (13.2) 
                                        ----------------------------------  
                                             389.9       616.2     1,006.1  
                                        ----------------------------------  
                                        ----------------------------------  
                                                                            

--  The company held $1,113.7 million of cash, short term investments and
    marketable securities at the holding company level ($1,085.7 million net
    of short sale and derivative obligations) at March 31, 2014, compared to
    $1,296.7 million ($1,241.6 million net of short sale and derivative
    obligations) at December 31, 2013.

--  The company's total debt to total capital ratio was 25.1% at March 31,
    2014, compared to 26.1% at December 31, 2013.

--  At March 31, 2014, common shareholders' equity was $7,807.6 million, or
    $368.53 per basic share, compared to $7,186.7 million, or $339.00 per
    basic share, at December 31, 2013.

Fairfax holds significant investments in equity and equity-related securities. In response to the significant appreciation in equity market valuations and uncertainty in the economy, the company has hedged its equity investment exposure. At March 31, 2014, equity hedges represented approximately 89% of the company's equity and equity-related holdings. The hedge ratio decreased from 98% at December 31, 2013 because of the increase in market value of the company's equity and equity-related holdings. The market value and the liquidity of these hedges 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.

There were 21.2 and 20.2 million weighted average shares outstanding during the first quarters of 2014 and 2013 respectively. At March 31, 2014, there were 21,185,614 common shares effectively outstanding.

Summarized (without notes) interim consolidated balance sheets and statements of earnings and comprehensive income, along with segmented premium and combined ratio information, follow and form part of this news release. Fairfax's detailed first quarter report can be accessed at its website www.fairfax.ca.

As previously announced, Fairfax will hold a conference call to discuss its first quarter results at 8:30 a.m. Eastern time on Friday, May 2, 2014. The call, consisting of a presentation by the company followed by a question period, may be accessed at 1 (800) 857-9641 (Canada or U.S.) or 1 (517) 308-9408 (International) with the passcode "Fairfax". A replay of the call will be available from shortly after the termination of the call until 5:00 p.m. Eastern time on Friday, May 16, 2014. The replay may be accessed at 1 (800) 884-1527 (Canada or U.S.) or 1 (203) 369-3842 (International).

Fairfax Financial Holdings Limited is a financial services holding company which, through its subsidiaries, is engaged in property and casualty insurance and reinsurance and investment management.

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; risks associated with implementing our business strategies; the timing of claims payments being sooner or the receipt of reinsurance recoverables being later than anticipated by us; the inability of our subsidiaries to maintain financial or claims paying ability ratings; 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 failure of any of the loss limitation methods we employ; the impact of emerging claim and coverage issues; our inability to access cash of our subsidiaries; our inability to obtain required levels of capital on favourable terms, if at all; 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; 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; and assessments and shared market mechanisms which may adversely affect our U.S. insurance subsidiaries. Additional risks and uncertainties are described in our most recently issued 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.

                                                                            
CONSOLIDATED BALANCE SHEETS                                                 
as at March 31, 2014 and December 31, 2013                                  
(unaudited - US$ millions)                                                  
                                                                            
                                                    March 31,   December 31,
                                                         2014           2013
                                              ------------------------------
Assets                                                                      
Holding company cash and investments                                        
 (including assets pledged for short sale and                               
 derivative obligations - $103.7; December 31,                              
 2013 - $124.4)                                       1,113.7        1,296.7
Insurance contract receivables                        2,150.7        2,017.0
                                              ------------------------------
                                                      3,264.4        3,313.7
                                              ------------------------------
Portfolio investments                                                       
Subsidiary cash and short term investments            7,075.1        7,445.7
Bonds (cost $9,529.5; December 31, 2013 -                                   
 $9,190.0)                                           10,367.4        9,550.5
Preferred stocks (cost $582.3; December 31,                                 
 2013 - $565.1)                                         549.8          541.8
Common stocks (cost $3,235.9; December 31,                                  
 2013 - $3,305.5)                                     3,935.6        3,835.7
Investments in associates (fair value                                       
 $2,486.5; December 31, 2013 - $1,815.0)              1,989.8        1,432.5
Derivatives and other invested assets (cost                                 
 $714.7; December 31, 2013 - $667.8)                    276.5          224.2
Assets pledged for short sale and derivative                                
 obligations (cost $571.0; December 31, 2013 -                              
 $829.3)                                                616.1          802.9
                                              ------------------------------
                                                     24,810.3       23,833.3
                                              ------------------------------
                                                                            
Deferred premium acquisition costs                      477.9          462.4
Recoverable from reinsurers (including                                      
 recoverables on paid losses - $380.7;                                      
 December 31, 2013 - $353.3)                          4,934.3        4,974.7
Deferred income taxes                                   706.9        1,015.0
Goodwill and intangible assets                        1,368.8        1,311.8
Other assets                                          1,093.1        1,047.9
                                              ------------------------------
                                                     36,655.7       35,958.8
                                              ------------------------------
                                              ------------------------------
                                                                            
Liabilities                                                                 
Subsidiary indebtedness                                  61.9           25.8
Accounts payable and accrued liabilities              2,016.0        1,800.4
Income taxes payable                                     82.7           80.1
Short sale and derivative obligations                                       
 (including at the holding company - $28.0;                                 
 December 31, 2013 - $55.1)                             182.7          268.4
Funds withheld payable to reinsurers                    458.0          461.2
                                              ------------------------------
                                                      2,801.3        2,635.9
                                              ------------------------------
Insurance contract liabilities                       21,769.0       21,893.7
Long term debt                                        2,991.4        2,968.7
                                              ------------------------------
                                                     24,760.4       24,862.4
                                              ------------------------------
                                                                            
 Equity                                                                     
Common shareholders' equity                           7,807.6        7,186.7
Preferred stock                                       1,166.4        1,166.4
                                              ------------------------------
Shareholders' equity attributable to                                        
 shareholders of Fairfax                              8,974.0        8,353.1
Non-controlling interests                               120.0          107.4
                                              ------------------------------
Total equity                                          9,094.0        8,460.5
                                              ------------------------------
                                                     36,655.7       35,958.8
                                              ------------------------------
                                              ------------------------------
                                                                            
CONSOLIDATED STATEMENTS OF EARNINGS                                         
for the three months ended March 31, 2014 and 2013                          
(unaudited - US$ millions except per share amounts)                         
                                                                            
                                                                            
                                                         First quarter      
                                                           2014        2013 
                                                    ----------------------- 
Revenue                                                                     
 Gross premiums written                                 1,900.7     1,891.8 
                                                    ----------------------- 
 Net premiums written                                   1,612.4     1,605.7 
                                                    ----------------------- 
                                                                            
 Gross premiums earned                                  1,714.9     1,761.2 
 Premiums ceded to reinsurers                            (277.2)     (298.4)
                                                    ----------------------- 
 Net premiums earned                                    1,437.7     1,462.8 
 Interest and dividends                                    90.5        99.5 
 Share of profit of associates                             42.6        18.7 
 Net gains on investments                               1,006.1         9.4 
 Other revenue                                            305.6       194.2 
                                                    ----------------------- 
                                                        2,882.5     1,784.6 
                                                    ----------------------- 
Expenses                                                                    
 Losses on claims, gross                                1,093.2     1,173.1 
 Losses on claims ceded to reinsurers                    (217.0)     (269.6)
                                                    ----------------------- 
 Losses on claims, net                                    876.2       903.5 
 Operating expenses                                       300.1       284.4 
 Commissions, net                                         239.8       240.2 
 Interest expense                                          49.8        53.3 
 Other expenses                                           297.3       191.1 
                                                    ----------------------- 
                                                        1,763.2     1,672.5 
                                                    ----------------------- 
Earnings before income taxes                            1,119.3       112.1 
Provision for (recovery of) income taxes                  334.3       (51.2)
                                                    ----------------------- 
Net earnings                                              785.0       163.3 
                                                    ----------------------- 
                                                    ----------------------- 
                                                                            
Attributable to:                                                            
Shareholders of Fairfax                                   784.6       161.6 
Non-controlling interests                                   0.4         1.7 
                                                    ----------------------- 
                                                          785.0       163.3 
                                                    ----------------------- 
                                                    ----------------------- 
                                                                            
Net earnings per share                               $    36.35  $     7.22 
Net earnings per diluted share                       $    35.72  $     7.12 
Cash dividends paid per share                        $    10.00  $    10.00 
Shares outstanding (000) (weighted average)              21,193      20,244 
                                                                            
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME                             
for the three months ended March 31, 2014 and 2013                          
(unaudited - US$ millions)                                                  
                                                                            
                                                            First quarter   
                                                              2014     2013 
                                                          ----------------- 
                                                                            
Net earnings                                                 785.0    163.3 
                                                          ----------------- 
                                                                            
  Other comprehensive income (loss), net of income taxes                    
                                                                            
 Items that may be subsequently reclassified to net                         
  earnings                                                                  
   Change in unrealized foreign currency translation gains                  
    (losses) on foreign operations                           (42.6)   (70.5)
   Change in gains (losses) on hedge of net investment in                   
    Canadian subsidiaries                                     53.6     31.1 
   Share of other comprehensive income (loss) of                            
    associates, excluding gains (losses) on defined                         
    benefit plans                                              6.5     (8.6)
                                                          ----------------- 
                                                              17.5    (48.0)
                                                          ----------------- 
 Items that will not be subsequently reclassified to net                    
  earnings                                                                  
   Share of gains (losses) on defined benefit plans of                      
    associates                                                59.4      2.2 
                                                          ----------------- 
                                                                            
Other comprehensive income (loss), net of income taxes        76.9    (45.8)
                                                          ----------------- 
Comprehensive income                                         861.9    117.5 
                                                          ----------------- 
                                                          ----------------- 
                                                                            
Attributable to:                                                            
Shareholders of Fairfax                                      860.5    116.3 
Non-controlling interests                                      1.4      1.2 
                                                          ----------------- 
                                                             861.9    117.5 
                                                          ----------------- 
                                                          ----------------- 

SEGMENTED INFORMATION

(unaudited - US$ millions)

Net premiums written and net premiums earned by the insurance and reinsurance operations (excluding Runoff) in the first quarters ended March 31, 2014 and 2013 were:

                                                                            
Net Premiums Written                                                        
                                                                            
                                                          First quarter     
                                                    ------------------------
                                                            2014        2013
                                                    ------------------------
Insurance - Canada (Northbridge)                           192.7       247.6
   - U.S. (Crum & Forster and Zenith National)             627.3       577.2
   - Asia (Fairfax Asia)                                   103.2        76.1
Reinsurance - OdysseyRe                                    572.5       604.0
Insurance and Reinsurance - Other                          115.8       100.9
                                                    ------------------------
Insurance and reinsurance operations                     1,611.5     1,605.8
                                                    ------------------------
                                                    ------------------------
                                                                            
Net Premiums Earned                                                         
                                                                            
                                                          First quarter     
                                                            2014        2013
                                                    ------------------------
Insurance - Canada (Northbridge)                           226.0       245.7
   - U.S. (Crum & Forster and Zenith National)             481.8       468.8
   - Asia (Fairfax Asia)                                    75.4        54.9
Reinsurance - OdysseyRe                                    522.7       556.5
Insurance and Reinsurance - Other                           96.8       106.3
                                                    ------------------------
Insurance and reinsurance operations                     1,402.7     1,432.2
                                                    ------------------------
                                                    ------------------------

Combined ratios of the insurance and reinsurance operations (excluding Runoff) in the first quarters ended March 31, 2014 and 2013 were:

                                                       First quarter       
                                                         2014         2013 
                                                 ------------------------- 
Insurance - Canada (Northbridge)                         99.8%       100.5%
   - U.S. (Crum & Forster and Zenith National)           96.6%       103.1%
   - Asia (Fairfax Asia)                                 93.8%        91.0%
Reinsurance - OdysseyRe                                  85.6%        82.9%
Insurance and Reinsurance - Other                        97.7%        98.4%
                                                 ------------------------- 
Insurance and reinsurance operations                     93.0%        94.0%
                                                 ------------------------- 
                                                 ------------------------- 

Contacts:
Fairfax Financial Holdings Limited
John Varnell
Vice President, Corporate Development
(416) 367-4941

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