Financials_FFH.TO_Hold_03_02_2015-3 (FInal Version)

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Financials Sector Team October 22/2014
Rating: HOLD ACE Limited. (TSX: FFH.TO)
Price Target: $699.97 Industry: Multi-Line Insurance
Close: 02/27/2015
Price: $656.00
52 Wk. High: $438 - $697
Shares Out (mm): 22.0
Mkt. Cap (mm): $14,409.6
Source: Capital IQ, Bloomberg
2013 2014 2015 2016
Total Revenue
(B) $5.90 $10.00 $10.20 $11.40
Net Income -$634.00 $1,633.20 $1,098.50 $1,329.19
EPS BCF -$31.15 $73.01 $50.00 $60.50
EPS Consensus $34.13 $29.69
Difference $15.87 $30.81
Source: Capital IQ, Bloomberg, BCF Analysis (all values are USD)
Investment Action & Thesis
The Financials team is initiating our coverage of Fairfax Financial Holdings
(FFH.TO) with a HOLD rating and a target price of $699.97 representing a potential
upside of 6.7%. FFH.TO ’s strengths lie in its: 1) Unique investment philosophy, 2)
Improved underwriting Results and exposure to niche insurance products, 3)
Uncorrelated market returns that provide “Hedging capabilities” for our portfolio,
4) Diversified investment and income portfolios and 5) The ability to consistently
increase book value per share and generate capital gains for shareholders. Further
analysis will reveal that at the current prices Fairfax Financial presents to much
uncertainty to invest, but the opportunity to do so could arrive if a lower valuation
provides an entry point and a larger margin of safety is taken advantage of.
Key Investment Highlights:
We have an overall positive stance towards the P&C insurance and reinsurance
space in the medium term. Even though the industry has low barriers of entry and
the competitive landscape is highly concentrated, companies such as Fairfax
Holdings that operate on a global scale in fast growing markets that are not yet fully
penetrated with niche products will outperform the broader market. Looking more
closely at the drivers behind out thesis we find:
Fairfax’s Unique Investment approach will continue to deliver positive results
going forward. The way this company does business differs substantially from most
property and casualty insurers. The company operates using a business model
similar to that of “Berkshire Hathaway” and” Markel Corporation”. Basically, the
company takes the “float” generated through their insurance business and reinvests
it into companies that have competitive “moats” and operate on stable predictable
type industries, generating a lot of free cash flow.
These companies are selected using a deep value investment approach that seeks to
purchase these business at prices below their intrinsic value. Over the years this has
allowed the company to grow book value at a compound annual growth rate of
21.3% for the 1985-2013 period. We can see a summary of this growth in the bellow
graph:
Basic Information
Beta (vs SPTSX): 0.48
Cash & ST Invst.: $1,244.30
Total Debt (bn): $3,977.7
Dividend Yield: 1.9%
P/E (2015): 13.39
P/B (2015): 1.42
P/TBV: 1.71
P/B (Ex AOCI): 1.51
Comb. Ratio: 90.8%
Cash F/Share: $34.74
Source: Capital IQ, Value Line,
Bloomberg
Company Overview
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.
Fairfax seeks to differentiate itself by
combining disciplined underwriting with
the investment of its assets on a total
return basis, which Fairfax believes
provides above-average returns over the
long-term. The present Chairman and
Chief Executive Officer, V. Prem Watsa
founded Fairfax in 1985. The company has
been under present management since
1985 and is headquartered in Toronto,
Canada.
Source: Company Web Site
Analysts
BCF Financial Team:
Alfredo Leon
Ryan Diplock
Paul Ramey

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Improved Underwriting Results, due to
penetration of untapped markets with niche-
like products. The company’s growth in the
insurance space has been mainly inorganic
growth through acquisitions. The company was
early entering the Asian market with Fairfax
Asia celebrating its 10 year anniversary in 2012.
Fairfax Asia generates about $1 B in gross
premiums written. Furthermore, the company is
also present in India given the company’s stake
(26% interest) in ICICI Lombardi the non-life
Indian Insurer that generates $1.2 B in gross
premiums. The company is also exposed to
China trough Alltrust (15% interest).
Over the past couple of years the company has
been able to leverage their insurance expertise to
the newly acquired companies as evidenced in
the improved combined ratio of the companies
post-acquisition.
Source: CEO Letter to Shareholders 2013
Furthermore, Fairfax is increasing their exposure to new insurance “niche type products” that are less “commodity type”
and have room for improved pricing. In 2013 for example, Fair Fax Financial acquired Hartville (pet insurer) for $34 million
from a private equity firm. Hartville generates about $40 million of insurance business averaging a combined ratio of 85%
for the last 7 years. In the environmental liability field the company also acquired American Safety becoming the market
leader in this segment. These type of products proof more profitable because of improved pricing and reduced market
penetration.
In terms of ability to write premiums, the company also has plenty of dry powder left. Under “bad” market conditions in
the insurance space (2002-2005) the company wrote on average 1.5 times statutory surplus. The bellow table shows that at
current levels the weighted average is around .9x. If we compare this to (2002-2005) period this means there is additional
capacity to write premiums of about $2.7B in a better market. All of these factors combined have allowed for the company
to substantially improve their insurance business operation as witnessed by the declining combined ratio. For year end 2014
Fairfax Financial Holding further improved the combined ratio to reach 90.8%.
Source: CEO Letter to Shareholders 2013, Company Reports.

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Uncorrelated Market Returns, that offer hedging capabilities for the BCF Portfolio. As pointed out by the quant team during
the last session the financial sector team is the sector with the highest beta against the S&P 500 with beta of 1.68. This stock
offers the opportunity to generate returns that are not correlated with the market. An indicator of this is the stock’s low beta
of 0.48. We believe the reason for this might be two-fold. On one hand, the company invest the float generated through the
insurance in businesses suitable to a deep value strategy. That is, trying to find companies trading for less than their intrinsic
value with a long term investment horizon and offer substantial free cash flow. This is counterintuitive to most companies
in Wall Street that focus a lot more on earnings and hence this fact, chase yield.
On the other hand at the end in 2014 equities made 19.3% of the investment portfolio of the company, while cash bonds and
other low risk financial products 67.7%, as summarized by the bellow pie chart.
For year end 2014 the book value of the investment portfolio was standing
at $25,109 million. However, Fairfax holds short positions totaling $6,857
million in the S&P 500/TSX 60 and Russell 2000 indexes. This means that
the company’s net position is long by $18,252 million. This has to do with
the fact that the company’s CEO Mr Watsa, has a bearish stance to the
overall markets and feels that they are overvalued at current levels. It is of
interest to remember that Mr. Watsa has hold similar short positions ($4.2
Billion) in the past and is most famous for obtaining profits north of $3.3
B when the market crashed back in 2008. He also successfully called the
crash of 1987 and the Japanese decline in 1990. Further proof of his
Source: Company Reports.
investment conviction is that he hold the short position for 5 years before it finally paid off. Also, the investment portfolio is
highly concentrated on a reduced number of holdings. This is evident if we look at the bellow pie chart. In conclusion we
believe that the combination of these factors provides some explanation as to why the returns are uncorrelated. We see this
as a positive for both the stock and the financial sector portion of the BCF portfolio.
Source: Company Reports.
% of Holdings

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Diversified Investments and Income Portfolio. Fairfax diversification ads significant value in terms of the quality of the
earnings the company. Being present over a broad set of markets and different type of well-run businesses spreads the risk
over a broader sets of assets and will eventually (as long term investments mature) reduce the cyclicality in terms of the cash
flows that run to the holding company and ultimately EPS. From a geographical perspective, the company is well diversified
with about 80% of the revenues being international. United Sates represents (56%) while Asia and India compromise (24%).
The remainder of revenues are derived from Canadian local operations.
In terms of revenue streams the company derives about 62% of revenues from their insurance business operations and 38%
from the investment portfolio and share of profit form associates. As the two bellow graphs show sources of revenue are
well diversified. This mitigates the risk over a broader set of asset classes and markets; providing additional support for the
liquidity commitments of the insurance business.
.
.
Source: Capital IQ, Bloomberg.
Investment Risks:
Risk of Natural Catastrophes: Fairfax Financial Holding’s business model relies on their ability to make underwriting
profits; this ability is threatened if large Natural Catastrophes were to occur more frequently or on a larger scale than
anticipated.
Liquidity Risk: Liquidity is an important factor for any a P/C insurer, because of the insurer’s need to pay claims promptly.
Companies that fail to set aside enough cash to face commitments face liquidity issues. In the case of Fairfax Financial, the
company faces less risk than most property and casualty insurers because they have been modest in their underwriting
practices by only leveraging up to around .9x statutory surplus. Also, they are increasing exposure to niche products and
concentrating efforts on low penetrated markets.
Pricing and Competitive Landscape: Theoretically, insurance prices should move in the opposite direction of interest rates,
given the fact that higher interest rates translates in to higher investment yields on Bond Portfolios (which are a large portion
of the earning assets of insurance companies). However, during a period of historically low interest rates, insurance pricing
remained competitive. We do not expect this to change on the near future, and in the long run companies who restrain from
overexposing themselves to risk will outperform.
0%
20%
40%
60%
80%
100%
120%
Revenues by Source
Portfolio of Investments and Share of
Profit from Associates
Insurance Business
Revenues by Geography
United States Asia and India Canada

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General Market Risks: As with any other stock Fairfax Financial Holdings faces investment risks associated with market
movements. Moreover, as explained above, because of the investment philosophy of the company 40% of revenues come
from assets that are not very correlated to general market conditions. This means that in a down market companies like
Fairfax Financial will tend to outperform while companies that have higher betas will underperform.
This year, the opposite story might be true given the general positive climate that rains in the U S economy today with
unemployment, consumer spending, consumer credit quality and GDP rates at healthy levels. If this were to propel a rally
on the markets Fairfax Financial will miss that upside given the company is heavily hedging against a market drop in in the
S&P 500/TSX 60 and Russell 2000 indexes.
Currency Exchange Risk. With about 80% of revenues coming from International Operations. Fairfax Financial faces
potential negative effects derived from currency exchange risks. However, 56% of that 80% comes from the United States so
the current trend of the strengthen dollar should not significantly impact the company. If anything the US dollar has been
appreciating against the Canadian dollar around 15% in the last 12 months. Despite this, the Fairfax Financial Holdings
exposure to the Asian and Indian Markets still merits caution given that the remaining 24% of revenues comes from this
geography’s.
Geopolitical Risk. The company is exposed to important sources of geopolitical risk for being present in markets such as
Asia and India. Moreover, given the investment philosophy of the company many of these investments are long term and
are affected by major political and regulatory changes in government.
Nonetheless, during the last conference call celebrated February 13th. The CEO, Mr Watsa pointed out that India’s current
Prime Minister Mr. Modi has a friendly track record with international businesses and has positive stands toward
International capital Inflows. Management suggests that there is a strong possibility that he could get reelected if he fulfills
his duties well as prime minister. This is very favorable for Fairfax Financial Holdings as the company recently set up and
investment vehicle that manages close to $1B to allocate capital in India over long term investments.
Business Overview:
Fairfax Financial Holdings Ltd. (“Fairfax”) was incorporated under the Canada Corporations Act on March 13, 1951 and
continued under the Canada Business Corporations Act in 1976. Fairfax's original name was Markel Service of Canada Ltd.,
The name was subsequently changed to Markel Financial Holdings Ltd. and, in May 1987, to their current name of Fairfax
Financial Holdings Ltd. The company through its subsidiaries, is engaged in property and casualty insurance and
reinsurance and investment management businesses. The company operates under the following business segments:
Canadian. Insurance
Northbridge Financial, based in Toronto, provides property and casualty insurance products in the Canadian market
through its Northbridge Insurance and Federated subsidiaries. In 2013, Northbridge’s net premiums written were Cdn
$1,062.1 million. At year-end, the company had statutory equity of Cdn $1,245.5 million and there were 1,491 employees.
U.S. Insurance.
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. C&F’s other specialty niche property
and casualty business and its accident and health insurance business are carried on through its Fairmont Specialty division.
In February 2011, C&F acquired First Mercury, which offers insurance products and services primarily related to specialty
commercial insurance markets, focusing on niche and underserved segments. In 2013, C&F’s net premiums written were US
$1,232.9 million. At year-end, the company had statutory surplus of US$1,141.5 million and there were 1,695 employees.
Zenith National, based in Woodland Hills, California, is primarily engaged in the workers’ compensation insurance

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business in the United States. In 2013, Zenith National’s net premiums written were US $700.3 million. At year-end, the
company had statutory surplus of US $515.8 million and there were 1,480 employees.
Asian Insurance.
First Capital, based in Singapore, writes property and casualty insurance primarily in Singapore markets. In 2013, First
Capital’s net premiums written were SGD 186.3 million (approximately SGD 1.3 = US$1). At year-end, the company had
shareholders’ equity of SGD 459.7 million and there were 140 employees.
Falcon Insurance, based in Hong Kong, writes property and casualty insurance in niche markets in Hong Kong. In 2013,
Falcon’s net premiums written were HK $466.9 million (approximately HK$7.8 = US$1). At year-end, the company had
shareholders’ equity of HK $566.6 million and there were 66 employees.
Pacific Insurance, based in Malaysia, writes all classes of general insurance and medical insurance in Malaysia. In 2013,
Pacific Insurance’s net premiums written were MYR 151.9 million (approximately MYR 3.1 = US$1). At year-end, the
company had shareholders’ equity of MYR 256.1 million and there were 207 employees.
Other insurance.
Fairfax Brazil, based in Sao Paulo, commenced writing insurance in March 2010 in all lines of business in Brazil. In 2013,
Fairfax Brazil’s net premiums written were BRL 130.8 million (approximately BRL 2.1 = US$1). At year-end, the company
had shareholders’ equity of BRL 78.5 million and there were 71 employees.
Reinsurance.
OdysseyRe, based in Stamford, Connecticut, underwrites treaty and facultative reinsurance as well as specialty insurance,
with principal locations in the United States, Toronto, London, Paris, Singapore and Latin America. In 2013, OdysseyRe’s
net premiums written were US $2,376.9 million. At year-end, the company had shareholders’ equity of US $3,809.3 million
and there were 790 employees.
Advent, based in the U.K., is a reinsurance and insurance company, operating through Syndicate 780 at Lloyd’s, focused on
specialty property reinsurance and insurance risks. In 2013, Advent’s net premiums written were US $157.0 million. At year-
end, the company had shareholders’ equity of US $148.4 million and there were 81 employees.
Polish Re, based in Warsaw, Poland, writes reinsurance in the Central and Eastern European regions. In 2013, Polish Re’s
net premiums written were PLN 265.8 million (approximately PLN 3.2 = US$1). At year-end, the company had shareholders’
equity of PLN 264.7 million and there were 42 employees.
Group Re primarily constitutes the participation by CRC Re and Wentworth (both based in Barbados) in the reinsurance of
Fairfax’s subsidiaries by quota share or through participation in those subsidiaries’ third party reinsurance programs on the
same terms and pricing as the third party reinsurers. Group Re also writes third party business. In 2013, Group Re’s net
premiums written were US $105.0 million. At year-end, the Group Re companies had combined shareholders’ equity of US
$467.7 million.
Brit, on February 16th 2015 Fiarfax Financial Holdings announced the agreement to purchase Brit. Brit PLC, through its
subsidiaries, provides insurance and reinsurance services focusing on property, casualty, and energy sectors worldwide. Its
principal products include property, marine, energy, accident and health, specialty, terrorism, political, aerospace, casualty
and specialist liability, and property and casualty treaty insurance. The company wrote around $1.5 billion (about 25% of
the premiums currently written By Fair Fax in 2014) in premiums in 2014 and has around 400 employees.
Runoff
The runoff business comprises the U.S. and the European runoff groups. At year-end, the runoff group had combined
shareholders’ equity of US$ 1,597.8 million.

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The Resolution Group (TRG) and the River Stone Group (run by TRG management) manage runoff under the River Stone
name. At year-end, TRG/River Stone had 222 employees in the U.S., located primarily in Manchester, New Hampshire, and
110 employees in its offices in the United Kingdom.
Other
Hamblin Watsa Investment Counsel, founded in 1984 and based in Toronto, provides investment management to the
insurance, reinsurance and runoff subsidiaries of Fairfax.
The bellow graph, will help to better understand the broad set of sectors/asset classes that Fairfax uses to invest the float
generated through the insurance business.
Source: Capital IQ
One fact that is of interest to note is the timing of these investments. Which we believe reflect the companies approach to
deep-value investing and emphasis on growing book value on a per share bases. As the bellow graph shows over the last a
17 year period the company invested more heavily in times of financial distress (2008-2009), reflecting the opportunity to
purchase assets trading below their intrinsic value.
Source: Capital IQ
The fact that the company is investing heavily in Europe with the acquisition of (Brit U.K insurer, and QBE Ukrainian

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Insurance Company) provides additional support to our thesis, and explains why the company sits with a significant cash
(approximately $1.2 B) on the balance sheet to deploy capital when opportunity exists.
Industry Analysis:
Because most of the operating cash flows come from Fairfax’s Financial P & C Reinsurance operations we decided to focus
our analysis on the external factors that impact this space and shape the competitive landscape. Industry at a Glance/Drivers:
Source: IBIS World
Industry at a Glance. The Global Reinsurance Carriers industry provides support to direct insurance markets all over the
world. Reinsurers assume part or all of the liability for one or more insurance policy and compensate insurers within
contracted parameters for prescribed losses incurred under that insurance policy. This transfers part or all of the risk to
reinsurers, helping insurers to increase their capacity and limit their liability. The global reinsurance market then spreads
this risk across more companies and countries, thereby maximizing the spread of risk and protection against unforeseen
losses. This improves the capital efficiency of the overall insurance market so that less capital is required to back any unit of
risk. Reinsurance carriers generate revenue not just from reinsurance transactions but also through investing their earned
premiums.
Revenues and Trends. In terms of revenues, the industry is forecasted to experience modest gains of around 4%-5% until
2020. These forecast take into account the following trends:
Expansion Projects, the industry as a whole is experiencing a broad consolidation trend where the superior capital position
of some reinsurers places them in perfect position to acquire weaker rivals at bargain prices. This will limit the growth in
terms of number of operators in the future.

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P & C Outlook, here the state of the economy will shape the global demand for Reinsurers. This is because growth in demand
for insurance products is tightly related to new purchases of big ticket items such as: houses, housing renovations,
automobiles, boats, appliances; that are tied to the public’s ability to purchase and finance such items. This is why an
expanding economy would benefit reinsurers at least form a demand perspective.
L&H optimism, Demand for life insurance and annuities has
been hit as stretched consumers reigned in their overall
expenditure. This has occurred despite some market segments
experiencing a life insurance renaissance as wealthier
consumers shift from wealth accumulation to wealth protection.
Interest in life insurance and annuities is expected to surge as
consumers who were burnt by the financial turmoil seek out
safer wealth management options. Many consumers in the post
crisis world, however, will be unable to devote the same level of
resources to life insurance and annuities. This will be
particularly the case for people nearing retirement. With
dwarfed pension plans, those nearing retirement will have fewer
dollars to transfer into an annuity.
Source: IBIS World
Industry Life Cycle. The insurance space is considered to be a mature. Given the following: The industry “value added” is
growing at a slower rate than GDP, the industry is ongoing a consolidation trend, and the industry has become saturated by
insurance products in the most developed economies.
Breakdown of Product and Geography.
Product Type. Premiums by Region
Source: IBIS World

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Cost Structure. If we take a look at the cost structure we see that the biggest components of cost is the “other” category. This
segment includes loss and loss adjustment expenses, commission and brokerage costs, administrative costs, legal costs and
other operating costs associated with investment income.
Source: IBIS World
Key Success Factors. IBIS World identifies 250 Key Success Factors for a business. The most important for this industry are:
Possession of accurate information: A large database of risk-related information enables reinsurers to price policies
accurately and calculate requisite surplus levels. Without accurate information, models defining the price of risk become
fundamentally flawed.
Market research and understanding: A strong understanding of the market enables reinsurers to challenge competitors
without engaging in unsustainable activities, such as dangerous diversification into other reinsurance lines or overly
aggressive price-cutting.
Having a good technical knowledge of the product: Reinsurance carriers compete with numerous international companies
and service providers, and it is vital to have good knowledge and experience in the types of business underwritten.
Must comply with government regulations: Reinsurers must meet specific capital requirements. Failing to do so can see the
reinsurer's operating license revoked.
Ability to effectively manage risk: Reinsurers must seek to limit their exposure to loss on any single agreement through a
diversified risk profile, including lines of business, geographic spread of business and the spread of retrocession
arrangements.
Management:
FFH.TO’s management team is well known for their conservative steady growth approach and diligent focus towards strong
underwriting premium discipline and investment philosophy. Most of the management team has been together for quite a
while the average tenure of the operating team being about 7 years. Key leaders in FFH.TO’s team include:
Prem Watsa, has been the Chairman of the Board of Directors and Chief Executive Officer since 1985. He has served as Vice
President of Hamblin Watsa Investment Counsel Ltd. since 1985. Mr.Watsa is known to some as the “Warren Buffet of
Canada” do to his deep value investment strategy as well as Fair Fax Financial Holding’s resemblance to the operating model
Industry Table Summary Trend
Competition High and Increasing
Barriers of Entry Medium and steady
Industry Globalization High and Increasing
Capital Intensity Medium
Technology & Systems Medium
Revenue Volatility Low
Regulation and Policy Heavy and increasing

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of Berkshire Hathaway. Watsa, successfully predicted, and profited from the 2008 stock market crash. He also correctly
called the 1990 Japanese stock market crash and the market crash of 1987.
Mr. Paul C. Rivett, has been the President of Fairfax Financial Holdings Limited since July 19, 2013. Mr. Rivett also serves
as the Chief Operating Officer at Hamblin Watsa Investment Counsel Ltd. Moreover, Mr. Rivett served as a Vice President
of Operations at Fairfax Financial Holdings Ltd. since August 1, 2012 until July 19, 2013, Chief Legal Officer since January
2007 and Vice President since April 2004.
David J. Bonham, is Chief Financial Officer & Vice President at Fairfax Financial Holdings Ltd. and Chief Investment Officer
at Hamblin Watsa Investment Counsel Ltd. Prior to joining Hamblin Watsa Investment Counsel, Mr. Bonham was employed
as a Senior Manager by PricewaterhouseCoopers LLP. We feel confident on the management’s ability to continue to provide
positive result for the company by combining underwriting discipline and deep value. Furthermore the team has an excellent
track record and a sound company culture based on firm guiding principles. For more information on values and objectives
visit: http://www.fairfax.ca/Corporate/guiding-principles/default.aspx
Shareholder Structure:
Institutions and insiders own about 60% of the shares of FFH.TO’S. Also worth noting, is that the CEO Mr. Watsa is the
largest single holder of shares with about 9% of the total shares outstanding. Such large insider ownership is a positive
for the stock because it provides reassurance to some extent that management interests are aligned with those of
shareholders.
Source: Capital IQ
Stock Performance:
Given the company’s investment philosophy FFH.TO’s stock price displays little correlation (see graph) with both the
S&P 500 and the S&P/TSX Composite Index. This is even more noticeable if you consider the low beta the stock (0.48).
Furthermore, during this period the stock has outperform the S&P/TSX composite index and underperformed slightly
the S&P 500 index with a return of 79.80% versus 30.39% and 91.53% respectively.

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Source: Bloomberg
Consensus Recommendations:
This stock is not highly covered by analysts. That being said, out of the 5 analyst that do cover it 3 of them have “BUY”
ratings on it while the reminder of the recommendations appear “restricted” on Bloomberg. The ratings imply an average
12 month return potential of 12.2% and a price target of $729.93.
In addition to using Bloomberg for analyst consensus, we contacted two equity analysts to discuss our thesis on the stock.
Tom Mackinnon of BMO Capital Markets and Neil Fonseca of EVA Dimensions. While Neil was unable to comment a lot
on the performance of the stock as he admitted not to cover it in depth, Tom provided us with the following insights
regarding the stock’s performance going forward:
Stock Rating. Market Perform. Tom feels that although the stock has an excellent track record at being able to grow
book value per share over the last 30 years, form a Valuation Perspective the company is trading slightly higher
to where it usually trades. According to the analyst from a price to book perspective the stock is trading now at a
15% premium.

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Valuation. Regarding valuation, Tom prefers to use relevant multiples of comparable peers for Fair Fax Financial
Holding (mainly P/B, P/TB). This is due to the volatility of EPS the company has had in the past. He restrains
form forecasting cash flows given that a substantial amount of revenues (40%) that come in the from of investment
gains on portfolios that are hard to model, and assets (equity stakes on partnerships) that have a long term
investment horizons and are somewhat less predictable.
Competitive Landscape. Regarding competition, Tom expressed that space is getting very competitive and a lot of
new players are entering the market. The relatively low amount of catastrophes for P & C insurers has caused a
general increase in the number of players. In addition these new players operate under a different structure
compared to the conventional insurer. Consider for example, the reinsurance market where a lot of hedge funds
have entered recently and started underwriting. By taking advantage of their lower tax rate and overhead, they
can invest more aggressively the float and in turn can afford higher loss ratios. This translates into more
competitive pricing and is and overall negative for the industry.
Growth/Recent Acquisitions. In terms of the company’s ability to continue to grow the business. Tom sees the recent
acquisition of Brit the specialty insurer from the U.K for $1.88 B as big plus for the company. Taking 2014 as a
reference Fairfax Financial Holdings will now add additional capacity to write premiums of around ($1.5 Billion).
This is around 20% of Fairfax’s current underwriting capacity. Considering the increase in underwriting capacity
that will generate cash to continue to invest in other assets and that Fair Fax, paid around 10 times earnings
(taking in to account Trailing 12 months ending June 2014), the deal was highly accretive for FFH.TO shareholders.
Investment Risks. Concerning investment risks, the analyst noticed that as any insurance company Fairfax
Financial Holdings could face potential problems if natural Catastrophes (that are at relatively low levels) were
to increase substantially. Also, if the competitive landscape remains intense and pricing is weak revenues could
be affected due to the inability to command higher prices. Looking know at Fairfax specifically, the other big risk
the analyst noted is that returns from the investment portfolio have contributed in the past to a lot of EPS (think
of 2008-2009) but tend to be very volatile as the company restrains from chasing yield and invests more in the
long term.
Benchmarking and Valuation
Given the unpredictable nature of about 40% of the cash flows that are spread over a broad set of geographies and asset
classes (including investments in equity of associates, portfolio of common stocks and derivatives (hedges). We felt that
forecasting cash flows going forward will be too unpredictable to arrive at a proper valuation for the equity in Fairfax
Financial. Instead, we decided to use relative valuation techniques (COMPCO) to benchmark the value of the equity
against multiples of comparable peers.
For peers, we used 4 companies that act like insurance companies with active investment portfolios or mini conglomerates
where managers actively allocate capital, and are generally unconcerned with returning a lot of capital through dividends
or executing stock splits. To balance the mix we also included 4 insurance companies that operate in similar markets with
fairly similar products. Bellow, some of the most relevant metrics of the companies in the peer group that serve as
benchmarking tools.

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By using a blended compco between price to book and price
to earnings ratios (equally weighted) and taking the mean of
these multiples we arrive at a fair value of equity for Fairfax
Financial of $ 699.97. This implies about 6.7% upside from
where the stock is currently trading at. Hence, our HOLD
rating on the stock. Our thesis is that due to the volatility of
the company’s earnings the stock trades around book value
more than anything else, and currently is trading in the upper
range of that price to book ratio. If earnings were to stabilize
going forward we see a lot of good upside potential for the
stock, taking into account for example that last year the
company generated EPS of $ 77.09.
OPERATING METRICS
Company Name
LTM EBIT Margin % LTM Net Income Margin
%
LTM Total Debt/Capital % LTM Total Debt/EBITDA 5 Year Beta
RenaissanceRe Holdings Ltd. (NYSE:RNR) 56.2% 42.49% 4.77% 0.3x 0.44
Everest Re Group Ltd. (NYSE:RE) 25.6% 20.71% 7.50% - 0.61
Alleghany Corporation (NYSE:Y) 19.5% 12.98% 19.42% 1.5x 0.71
ACELimited (NYSE:ACE) 19.4% 14.74% 20.33% 2.0x 0.87
The Chubb Corporation (NYSE:CB) 18.2% 15.38% 16.66% 1.3x 0.66
Loews Corporation (NYSE:L) 17.9% 4.13% 30.21% 3.1x 1.05
Berkshire Hathaway Inc. (NYSE:BRK.A) 17.2% 11.04% 23.74% 1.9x 0.49
Markel Corp. (NYSE:MKL) 10.9% 6.26% 23.90% 3.6x 0.75
Fairfax Financial Holdings Limited (TSX:FFH) 25.4% 16.30% 24.60% 1.2x 0.48
Summary Statistics LTM EBIT Margin % LTM Net Income Margin
%
LTM Total Debt/Capital % LTM Total Debt/EBITDA 5 Year Beta
High 56.2% 42.49% 30.21% 3.6x 1.05
Low 10.9% 4.13% 4.77% 0.3x 0.44
Mean 23.1% 15.96% 18.32% 1.9x 0.7
Median 18.8% 13.86% 19.87% 1.9x 0.69
COMPCO OVERVIEW
Company Name
Day Close Price Latest Market Capitalization
Latest
LTM Tangible Book
Value/Share
Berkshire Hathaway Inc. (NYSE:BRK.A) 221,180.0 363,309.7 102,814.05
Markel Corp. (NYSE:MKL) 745.44 10,407.8 385.42
Alleghany Corporation (NYSE:Y) 472.54 7,562.5 450.23
Everest Re Group Ltd. (NYSE:RE) 177.43 7,928.6 166.74
ACE Limited (NYSE:ACE) 114.01 37,821.4 72.61
RenaissanceRe Holdings Ltd. (NYSE:RNR) 102.53 3,930.0 89.95
The Chubb Corporation (NYSE:CB) 100.45 23,189.6 68.02
Loews Corporation (NYSE:L) 41.01 15,304.0 50.48
Fairfax Financial Holdings Limited (TSX:FFH) 524.28 11,516.4 321.24
Summary Statistics Market Capitalization
Latest
LTM Tangible Book
Value/Share
High 363,309.7 102,814.05
Low 3,930.0 50.48
Mean 58,681.7 13,012.19
Median 12,855.9 128.35
RELATIVE VALUATION
Company
Name
EPS 2014 EPS 2015 (E)
Book
Value/Share
2014
Book
Value/Share
2015 (E)
Fairfax
Financial
77.09 50.0 405.0 490.05
P/E2014 P/E2015 (E) P/B 2014
High 33.5x 32.51x 1.5x
Low 6.8x 9.52x 0.8x
Mean 15.0x 16.36x 1.2x
Median 12.6x 13.33x 1.2x
= Implied
High 35,712.2 16,149.6
Low 10,457.7 8,613.1
Mean 17,971.5 12,785.1
Median 14,643.0 12,381.4
/ Shares
Outstanding
22.0 22.0
= Implied Price
High 1,625.5 735.1
Low 476.0 392.0
Mean 818.0 581.9
Median 666.5 563.6
Weight in 50% 50%
High 1180.29
Low 434.02
Mean 699.97
Median 615.03
Final Implied 699.97
Share Price 656.00
Potential 6.70%

BABSON
College Fund
15
Appendix 1: FFH.TO’s Financial Statements
Source: Capital IQ
Balance Sheet
Balance Sheet as of: Restated
Dec-31-2009
Restated
Dec-31-2010
Reclassified
Dec-31-2011
Restated
Dec-31-2012 Dec-31-2013
Press Release
Dec-31-2014
Currency USD USD USD USD USD USD
ASSETS
Investment In Debt Securities 11,321.5 12,261.7 11,023.3 10,919.5 9,790.9 11,445.5
Invest. in Equity and Pref. Securities, Total 5,921.9 5,811.7 5,362.1 6,575.9 6,297.9 6,842.6
Total Other Investments 1,166.5 634.7 4,478.4 4,689.3 3,784.3 -
Total Investments 18,409.9 18,708.1 20,863.8 22,184.7 19,873.1 18,288.1
Cash And Equivalents 2,388.4 3,260.5 1,903.8 2,769.4 3,752.4 6,668.9
Reinsurance Recoverable 3,818.6 4,145.7 4,626.5 5,896.1 5,502.1 3,982.1
Other Receivables 1,855.4 1,330.5 1,416.2 1,532.3 1,669.7 1,931.7
Deferred Policy Acq. Costs 372.0 357.0 415.9 463.1 462.4 497.6
Net Property, Plant & Equipment 168.6 184.8 210.8 259.9 241.2 -
Goodw ill 249.3 575.7 696.3 791.1 851.3 -
Other Intangibles 189.5 373.4 418.9 530.1 460.5 1,558.3
Restricted Cash 159.8 113.5 140.9 223.2 352.2 -
Other Current Assets 421.9 1,027.0 1,156.1 951.4 742.9 1,396.5
Deferred Tax Assets, LT 318.7 490.5 628.2 607.6 1,015.0 460.4
Other Long-TermAssets 99.9 881.4 929.5 736.5 1,036.0 1,347.6
Total Assets 28,452.0 31,448.1 33,406.9 36,945.4 35,958.8 36,131.2
LIABILITIES
Accounts Payable 1,137.9 45.4 23.5 64.1 22.4 2,029.1
Accrued Exp. 100.2 398.6 861.4 761.7 864.4 -
Insurance And Annuity Liabilities - 16,049.3 17,232.2 19,648.8 19,212.8 20,438.7
Unpaid Claims 14,766.7 - - - - -
Unearned Premiums 1,913.8 2,120.9 2,487.3 2,727.4 2,680.9 -
Reinsurance Payable 354.9 722.3 822.4 1,079.8 941.7 461.5
Curr. Port. of LT Debt - 2.5 87.1 182.3 - -
Short-termBorrow ings - - - 36.6 6.0 -
Long-TermDebt 2,304.7 2,717.5 2,880.9 2,779.2 2,938.0 3,179.0
Trust Pref. Securities 9.1 9.1 50.5 50.5 50.5 -
Curr. Income Taxes Payable 70.9 31.7 21.4 70.5 80.1 118.3
Other Current Liabilities 56.9 268.8 230.5 326.4 367.6 160.8
Pension & Other Post-Retire. Benefits - 139.4 154.1 182.0 166.9 -
Other Non-Current Liabilities 0.3 268.7 147.1 141.6 167.0 -
Total Liabilities 20,715.4 22,774.2 24,998.4 28,050.9 27,498.3 26,387.4
Pref. Stock, Redeemable 227.2 934.7 934.7 1,166.4 1,166.4 1,164.7
Total Pref. Equity 227.2 934.7 934.7 1,166.4 1,166.4 1,164.7
Common Stock 3,058.6 3,251.3 3,247.1 3,247.1 3,646.6 8,361.0
Additional Paid In Capital - - - - - -
Retained Earnings 3,468.8 4,394.4 4,153.8 4,389.8 3,551.2 -
Treasury Stock (28.7) (52.4) (72.7) (121.1) (140.0) -
Comprehensive Inc. and Other 893.1 104.6 99.7 138.9 128.9 -
Total Common Equity 7,391.8 7,697.9 7,427.9 7,654.7 7,186.7 8,361.0
Minority Interest 117.6 41.3 45.9 73.4 107.4 218.1
Total Equity 7,736.6 8,673.9 8,408.5 8,894.5 8,460.5 9,743.8
Total Liabilities And Equity 28,452.0 31,448.1 33,406.9 36,945.4 35,958.8 36,131.2
Supplemental Items
Total Shares Out. on Filing Date 20.0 20.5 20.4 20.2 21.2 21.2
Total Shares Out. on Balance Sheet Date 20.0 20.5 20.4 20.2 21.2 21.2
Book Value/Share $369.8 $376.33 $364.55 $378.1 $339.0 $394.83
Book Value/Share (Reported) $369.8 $376.33 $364.55 $378.1 $339.0 $394.83
Tangible Book Value 6,953.0 6,748.8 6,312.7 6,333.5 5,874.9 6,802.7
Tangible Book Value/Share $347.84 $329.93 $309.81 $312.84 $277.12 $321.24
Total Debt 2,313.8 2,729.1 3,018.5 3,048.6 2,994.5 3,179.0
Net Debt (74.6) (531.4) 1,114.7 279.2 (757.9) (3,489.9)

BABSON
College Fund
16
Source: Capital IQ
Income Statement
For the Fiscal Period Ending
Reclassified
12 months
Dec-31-2009
Restated
12 months
Dec-31-2010
Reclassified
12 months
Dec-31-2011
Restated
12 months
Dec-31-2012
12 months
Dec-31-2013
Press Release
12 months
Dec-31-2014
Currency USD USD USD USD USD USD
Premiums and Annuity Rev. 4,422.0 4,580.6 5,426.9 6,084.9 6,077.3 6,216.2
Total Interest And Dividend Income 712.7 711.5 705.3 409.3 376.9 403.8
Asset Management Fee - - - - - -
Gain (Loss) on Sale of Invest., Total (Rev) 944.5 (3.0) 691.2 642.6 (1,564.0) 1,736.2
Non-Insurance Activities Revenue - - - - - -
Other Revenue 556.4 595.1 651.6 879.2 1,054.7 1,661.7
Total Revenue 6,635.6 5,884.2 7,475.0 8,016.0 5,944.9 10,017.9
Policy Benefits 3,186.9 3,398.7 4,585.3 4,242.6 3,670.3 3,794.3
Policy Acq. and Underw riting Costs 701.1 707.5 795.4 920.0 969.2 959.9
Depreciation & Amort. - - - - - -
Amort. of Goodw ill and Intangibles - - - - - -
Selling General & Admin Exp., Total - 973.5 1,148.3 1,119.7 1,140.9 1,227.2
Other Operating Exp. 1,360.2 538.7 636.5 830.3 906.9 1,492.3
Total Operating Exp. 5,248.2 5,618.4 7,165.5 7,112.6 6,687.3 7,473.7
Operating Income 1,387.4 265.8 309.5 903.4 (742.4) 2,544.2
Interest Expense, Total (166.3) (195.5) (214.0) (208.2) (211.2) (206.3)
EBT Excl. Unusual Items 1,221.1 70.3 95.5 695.2 (953.6) 2,337.9
Restructuring Charges - - - (12.4) (12.9) -
Impairment of Goodw ill (3.6) 83.1 - 6.8 - -
Asset Writedow n - - - - (31.2) -
Other Unusual Items (11.9) (2.3) (104.2) (40.6) (3.4) -
EBT Incl. Unusual Items 1,205.6 151.1 (8.7) 649.0 (1,001.1) 2,337.9
Income Tax Expense 214.9 (186.9) (56.5) 114.0 (436.6) 673.3
Earnings from Cont. Ops. 990.7 338.0 47.8 535.0 (564.5) 1,664.6
Earnings of Discontinued Ops. - - - - - -
Extraord. Item & Account. Change - - - - - -
Net Income to Company 990.7 338.0 47.8 535.0 (564.5) 1,664.6
Minority Int. in Earnings (133.9) (2.2) (2.7) (8.1) (8.9) (31.4)
Net Income 856.8 335.8 45.1 526.9 (573.4) 1,633.2
Pref. Dividends and Other Adj. 51.8 31.4 51.5 60.5 60.8 -
NI to Common Incl Extra Items 805.0 304.4 (6.4) 466.4 (634.2) 1,633.2
NI to Common Excl. Extra Items 805.0 304.4 (6.4) 466.4 (634.2) 1,633.2
Per Share Items
Basic EPS $43.99 $14.9 ($0.31) $22.95 ($31.15) $77.09
Basic EPS Excl. Extra Items 43.99 14.9 (0.31) 22.95 (31.15) 77.09
Weighted Avg. Basic Shares Out. 18.3 20.4 20.4 20.3 20.4 21.2
Diluted EPS $43.75 $14.82 ($0.31) $22.68 ($31.15) $73.01
Diluted EPS Excl. Extra Items 43.75 14.82 (0.31) 22.68 (31.15) 73.01
Weighted Avg. Diluted Shares Out. 18.4 20.5 20.4 20.6 20.4 22.4
Normalized Basic EPS $34.39 $2.04 $2.79 $20.98 ($29.71) $67.49
Normalized Diluted EPS 34.2 2.03 2.79 20.73 (29.71) 63.92
Dividends per Share $10.0 $10.0 $10.0 $10.0 $10.0 $10.0
Payout Ratio % 17.7% 69.1% 570.7% 50.5% NM NA
Supplemental Items
EBITDA 1,423.2 305.9 357.5 956.5 (686.6) 2,636.1
EBITA 1,398.5 277.4 328.0 922.0 (721.5) 2,544.2
EBIT 1,387.4 265.8 309.5 903.4 (742.4) 2,544.2
EBITDAR NA 362.4 414.9 1,022.0 (620.4) NA
As Reported Total Revenue* 6,635.6 5,967.3 7,475.0 8,022.8 5,944.9 10,017.9
Effective Tax Rate % 17.8% NM NM 17.6% NM 28.8%
Total Current Taxes 202.1 16.6 71.6 98.2 (4.8) -
Total Deferred Taxes 12.8 (203.5) (128.1) 15.8 (431.8) -
Normalized Net Income 629.3 41.7 57.0 426.4 (604.9) 1,429.8
Interest on Long Term Debt 166.3 195.3 213.9 206.0 207.9 NA
Non-Cash Pension Expense 2.8 0.3 (1.8) 4.3 3.6 -

BABSON
College Fund
17
Important Disclosures
Babson College Fund
The Babson College Fund (BCF) is an academic program in which selected students manage a portion of the Babson
College endowment. The program seeks to provide a rich educational experience through the development of investment
research skills and the acquisition of equity analysis and portfolio management experience. Please visit
http://cutler.babson.edu for more information.
Analyst Contact Information
Alfredo Leon | 7347304664 | rdiplock1@babson.edu
Paul Ramey | 6032754515 | pramey1@babson.edu
Ryan Diplock| 4136956343| rdiplock1@babson.edu
Definition of Ratings
BUY: Expected to outperform the S&P500 producing above average returns.
HOLD: Expected to perform in line with the S&P500 producing average returns.
SELL: Expected to underperform the S&P500 producing below average returns.
References
Capital IQ
Thomson ONE
S&P Net Advantage
IBIS World
Bloomberg
FFH.TO Group Company Website, Letters to Shareholders, company reports.
Analysts:
Tom Mackinnon | BMO Capital Markets | 14163594629.
Neil Fonseca| EVA Dimensions| 12126458400.

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