Fairfax Financial Holdings' Equity Portfolio is Significantly Hedged

net earnings of $469.0 million ($21.31 per diluted share) compared to $856.8 million ($43.75 per diluted share) in 2009, reflecting lower net gains on investments and weaker underwriting results, partially offset by a corporate income tax recovery for 2010.

Book value per share increased to $379.46 at December 31, 2010 from $369.80 at December 31, 2009, an increase of 5.3% (adjusted for the $10 per share common dividend paid in the first quarter of 2010). In the 2010 fourth quarter, Fairfax had a net loss of $364.6 million ($18.43 per diluted share) compared to net earnings of $79.4 million in the fourth quarter of 2009 ($1.65 per diluted share). The loss arose primarily from higher net mark to market investment losses in the fourth quarter of 2010 (net losses on investments of $683.9 million compared to $30.3 million in the fourth quarter of 2009), partially offset by the higher corporate income tax recovery in the fourth quarter of 2010.

“After an outstanding three years during which our book value per share went up by more than 146%, our book value per share increased by only 5% in 2010 to $379 per share,” said Prem Watsa, Chairman and CEO of Fairfax. “Our muted increase in book value in 2010 reflected mark to market losses in our bond portfolios particularly our muni bonds, primarily as a result of an increase in interest rates, together with the elimination of significant gains in our common stock portfolios due to our decision to hedge those stock portfolios. We remain comfortable with the safety and total return potential of our bond holdings which consist primarily of high quality municipals (predominantly guaranteed by Berkshire Hathaway) and government securities which we plan to hold for the long term. Our excess capital generated over the last few years permitted Fairfax to acquire five companies: Zenith National Insurance, First Mercury (closed on February 9, 2011), Pacific Insurance Berhad, Malaysia (expected to close in the first quarter of 2011), a 41% interest in Gulf Insurance and General Fidelity Insurance (a runoff company). Our company continues to be soundly financed and we ended the year with $1.5 billion of cash and marketable securities at the holding company level.

Fairfax holds significant investments in equities and equity-related securities. In response to the significant appreciation in equity market valuations during 2009 and 2010 and uncertainty in the economy, the company continued hedging its equity investment exposure by entering into total return swaps referenced to the Russell 2000 index (at an average Russell 2000 index value of 646.5) in addition to its existing swap contracts referenced to the S&P 500 index (at an average S&P 500 index value of 1,062.52). At December 31, 2010, these hedges represented 88.8% of the company’s equity and equity related holdings. The market value and the liquidity of these investments 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.