Message#: 933

Message Sent: 07/08/2002 13: 11 :36
From: JENN.HEMPTON@BIGFOOT.COMIJohn And Lucas Hempton Jenniferlll
To: MWMONTY@bloomberg.netIMWMONTGOMERYIROCKER MANAGEMENT, L111266j34288
SUbject: Re: Re:
Welcome back. Tried to ring you several times.
Fairfax Financial is having an ALL DAY meeting in NY. Its the first time
they have EVER had an analyst meeting - and only their second ever
conference call.
They want to (need to) list on the NYSE.
The company however is relatively strong because they own 1 billion face
value in S&P puts. So short that fraud has the beta of long the S&P.
JH
- Original Message -
From: "MWMONTGOMERY, ROCKER MANAGEMENT, L" <MWMONTY@bloomberg.net>
To: <jenn.hempton@bigfoot.com>
Sent: Tuesday, July 09, 2002 12:54 AM
SUbject: Re:
> sorry so late in responding, i was at the farm all last week. will
check
> around and see what i find.
>
>
>
>
COt\IFIDENTIAL
CR 006625
Message#: 12246
Message Sent 12/02/2002 19: 50: 03
From: HEMPTON@PLATINUM.COM,AUIJohn Hemptonlll
To: MWMONTY@bloomberg.netIMWMONTGOMERYIROCKER MANAGEMENT, L[11266134288
Attachment 345325797 Fairfax .doc
Attachment 345325799:Letshr11. pdf
Attachment 345325801_3q2002.pdf
SUbject: Fwd:
>Date: Tue, 03 Dec 2002 11:41 :41 +1100
>To: whr@ponalespartners,com
>From: John Hempton <hempton@platinum.com,au>
>Bcc: jhempton@bigpond,netau
>
>Fairfax...
This email and any files transmitted with it are confidential
and intended solely for the use of the individual or entity to
whom they are addressed. If you have received this e-mail
in error please notify: postmaster@platinumcom.au,
We scan all outbound messages for the presence of
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~ ~ ~ - ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~
CR 006628
From:
Sent:
To:
cc:
Subject:
James Chanos
Monday, August 12, 2002 09:20 AM
Charles Hobbs
Douglas Millett
FW: FFH Earnings
Same as our take ...
----- Forwarded by James Chanos/kynikos on 08/12/2002 08:25 PM -----
"Perry, Jeff" <Jeff.Perry@sac.com>
08/12/2002 05:09 AM
To: "'jchanos@kynikos.com'" <jchanos@kynikos.com>
cc:
SUbject: n ~ : FFH Earnings
-----OriginalMessage-----
From: Cohen, Andrew
Sent: Sunday, August 11, 2002 8:04 PM
To: Perry, Jeff; Behrens, Evan
Cc: Fontana, Forrest; Sapanski, Larry; Zigmond, Gary; Cohen Acct
SUbject: FFH Earnings
Fairfax reported Q2 earnings Friday evening. Despite positive datapoints from
Sigma, I do not believe the quarter marked an improvement, and in fact,
showed deterioration from Ql and the much-hyped investor meeting in New York:
Total combined ratio of 103.2%, unchanged from Ql, down from 108.3% a year ago
Canadian operations' sequential combined ratio to 96.6%, 300 bps improvement
US operations' sequenia1 combined ratio of 108.5% from 106.9% in Ql - clearly
a negative and emphasizes weak conditions at C&F (106.3%) and TIG (110.1%) -
the C&F IPO remains virtually impossible with declining operating performance
Mgmt expects C&F ratio below 105% during 2H - should be interesting...
Gross and net premiums written increased slightly - the obvious question is
the soundness and profitability of the underlying policies - EPS declined to
C$2.95 vs. C$3.27 a year ago - higher effective tax rate, accounting for
non-controlling interests and increased shares outstanding were responible
for decline
Cash and. marketable securities declined to C$55lMM - well below Mgmt's stated
goal of C$800MM
Uses included: TIG capital call, SwissRe payment, hedging contracts
Sources: sale of S&P 500 puts for C$106MM
FFH still owns C$500MM of notional value S&P puts with 986 strike price
Bond portfolio, despite telecom losses, increased as % of portfolio as FFH
reallocates from common equity - they do not break out gains/losses on
portfolio, but 80% currently in fixed-income, which also serves to provide
more income to holding company
Prem Watsa changes his goal for holding company cash at almost every turn -
whereas his previous goal was for 5x interest coverage in holding company
cash, he now caveats that to include equity accounting for Linday Morden
No discussion of reserve levels and dividend capacity in the interim reports
- will have to wait until Q4 .
Virtually no sell-side converage as FFH IR and corporate policy is not
cooperative - will work to get reaction from other shorts ...
Andy
Subject To Protective Order Confidential K0015985
From:
Sent:
To:
Subject:
James Chanos
Friday, November 15, 2002 08:06 PM
DMillett@kynikos.com@kynikos; Charles Hobbs; Mark Heiman
FW: FFH Update - Conversation with Moody's Analyst
----- Forwarded by James Chanos/kynikos on 11/15/02 03:01 PM -----
"Perry, Jeff" <Jeff.Perry@sac.com>
11/15/02 03:00 PM
To: '" j chanos@kynikos.com
'
" <jchanos@kynikos.com>
cc:
SUbject: n ~ : FFH Update - Conversation with Moody's Analyst
-----Original Message-----
From: Cohen, Andrew
Sent: Friday, November 15, 2002 2:15 PM
To: Cohen Acct
Cc: Sapanski, Larry; Fontana, Forrest: zigmond, Gary; Pohly, Rob:
Shapiro, Glenn subject: FFH Update - Conversation with Moody's Analyst
Based upon release last night putting FFH under review. Credit analyst is
openly negative on FFE's Q3 earnings quality, operational performance and
prospects
thinks FFH will take reserve hit in Q4 as does not believe company has not
adequately reserved, especially at TIG
only gains comfort when actual reserves are taken
questions sustainability of gains in investment portfolio
is focused on RHINO refinancing as potential use of cash; CIBC analyst thinks
FFH may have pay 50% in cash: expire in February 2003
quarter filled with gains on investments and swaps as underlying operations
deteriorate .
review process should take a b ~ u t 30 days - from analyst's tone, sounds as
though downgrade is imminent
downgrade (currently Ba2 - junk} would not have immediate impact - however,
as FFH parent's bank lines roll off, might impact ability to refinance (at
minimum, . higher cos t)
Andy
Andrew B. Cohen
SAC Capital Advisors
777 Long Ridge Road
Stamford, CT 06902
Telephone: (203) 614-2163
Fax: (203) 321-3382
andrew.cohen@sac.com
,ubject To Protective Order
Confidential
KOO14013
5
Message#: 15865
Message Sent 08/18/200220:09:16
From: EAVIS@RCN.COMIPeter Eavis/II
To: MWMONTY@bloomberg.netIMWMONTGOMERYj ROCKER MANAGEMENT, '-111266134288
Attachment 336168553 16512300.htm .
Subject Out this week, studying
Manulife and Fairfax Financial, when I am not trying to rescue my rhododendrons
from this Biblical drought.
Email if you have any thoughts on these.
- Peter
Can also be reached on 845 279 7724 if something really jUicy crops up.
Peter, Phoebe and Victoria Eavis
New York
eavis@rcn.com
www.eavis.com
CONFIDENTIAL REDACTED
CR 006627
From:
Sent:
To:
SUbject:
James Chanos
Sunday, August 18,2002 09:13 PM
"Peter Eavis" <eavis@rcn.com>
Re: Out this week, studying
Fairfax is one of our largest shorts. JC
"Peter Eavis" <eavis@rcn.com>
08/18/2002 08:08 PM
To: <Undisclosed-Recipient:;>
cc:
Subject: Out this week, studying
Manulife and Fairfax Financial, when I am not trying to rescue my
rhododendrons from this Biblical drought.
Email if you have any thoughts on these.
-- Peter
Can also be reached on 845 279 7724 if something really juicy crops up.
Peter, Phoebe and Victoria Eavis
New York
eavis@rcn.com
www.eavis.com
3ubject To Protective Order CoIJfidential
K0015986
From:
Sent:
To:
Subject:
James Chanos
Monday. August 19, 2002 12:23 AM
"Peter Eavis" <eavis@rcn.com>
Re: out this week., studying
No problem. Let me know when. Enjoyed the HI story in the NYT. JC
"Peter Eavis" <eavis@rcn.com>
08/18/2002 08:15 PM
To: "James Chanos" <jchanos@kynikos.com>
cc:
SUbject: Re:· Out this week, studying
Good to know. Hempton explained this story to me a while ago, but I was
swamped, and noW I have some breathing room I wanted to get back in. We
should compare notes at some point.
-- Peter
----- Original Message -----
From: "James Chanas" <jchanos@kynikos.com>
To: "Peter Eavis" <eavis@rcn.com>
Sent: Sunday, August 18, 2002 5:13 PM
Subject: Re: Out this week, studying
To:
cc:
Subject: Out this week,
845 279 7724 if something really juicy crops up.
08/18/2002 08:08
PM
and Victoria Eavis
>
> Fairfax is one of our largest shorts. JC
>
>
>
> "Peter Eavis"
> <eavis@rcn.com>
<Undisclosed-Recipient:;>
>
>
studying
>
>
>
>
>
>
>
> Manulifeand Fairfax Financial, when I am not trying to rescue my
> rhododendrons from this Biblical drought.
>
> Email if you have any thoughts on these.
>
> -- Peter
>
> Can also be reached on
>
>
> @-@-@-@-@-@-@-@-@-@-@-@-@-@-@
>
> Peter, Phoebe
> New York
> eavis@rcn.com
> www.eavis.com
>
>
>
)ubject To Protective Order
Confidential
K0015987
Message#: 19278
Message Sent 12/17/200223:17:55
From: HEMPTON@PLATINUM.COM.AUIJohn Hemptonlll
To: DROCK@bloomberg.netIOAVIOROCKERIROCKER PARTNERS, L.PI11266/11266
SUbject Re: Fwd: MBIA's Insured COO Portfolio
You are at work late.
I gather I have (finally) interested Monti in the great Ponzi scheme to the
North (Fairfax Financial).
JH
At 22:4817/12/02 -0500, you wrote:
>thx
>
>
>
>
>
This email and any files transmitted with it are confidential
and intended solely for the use of the individual or entity to
Whom they are addressed. If you have received this e-mail
in error please notify: postmaster@platinum.com.au.
We scan all outbound messages for the presence of
viruses, however we cannot assure yOIl that any message
is clean.
postmaster@platinum.com.au
~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~
CONFIDENTIAL
CR 00663'
Message#: 12806
Message Sent 121D412002 04:19:02
From: And Lucas Hempton Jenniferlll
To: MWMONTY@bloomberg.netIMW MONTGOMERYIROCKER MANAGEMENT, LI11266134288
Attachment 345442739 20617889.htm
-
Monty,
Just so you know - I have convinced my boss to have a bit of a go at Fairfax
Financial. Can you layoff it for tonight... and tomorrow.
I will let you know when we are not trading.
There should be plenty of room for you there anyway.
JH
CONFIDENTIAL
CR 006630
Message#: 24287
Message Sent: 12/30/200209:14:15
From: JHEMPTON@BIGPOND.NET.AUlJohn And Lucas Hempton Jenniferlll
To: MWMONTY@bloomberg.netIMW MONTGOMERYjROCKER MANAGEMENT, L]1126613428B
Attachment 347706853_82218229.htm
SUbject: Fw Fairfax Financial Holdings...
- Original Message --
From: Jennifer, John and Lucas Hempton
To: help@longleafpartners.com
Sent: Tuesday, December 31,200212:48 AM
SUbject: Fairfax Financial Holdings...
Just a qUick question. Why are you so interested in Fairfax Financial Holdings?
As far as I can see (and I feel myself qUITe expert in this) it is a ponzi pure
and simple. Here it is.
Fairfax is a leveraged holding company owning regulated and underperforming
insurance companies in the USA (and to a lesser extent Canada).
The company relies on getting cash out of the regulated holding companies to
service the parent company debt and to keep up the largish cash holding in the
holding company.
The problem is that it has insufficient caplial in the regulated subsidiaries
given the poor performance of the holding company.
So it has relied on reinsurance. Reinsurance of course being the equivalent to
capital at the regulated subsidiary allowing cash out of those subsidiaires.
The reinsurance companies however have been bumt - witnessed by CDN11.8 billion
in reinsurance recoverables in the consolidated accounts. This is by far the
largest such number in the wond.
The reinsurance companies will not Willingly lend their capital again - but the
need for cash from the substandard subsidiaries goes on.
So they reinsure intemally - usually wrth subsidiaries based in DUblin.
How do the subsidiaries based in Dublin get by - they have assets being letters
of credit from the holding company. Go on - find the statutory statements of
the Dublin subsidiaries and prove the point.
If you look at the holding company bank lines they have become progressively
more drawn (now about 700 million) to provide those letters of credit.
So the holding company gets cash out of the regUlated subsidiaries by indirectly
proViding them with the bank lines - which is why I figure this is a ponzi
scheme.
The immediate problem is that the bank lines are slowly but surely expiring as
the letters of credit become more drawn.
This must end in tears.
I have always admired you guys - but I am short Fairfax to the gunnels - I am
about a third of the short interest. I can't see how they are anything other
than a bust. (Just work out what bad reserving is being hidden by the
non-requirement to work it out because it is reinsured with the reinsurance
CONFIDENTIAL
CR 006641
covered by letter of credit!)
Yet you guys are long to the gunnels. It worries me.
Is there anyone that I can chat to to see why you guys have such confidence.
Anyway - please reply.
John Hempton
SYdney, Australia
COf\IFIDENTIAL
Message#: 20552
Message Sent 1212012D02 15:35:27
From: JHEMPTON@BIGPOND.NET.AUIJohn And Lucas Hempton Jenniferlll
To: MWMONTY@bloomberg.netIMW MONTGOMERYIROCKER MANAGEMENT, LI11266134288
Attachment 346865725 62675488. htm
S u ~ e c t : -
My favorite ••_ mutant has followed me to the Fairfax chatboard.
Have a look at this post.
http://wwvv.stockhouse.ca/bullboardslviewmessage.asp7 no=5843502&FO&all=O&TablelD
=0
CONFIDENTIAL -REDACTED
CR 006632
From:
Sent:
To:
Subject:
Mark Heiman
Wednesday, December 11,200211 :06 PM
James Chanos; Douglas Millett
Fairfax
i
,.I
I just got off the phone with ZBI's insurance analyst, Michael Ting. He just
talked to a new insurance analyst at Morgan Keegan, and apparently that
analyst is about to initiate FFRX at "Underperform," with the thesis being
that they are extremely under-reserved into the $3-$5 BN area. Also, there
may be an article in Forbes or Fortune soon that will be similarly critical.
Ting said he thought that analyst was one of the best P&C analysts he has
talked to, and wanted to give us the heads-up, as well as hear how we're
coming at it-
Subject To Protective Order Confidential
K0013163
From:
Sent:
To:
SUbject:
Mark Heiman
Saturday, December 21,200206:03 PM
James Chanos; Douglas Millett; Charles Hobbs
Fairfax
Last night John Gwinn at Morgan Keegan faxed over to me an outline detailing
the issues at FFH, basically those he will be pUblishing on. He has been a
huge help and even offeLed to talk to me fLom his horne today. We can look at
these and talk to him next week--I just wanted to corne in today anp take a
look at what he sent to get a head staLt on what he sent.
On the major issue of huge reserve deficiencies, he has a detailed
spreadsheet that gives core reseLve deficiencies for all the major subs, both
with and without tail factors. For all the us business (80% of FFH's
business), entiLe company reserve deficiency is shown to be $2.6 BN without
tail and $5.0 BN with tail. As expected, TIG is shown to have the largest
indicated deficiencies of $1.6 BNwithout tail, and $3.1 BN with tail. Looks
very interesting.
Subject To Protective Order Confidential
KOOIJ175
From:
Sent:
To:
Subject:
James Chanos
Wednesday, December 18, 2002 08:01 PM
Jeff.perry@saccapital.com
Fairfax
----- Forwarded by James Chanos/kynikos on 12/18/02 02:53 PM -----
Mark Heiman
12/16/02 04:46 PM
To: James Chanos/kynikos@kynikos, Douglas Millett/kynikos@kynikos, Charles
Hobbs/kynikos@kynikos
cc:
subject: Fairfax
Just spoke to John Gwinn at Morgan Keegan, and he was more critical of FFRX
than I've ever heard a sell side analyst. It looks like his criticisms of
from the top to the bottom--everything from underwriting to accounting to
dishonesty. He gave me his basics, as he is somewhat restricted because he
hasn't officially launched. It will be interesting to see how much of this
the people who run the research department there will let him publish!
Reserve valuation: Gwinn looked at the statutory financials and believes the
reserve deficiency is greater than the statutory capital of the entire
company, which could put it in receivership. He especially thinks this is
the case with respect to Crum and Forster's and TIG's asbestos liability.
Investments: How will they replace the bond gains that they took in the 3Q?
The bond portfolio of an insurance company really isn't supposed to be run
for capital gains and market timing--Gwinn points out that that is not the
business of insurance. Also, Prem Watsa's career was made via equity
investing, so the fixed income side isn't even his area of expertise. He
also has heard rumors that they are burying some real junk as well.
Swiss Re transaction is a financing rather than a reinsurance treaty, which
would weaken the balance sheet and affect coverage ratios.
High reinsurance recoverables--Ieading to negative earned surpluses.
Accounting issues regarding the double counting of surplUS capital as it
moved throughout subs. He thinks the regulators, especially California won't
be as lenient as they have been in the past.
Poor operating cash flows disguised in "peculiar" language.
Subject To Protective Order Confidential
K0016020
-
From:
Sent:
To:
Subject:
Name the time.
Gwynn, John D [John.Gwynn@morgankeegan.com)
Monday, January 06,20039:01 AM
Fontana, Forrest
RE: hope you had a nice holiday!
-----Original Message----- .
From: Fontana, Forrest [mailto:Forrest.Fontana@sac.com]
Sent: Monday, January 06, 2003 8:57 AM
To: Gwynn, John D
SUbject: RE: hope you had a nice holidayl
you available to touch-base on Fairfax sometime this week?
Forrest Fontana, CFA
Portfolio Manager
SAC Capital
72 Cummings Point Road
Stamford, CT 06902
"'* please !\fOTE the new SAC Capital phone # given our move *'"
CT:
MA:
Cell:
Fax.:
203-890-3303
781-756-0633
781-929-6490
240-465-3244
Forrest@Sl'.C.com
Forrest@Bloomberg.net
AOL 1M: FNFontana
-----Original Message-----
From: GWynn, John D [mailto:John.Gwynn@morgankeegan.com]
Sent: Thursday, January 02, 2003 9:36 AM
To: Fontana, Forrest
SUbject: RE: hope you had a nice holiday!
Per our conversation. Hope your new year is a happy one.
-----Original Message-----
From: Fontana, Forrest [mailto:Forrest.Fontana@sac.com]
Sent: Tuesday, December 31, 2002 1:55 PM
To: Gwynn, John D
Subject: hope you had a nice holiday!
John,
year is here.
CONFIDENTIAL
just following up now that the holidays are coming to a close and new
wanted to go over some of the numbers behind our dicussion when you
MK00060776
SUB..IECT TO PROTECTIVE ORDER
were in Boston, particular the reserves of TAP.
I am in Boston all this week.
take care,
Forrest
Forrest Fontana, CFA
Portfolio Manager
** please NOTE the new SAC Capital address & phone # given our move **
SAC Capital Advisors, LLC
72 Cummings Point Road
Stamford, CT 06902
CT:
MA:
Cell:
Fax:
203-890-3303
781-756-0633
781-929-6490
240-465-3244
forrest@SAC.com
Forrest@Bloomberg.net
AOL 1M: FNFontana
* * * * * * * ~ * * * * * * * * * * * ~ * * * * * * * * * . * * * * * * * * * * * * ~ * * * ~ * * * * * * * * * * * * * * * * * * * . ' . * * * * * * * * * * * * * *
****************
Morgan Keegan & Co., Inc. DOES NOT ACCEPT ORDERS AND/OR
INSTRUCTIONS REGARDING YOUR ACCOUNT BY E-MAIL. Transactional details
do not supersede normal trade confirmations or statements. Theinformation
contained in this transmission is privileged and confidentiaL It is
intended for the use of
the individual or entity named above. The information contained herein is
based on
sources we believe reliable but is not considered all-inclusive. opinions
are our current
opinions only and are sUbject to change without notice. Offerings are
subject to prior
sale and/or change in price. Prices, quotes, rates and yield,s are sUbj e ~ ; t
to change
without notice. Margan Keegan & Co., Inc., member NYSE, NASD and SIPC, _c a
registered broker-dealer subsidiary of Regions Financial Corporation.
Investments are
NOT FDIC INSURED, NOT BANK GUARANTEED and MAY LOSE VALUE. Morgan
Keegan & Co., Inc. reserves the right to monitor all electronic
correspondence.
http://www.morgankeegan.com
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * ~ * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * + k * *
****************
CONFIDENTIAL
MK00060777
SUBJECT TO PROTECTIVE ORDER
From:
To:
Sent:
Subject:
"Gwynn, John D" <John.Gwynn@morgankeegan.com>
"Fontana, Forrest" <Forresl.Fontana@sac.com>
Monday, January 06. 2003 1:09 PM
RE: hope you had a nice holiday!
Page I of 2
Going to send pd LDF's in separate e·mail.
-----Original Message----
From: Fontana, Forrest [mailto:ForreslFontana@sac.com]
Sent: Monday, January 06, 2003 11:42 AM
To: Gwynn, John D
Subject: RE: hope you had a nice holiday!
j'll buzz you tomorrow? do you have anylhing like a spreadsheet for Fairfax similar 10 what you sent me on
TAP?
Forrest Fontana, CFA
Portfolio Manager
SAC Capital
72 Cummings Point Road
Stamford, CT 06902
•• please NOTE the new SAC Capital phone # given our move ••
CT: 203-890-3303
MA: 781-756-0633
Cell: 781-929-6490
Fax: 240-465-3244
Forrest@SAC.com
Forrest@Bloomberg.net
AOL 1M: FNFontana
----Original Message---
From: Gwynn, John D [maiJto:John.Gwynn@morgankeegan.com]
Sent: Thursday, January 02, 2003 9:36 AM
To: Fontana, Forrest
SUbject: RE: hope you had a nice holidayl
Per our conversation Hope your new year is a happy ons.
----Original Message----
From: Fontana, Forrest [mallto:Forrest.Fontana@sac.com]
Sent: Tuesday, December 31, 20021:55 PM
To: Gwynn, John D
Subject: hope you had a nice holidayI
John.
just following up now that the holidays are coming tD a close and new year is 8r8_
9114/2006
CONFIDENTIAL
MK00021092
SUBJECT TO PROTECTIVE ORDER
\
· Page 20fl
wanted to go over some of the numbers behind our dicussion when you were in
Boston, particular the reserves of TAP.
I am in Boston all this week
take care,
Forrest
Forrest Fontana, CFA
Portfolio Manager
** please NOTE the new SAC Capital address & phone ~ given our
move **
SAC Capital Advisors, LLC
72 Cummings Point Road
Stamford, CT 06902
CT:
MA.:
Cell:
Fax:
203-890-3303
,91-756-0633
781-929-6490
240-465-3244
CONFIDENTIAL
Forrest@SAC.com
Forrest@Bloomherg.net
AOL 1M: FNFontana
~ * * * * * * * * * * * * * ~ * . * * * . * * ~ * * * * . * * * ~ * * * * * * * * ~ * * * ~ * * * * ~ * * * * * ~ * * * ~ * ~ * •• * * * * ~ * * ~
Morgan Keegan & Co., Inc. DOES NOT ACCEPT ORDERS ANDIOR
INSTRUCTIONS REGARDING YOUR ACCOUNT BY E-MAIL. Transactional details
do not supersede normal trade confirmations or statements. The informatio
contained in this transmission is privileged and confidential. It is inten
the individual or entity named above. The information contained herein is
sources we believe reliable but is not considered all-inclusive. Opinions
opinions only and are subject to change without notice. Offerings are sub
sale and/or change in price. Prices, quotes, rates and yields are subject
without notice. Morgan Keegan & Co., Inc., member NYSE, NASD ~ n d SIPC, is
registered broker-dealer subsidiary of Regions Financial Corporation. Inv
NOT FDIC INSURED, NOT BANK GUARANTEED and MAY LOSE VALUE. Morgan
Keegan & Co , Inc reserves the right to monitor all electronic correspond
http://www.rnorgankeegan.com
* * ~ ~ * * ~ ~ * * * ~ . * * ~ * * * ~ * ~ . * ~ * . * * * * ~ * w * ~ * * * * * * ~ * * * * * * ~ * * * * * * ~ * * * * ~ * * ~ * * * * * ~ * * .
9/14/2006
MK00021093
SUBJECT TO PROTECTIVE ORDER
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From:
Sent:
To:
SUbject:
Check, Geoffrey [Geoffrey.Check@morgankeegan.com]
Friday, January 17, 2003 10:30 AM
Daily - Exchange
New Research Coverage - Fairfax Financial Holdings, FFH, U
Employees and members of their immediate family are prohibited from effecting transactions as
listed below in the following security due to new coverage by the Research Dept.:
No Sales: Fairfax Financial Holdings FFH NR to U
This restriction ends at the close of business Tuesday, January 21, 2003.
CONFIDENTIAL
MK00215204
SUBJECT TO PROTECTIVE ORDER
From:
Sent:
To:
Subject:
Mark Heiman
Thursday, January 16, 2003 05:10PM
James Chanos; Douglas Millett; Charles Hobbs
FFH
Just got off the phone with Gwynn at Morgan Keegan--his piece that rips FFH
apart is supposed to be published tomorrow. Should be interesting to see how
the street reacts. I also talked with him about the important statutory
capital issues Chuck and I have been looking into, and I think t h ~ picture is
coming together of what is really happening here. Also, I expect Condon
should publish on it soon as well as his deadline was last week.
Subject To Protective Order Confidential
K00I3180
20
Exhibit 20
filed under seal
21
FFH I n t r a ~ D a y Trading Data Jan. 17, 2003
Date Time Open High Low Clpse Volume
1/17/2003 9:37 74.1 74.1 74.1 74.1 2000
1/17/2003 9:38 73.9 73.9 73.9
. .73.9
300
1/17/2003 9:39 73.5 73.51 73.5 73.5 1200
1/17/2003 9:40 73.5 73.5 73.25 73.45 2100
1/17/2003 9:41 73.4 73.4 73.28 73.31 1400
1/17/2003 9:43 73.31 73.31 73.1 73.1 2700
1/17/2003 9:44 73.11 73.19 73.11 73.19 4500
1/17/2003 9:46 73.12 73.12 73 73.1 2300
1/17/2003 9:47 73.01
. 73.01 72.8 72.81 2100
1/17/2003 9:48 72.72 72.79 72.65 72.7 1400
1/17/2003 9:49 72.7 72.8 72.7 72.8 800
1/17/2003 9:50 72.71 72.71 72.65 72.65 1100
1/17/2003 9:51 72.51 72.51 72.5 72.5 1000
1/17/2003 9:52 72.5 72.5 72.35 72.4 700
1/17/2003 9:53 72.35 72.35 72.35 72.35 1000
1/17/2003 9:54 72.35 72.35 72.06 72.06 1100
1/17/2003 9:55 72.06 72.06 71.75 71.75 4000
1/17/2003 9:56 71.75 71.81 71.7 71.81 7700
1/17/2003 9:57 71.89 71.9 71.89 71.9 3100
1/17/2003 9:58 72 72 71.99 71.99 1300
1/17/2003 9:59 72 72 72 72 2400
1/17/2003 10:00 71.87 72.15 71.84 72.15 2600
1/17/2003 10:01 72.14 72:14 72.13 72.13 300
1/17/2003 10:02 72.1 72.1 71.95 71.95 1000
1/17/2003 10:03 71.88 71.91 71.81 71.81 3000
1/17/2003 10:04 71.7 71.71 71.7 71.71 2600
1/17/2003 10:05 71.6 71.6 71.3 71.3 4000
1/17/2003 10:06 71.31 71.31 71.1 71.1 5800
1/17/2003 10:07 71.1 71.2 71.1 71.2 4500
1/17/2003 10:08 71.35 71.5 71.35 71.5 . 3800
1/17/2003 10:09 71.65 71.(35 71.63 71.64 1800
1/17/2003 10:10 71.58 71.65 71.57 71.57 2900
1/17/2003 10:11 71.5 71.68 71.39 71.56 2200
1/17/2003 10:12 71.57 71.75 71.57 71.75 2500
1/17/2003 10:13 71.69 71.69 71.69 . 71.69 100
1/17/2003 10:15 71.69 71.69 71.4 71.55 1400
1/17/2003 10:16 71.75 72 71.75 72 1100
1/17/2003 10:17 72.1 72.1 71.95 71.95 400
1/17/2003 10:20 72 72 72 72 300
1/17/2003 10:21 72.18 72.4 72.18 72.4 1300
1/17/2003 10:22 72.47 72.7 72.47 72.65 1800
1/17/2003 10:23 72.4 72.4 72.39 72.39 300
1/17/2003 10:24 72.69 72.69 72.69 72.69 100
1/17/2003 10:25 72.66 72.66 72.5 72.51 700
1/17/2003 10:26 72.61 72.65 72.61 72.64 1500
1/17/2003 10:28 72.52 72.59 72.52 72.59 1100
1/17/2003 10:29 72.51 72.59 72.3 72.45 3300
Page 1 '.
Date Time Open High Low Close Volume
1/17/2003 10:30 72.45 72.46 72.45 72.46 600
1/17/2003 10:31 72.5 72.68 72.5 72.68 600
1/17/2003 10:33 72.68 72.68 72.55 72.55 400
1/17/2003 10:34 72.62 72.62 72.62 72.62 300
1/17/2003 10:35 72.5 72.5 72.36 72.36 1200
1/17/2003 10:36 72.26 72.26 72.05 72.05 1500
1/17/2003 10:37 72 72 72 72 200
1/17/2003 10:38 72 72.01 72 72.01 3500
1/17/2003 10:39 72.06 72.15 72.06 72.15 400
1/17/2003 10:40 72.06 72.06 72 72 1000
1/17/2003 10:41 71.9 71.9 71.78 71.85 2000
1/17/2003 10:42
. 71.85 71.85 71.6 71.6 500
1/17/2003 10:43 71.59 71.64 71.4 71.41 2400
1/17/2003 10:44 71.41 71.63 71.41 71.63 2800
1/17/2003 10:45 71.63 71.75 71.63 71.75 1400
1/17/2003 10:46 71.67 71.67 71.45 71.45 1000
1/17/2003 10:47 71.4 71.4 71.4 71.4 1000
1/17/2003 10:49 71.41 7f44 71.21 71.23 700
1/17/2003 10:50 71.19 71.4 71.19 71.4 400
1/17/2003 10:51 71.4 71.63 71.4 71.63 2900
1/17/2003 10:52 71.4 71.4 71.4 71.4 200
1/17/2003 10:53 71.5 71.5 71.35 71.36 300
1/17/2003 10:55 71.36 71.36 71.11 71.19 1300
1/17/2003 10:56 71.19 71.19 71.11 71.12 2400
1/17/2003 10:57 71.12 71.4 71.12 71.3 1900
1/17/2003 10:59 71.29 71.33 71.29 71.33 1600
1/17/2003 11:00 71.2 71.21 71.2 71.21 1200
1/17/2003 11:01 71.32 71".32 71.32 71.32 100
1/17/2003 11:02 71.45 71.45 71.45 71.45 200
1/17/2003 11:03 71.5 71.5 71.5 71.5 200
1/17/2003 11:04 71.5 71.6 71.5 71.6 600
1/17/2003 11:05 71.65 71.65 71.65 71.65 200
1/17/2003 11:07 71.69 71.69 71.69 71.69 100
1/17/2003 11:08 71.73 71.73 71.73 71.73 200
1/17/2003 11:09 71.65 71.73 71.5 71.5 1800
1/17/2003 11:12 71.4 71.41 71.4 71.41 1000
1/17/2003 11:13 71.4 71.41 71.4 .71.4 900
1/17/2003 11:14 71.35 71.35 71.35 71.35 100
1/17/2003 11:15 71.49 71.49 71.4 71.42 3100
1/17/2003 11:17 71.42 71.42 71.2 71.2 2300
1/17/2003 11:19 71.2 71.2 71.12 71.12 700
1/17/2003 11 :20 71.08 71.2 71.08 71.2 2000
1/17/2003 11:21 71.2 71.2 71.05 71.05 3600
1/17/2003 11:22 71.05 71.06 71.01 71.05 3200
1/17/2003 11:23 70.85 71.19 70.85 71.19 1800
1/17/2003 11 :24 70.9 71.19 70.9 71.19 700
1/17/2003 11:25 71 71.2 71 71.2 2100
1/17/2003 11:26 71.25 71.29 71.25 71.29 900
1/17/2003 11:27 71 71.29 71 71.29 3700
1/17/2003 11:28 71.29 71.29 71.29 71.29 600
1/17/2003 11:30 71.2 71.2 71.2 71.2 600
Page 2
Date Time Open High Low Close Volume
1/17/2003 11 :31 71.2 71.2 71.2 71.2 100
1/17/2003 11:32 71 71 70.75 70.75 6400
1/17/2003 11:33 70.85 70.85 70.59 70.6 3800
1/17/2003 11:34 70.5 70.51 70.26 70.31 3000
1/17/2003 11:35 70.31 70.31 70.05 70.18 2900
1/17/2003 11 :36 70.1 70.4 70.05 70.26 3000
1/17/2003 11 :37 70.3 70.3 69.85 70 7200
1/17/2003 11:38 69.9 69.95 69.88 69.88 3800
1/17/2003 11:39 70 70 69.95 69.98 2100
1/17/2003 11:40 70 70 69.85 69.85 5700
1/17/2003 11 :41 69.85 69.85 69.6 69.6 3400
1/17/2003 11 :42 69.5 69.6 69.35 69.39 5500
1/17/2003 11 :43 69.49 69.51 69.49 69.51 1900
1/17/2003 11 :44 69.3 69.51 69.28 69.28 3000
1/17/2003 11 :45 69.2 69.3 69.1 69.1 3400
1/17/2003 11 :46 69.04 69.08 69 69.01 6900
1/17/2003 11 :47 69.01 69.01 68.75 68.94 2400
1/17/2003 11 :48 69.2 69.5 69.2 69.5 4900
1/17/2003 11 :49 69.6 69.7 69.4 69.45 5000
1/17/2003 11:50 69.5 69.5 69.33 69.34 3300
1/17/2003 11:51 69.3 69.3 69.16 69.16 2100
1/17/2003 11:52 69.04 69.25 68.95 69.25 3300
1/17/2003 11:53 69.25 69.55 68.75 69:01 3600
1/17/2003 11:54 69.05 69.2 68.49 68.9 5100
1/17/2003 11:55 68.85 68.85 68.5 68.51 3300
1/17/2003 11:56 68.63 68.64 68.3 68.3 4600
1/17/2003 11:57 68.33 68.33 68 68 4600
1/17/2003 11:58 68 68 67.7 67.71 4800
1/17/2003 11 :59 67.7 67.8 67.65 67.75 3700
1/17/2003 12:00 67.8 68.1 67.71 68.1 7900
1/17/2003 12:01 68.08 68.08 68.06 68.07 7800
1/17/2003 12:02 68.07 68.07 67.6 67.6 17900
·1/17/2003 12:03 67.55 67.55 67 67 7600
1/17/2003 12:04 67 67.38 67 67.38 16200
1/17/2003 12:05 67.38 67.44 67.38 67.44 12700
1/17/2003 12:06 67.5 67.78 67.5 67.77 6000
1/17/2003 12:07 67.85 67.9 67.8 67.81 2500
1/17/2003 12:08 67.96 67.96 67.83 67.93 4900
1/17/2003 12:09 68.25 68.25 68 68 2400
1/17/2003 12:10 68.08 68.08 67.97 68 3800
1/17/2003 12:11 67.99 68.1 67.99 68.1 3500
1/17/2003 12:12 68.2 68.3 68.17 68.2 6900
1/17/2003 12:13 68.2 68.22 68.17 68.22 1900
1/17/2003 12:14 68.22 68.22 68.2 68.21 2200
1/17/2003 12:15 68.23 68.4 68.23 68.4 4700
1/17/2003 12:16 68.5 68.58 68.48 68.49 3100
1/17/2003 12:17 68.5 68.52 68.5 68.5 2000
1/17/2003 12:18 68.47 68.47 68.2 68.25 3000
1/17/2003 12:19 68.3 68.3 68.3 68.3 2100
1/17/2003 12:20 68.3 68.3 67.95 67.95 8600
1/17/2003 12:21 67.9 67.9 67.7 67.84 5100
Page 3
Date Time Open High Low Close Volume
1/17/2003 12:22 67.95 68 67.95 68 900
1/17/2003 12:23 68.1 68.15 68.01 68.15 5100
1/17/2003 12:24 68.2 68.25 68.1 68.25 500
1/17/2003 12:25 68.11 68.11 68 68.06 5200
1/1-7/2003 12:26 68.1 68.15 68.07 68.07 1700
1/17/2003 12:27 68.11 68.25 68.11 68.25 5600
1/17/2003 . 12:28 68.28 68.28 68 68.04 4800
1/17/2003 12:29 67.96 68.01 67.96· 68.01 1000
1/17/2003 12:30 67.95 68.03 67.95 68.03 300
1/17/2003 12:32 68.02 68.02 67.9 67.9 1300
1/17/2003 12:33 67.8 67.8 67.55 67.7 7100
1/17/2003 12:34 . 67.69 67.9 67.69 67.9 1200
1/17/2003 12:35 67.98 67.98 67.98 67.98 1000
1/17/2003 12:36 67.98 67.98 67.98 67.98 600
1/17/2003 12:37 67.98 67.98 67.86 67.95 2700
1/17/2003 12:38 67.99 67.99 67.93 67.99 900
1/17/2003 12:39 67.99 68.05 67.99 68.05 4800
1/17/2003 12:40 68.05 68.05 68 68 1900
1/17/2003 12:41 68 68 67.95 67.95 1000
1/17/2003 12:42 67.98 67.98 67.8 67.8 2000
1/17/2003 12:43 67.8 67.96 67.74 67.95 6800
1/17/2003 12:44 67.96 67.96 67.75 67.75 2600
1/17/2003 12:45 67.7 67.82 67.7 67.71 3600
1/17/2003 12:46 67.71 67.79 67.66 67.66 2200
1/17/2003 12:47 67.66 67.92 67.66 67.88 2300
1/17/2003 12:48 67.92 67.98 67.92 67.98 2400
1/17/2003 12:49 67.98 68 67.98 68 4400
1/17/2003 12:50 68 68 67.97 67.97 800
1/17/2003 12:51 68.05 68.05 68.01 68.05 800
1/17/2003 12:52 68.05 68.1 68.05 ·68.1 2800
1/17/2003 12:53 68.1 68.15 68 68.15 3800
1/17/2003 12:54 68.12 68.35 68.05 68.35 2600
1/17/2003 12:55 68.35 68.4 68.3 68.4 6300
1/17/2003 12:56 68.4 68.5 68.4 68.5 7800
1/17/2003 12:57 68.6 68.6 68.6 68.6 900
1/17/2003 12:58 68.6 68.7 68.6 68.7 4700
1/17/2003 12:59 68.54 68.75 68.54 68.58 2400
1/17/2003 13:00 68.59 68.59 68.35 68.35 1200
1/17/2003 13:01 68.4 68.49 68.4 68.49 800
1/17/2003 13:02 68.48 68.48 68.38 68.38 700
1/17/2003 13:03 68.25 68.25 68.2 68.2 800
1/17/2003 13:04 68.2 68.21 68.2 68.21 300
1/17/2003 13:06 68.19 68.2 68.19 68.2 300
1/17/2003 13:07 68.2 68.2 68.2 68.2 300
1/17/2003 13:08 68.38 68.38 68.38 68.38 200
1/17/2003 13:11 68.38 68.38 68.38 68.38 200
1/17/2003 13:13 68.38 68.38 68.38 68.38 200
1/17/2003 13:14 68.38 68.38 68.38 68.38 300
1/17/2003 13:15 68.41 68.41 68.41 68.41 100
1/17/2003 13:18 68.45 68.45 68.43 68.43 500
1/17/2003 13:19 68.43 68.43 68.43 68.43 600
Page 4
Date Time Open High Low Close Volume
1/17/2003 13:20 68.5 68.5 68.5 68.5 2900
1/17/2003 13:21 68.54 68.65 68.54 68.65 1500
1/17/2003 13:22 68.56 68.58 68.51 68.58 1200
1/17/2003 13:23 68.59 68.59 68.59 ~ 8 . 5 9 100
1/17/2003 13:24 68.6· 68.6 68.51 68.51 300
1/17/2003 13:25 68.6 68.7 68.6 68.61 500
1/17/2003 13:26 68.65 68.69 68.65 68.69 2100
1/17/2003 13:27 68.73 68.74 68.73 68.74 2100
1/17/2003 13:29 68.74 68.8 68.74 68.8 1300
1/17/2003 13:30 68.76 68.76 68.76 68.76 100
1/17/2003 13:31 68.71 68.77 68.7 68.7 800
1/17/2003 13:32 68.67 68.75 68.67 68.75 . 700
1/17/2003 13:33 68.75 68.75 68.75 68.75 1000
1/17/2003 13:35 68.68 68.68 68.68 68.68 100
1/17/2003 13:37 68.68 68.68 68.68 68.68 300
1/17/2003 13:38 68.65 68.65 68.65 68.65 800
1/17/2003 13:39 68.65 68.7 68.5 68.5 1400
1/17/2003 13:40 68.42 68.42 68.42 68.42 900
1/17/2003 13:41 68.45 68.45 68.41 68.45 800
1/17/2003 13:42 68.49 68.49 68.49 68.49 900
1/17/2003 13:45 68.6 68.6 68.6 68.6 200
1/17/2003 13:48 68.45 68.45 68.45 68.45 100
1/17/2003 13:49 68.45 68.45 68.2 68.2 3300
1/17/2003 13:50 68.17 68.18 68 68.15 1300
1/17/2003 13:51 68 68 67.95 67.95 200
1/17/2003 13:52 67.91 68.01 67.91 68.01 300
1/17/2003 13:53 68 68 67.86 67.86 1100
1/17/2003 13:54 67.81 67.81 67.81 67.81 200
1/17/2003 13:55 67.9 67.95 67.8 67.95 900
1/17/2003 13:56 68.05 68.05 67.95 67.95 700
1/17/2003 13:58 68 68 68 68 100
1/17/2003 13:59 68.15 68.15 68.1 68.15 1300
1/17/2003 14:00 68.15 68.15 68.15 68.15 200
1/17/2003 14:01 68.15 68.15 68.15 68.15 200
1/17/2003 14:03 68.05 68.05 68.05 68.05 100
1/17/2003 14:07 68.04 68.04 67.91 67.95 2000
1/17/2003 14:08 67.91 68.05 67.91 68.05 500
1/17/2003 14:09 68.05 68.1 68 68 1400
1/17/2003 14:11 67.81 67.82 67.81 67.82 300
1/17/2003 14:12 67.8 67.8 67.46 67.46 1800
1/17/2003 14:13 67.46 67.5 67.4 67.5 1100
1/17/2003 14:14 67.49 67.49 67.33 67.33 600
1/17/2003 14:15 67.6 67.6 67.45 67.45 1200
1/17/2003 14:16 67.65 67.67 67.64 67.64 300
1/17/2003 14:17 67.56 67.56 67.45 67.45 1000
1/17/2003 14:18 67.4 67.44 67.4 67.44 300
1/17/2003 14:19 67.41 67.41 67.41 67.41 200
1/17/2003 14:20 67.42 67.5 67.42 67.46 400
1/17/2003 14:21 .67.36 67.36 67.33 67.35 700
1/17/2003 14:22 67.35 67.36 67.28 67.28 2200
1/17/2003 14:23 67.28 67.28 66.9 66.9 6600
Page 5
Date Time Open High Low Close Volume
1/17/2003 14:24 66.9 66.9 66.8 66.8 3500
1/17/2003 14:25 66.8 66.8 66.8 66.8 1500
1/17/2003 14:26 66.8 66.81 66.5 66.6 9900
1/17/2003 14:27 66.51 66.51 66.29 $6.31 4400
1/17/2003 14:28 66.31 66.31 66.05 66.16 5300
1/17/2003 14:29 66.11 66.11 65.8 65.81 7700
1/17/2003 14:30 65.8 65.81 65.79 65.81 9800
1/17/2003 14:31 65.81 65.95 65.81 65.95 4200
1/17/2003 14:32 66.2 66.2 65.95 65.95 700
1/17/2003 14:33 66.18 66.18 66.18 66.18 100
1/17/2003 14:34 65.91 66.2 65.91 66.2 2300
1/17/2003 14:35 66.45 66.53 66.4 66.53 6900
1/17/2003 14:36 66.6 66.6 66.3 66.3 4300
1/17/2003 14:37 66.4 66.4 66.35 66.35 2300
1/17/2003 14:38 66.32 66.32 66.25 66.25 300
1/17/2003 14:40 66.22 66.22 66.22 66.22 100
1/17/2003 14:41 66.38 66.4 66.21 66.25 1100
1/17/2003 14:42 66.23 66.23 66.2 66.22 800
1/17/2003 14:43 66.2 66.22 65.94 65.94 6200
1/17/2003 14:44 65.81 65.9 65.78 65.78 1600
1/17/2003 14:45 65.93 66 65.93 66 1700
1/17/2003 14:46 66.15 66.4 66.15 66.3 1400
1/17/2003 14:47 66.15 66.5 66.15 66.5 1200
1/17/2003 14:48 66.5 66.5 66.25 66.25 1800
1/17/2003 14:49 66.22 66.22 66.22 66.22 300
1/17/2003 14:50 66.4 66.4 66.3 66.3 200
1/17/2003 14:52 66.4 66.6 66.4 66.46 5200
1/17/2003 14:53 66.65 66.66 66.65 66.66 300
1/17/2003 14:54 66.69 66.9 66.69 66.9 800
1/17/2003 14:55 66.7 66.9 66.7 66.9 1000
1/17/2003 14:56 66.7 66.9 66.6 66.61 1700
1/17/2003 14:57 66.6 66.6 66.36 66.36 1100
1/17/2003 14:58 66.36 66.45 66.33 66.4 1700
1/17/2003 ·14:59 66.33 66.4 66 66.01 . 5200
1/17/2003 15:00 66.01 66.3 66.01 66.25 8100
1/17/2003 15:01 66.28 66.29 66.25 66.29 700
1/17/2003 15:02 66.35 66.35 66.21 66.21 300
1/17/2003 15:03 66.26 66.26 66.2 66.21 1000
1/17/2003 15:04 66.15 66.15 66.06 66.15 1000
1/17/2003 15:05 66.19 66.35 66.05 66.35 1100
1/17/2003 15:06 66.35 66.35 66.3 66.3 1700
1/17/2003 15:07 66.3 66.3 66.29 66.29 200
1/17/2003 15:08 66.29 66.29 66.12 66.12 1000
1/17/2003 15:09 66.17 66.17 66.17 66.17 400
1/17/2003 15:10 66.17 66.17 66.06 66.07 2500
1/17/2003 15:11 66.05 66.2 66.05 66.2 800
1/17/2003 15:12 66.2 66.2 66.1 66.1 1200
1/17/2003 15:13 66.11 66.11 66.1 66.1 200
1/17/2003 15:14 66.1 66.1 65.91 65.91 2100
1/17/2003 15:15 65.83 65.88 65.62 65.62 4100
1/17/2003 15:16 65.8 65.89 65.79 65.89 2000
Page 6
Date Time Open High Low Close Volume
1/17/2003 15:17 65.9 65.99
65.8 '65.8 1300
1/17/2003 15:18 65.9 65.92
65.9 65.92 500
1/17/2003 15:19 65.92 65.98
65.92 65.98 800
1/17/2003 15:20 65.99 66.04
65.99 66.04 1300
1/17/2003 15:21 66.05 66.05
66.05 66.05 600
1/17/2003 15:22 66.08 66.1
65.98 66.1 1400
1/17/2003 15:23 66.1 66.45 66.1 6.6.2 12300
1/17/2003 15:24 66.21 66.44
66.21 66.44 1500
1/17/2003 15:25 66.55 66.55 66.35 66.35 1900
1/17/2003 15:26 66.4 66.41 66.31 66.31 1800
1/17/2003 15:27 66.3 66.3 66.16 66.16 1100
1/17/2003 15:28 66.16 66.3.5 66.16 66.3 1300
1/17/2003 15:29 66.32 66.32 66.32 66.32 100
1/17/2003 15:30 66.32 66.32 66.32 66.32 2500
1/17/2003 15:31 66.3 66.3 66.15 66.3 1700
1/17/2003 15:32 66.35 66.36 66.35 66.35 700
1/17/2003 15:33 66.38 66.38 66.38 66.38 200
1/17/2003 15:34 66.4 66.4 66.3 66.3 1700
1/17/2003 15:35 66.17 66.22 66.17 66.22 900
1/17/2003 15:36 66.15 66.15 66.12 66.12 600
1/17/2003 15:37 66.14 66.14 65.98 65.98 1100
1/17/2003 15:38 65.98 66.05 65.98 66.05 1400
1/17/2003 15:39 66.09 66.17 66.09 66.17 1000
1/17/2003 15:40 66.17 66.25 66.17 66.24 900
1/17/2003 15:41 66.22 66.22 66.15 66.15 200
1/17/2003 15:42 66.17 66.17 66.09 66.09 1100
1/17/2003 15:43 66.08 66.16 66.08 66.16 600
1/17/2003 15:44 66.24 66.24 66.16 66.23 900
1/17/2003 15:45 66.17 66.29 65.95 66.13 2000
1/17/2003 15:46 66.07 66.14 65.95 65.98 4400
1/17/2003 15:47 65.98 65.98 65.85 65.9 1300
1/17/2003 15:48 65.9 65.9 65.7 65.71 4300
1/17/2003 15:49 65.65 65.83 65.65 65.71 4200
1/17/2003 15:50 65.71 65.71 65.55 65.55 1800
1/17/2003 15:51 65.52 65.78 65.51 65.65 6600
1/17/2003 15:52 65.56 65.56 65.25 65.31 5800
1/17/2003 15:53 65.31 65.4 65.31 65.4 2700
1/17/2003 15:54 65.48 65.48 65.35 65.39 3000
1/17/2003 15:55 65.4 65.49 65.35 65.49 2500
1/17/2003 15:56 65.35 65.36 65.25 65.25 1500
1/17/2003 15:57 65.2 65.2 65 65 5800
1/17/2003 15:58 65 65 64.8 64.81 3300
1/17/2003 15:59 64.7 64.95 64.7 64.95 2700
Page 7
22
From:
Sent:
To:
Subject:
Fox, John
Monday, May 21, 2007 3:4 :10 PM
n.niakan@copperrivermgt com
Re: What was date of Joh Gywnns first report on FFH
Call me 9012194602
---- Original Message -----
From: Navid Niakan <n.niakan@copperrivermg .com>
To: Fox, John
Sent: Man May 21 14:33:202007
Subject: What was date of John Gywnns first re ort on FFH
Was it 1/16/037
Navid Niakan
Copper River Management, L.L.C.
60 East Sir Francis Drake Blvd, Suite 300
Larkspur, CA 94939
P 415.925.8955
F 415.925.1165
NOTICE: This email message and any attachm nt to this email message contains confidential information that may be
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l
Morgan Keegan & Co., Inc. DOES NOT lCCEPT ORDERS AND/OR INSTRUCTIONS
REGARDING YOUR ACCOUNT BY E - ~ I L . Transactional details do not supersede normal trade
confirmations or statements. The informa ion contained in this transmission is privileged and
confidential. It is intended for the use of t e individual or entity named above. The information
CONFIDENTIAL CR 006506
contained herein is based on sources w believe reliable but is not considered ali-inclusive. Opinions
are our current opinions only and are Sl.l' 1ect to change without notice. Offerings are sUP1ect to prior
sale and/or change in price. Prices, quo es, rates and yields are subject to change without notice.
Morgan Keegan & Co., Inc., member N SE, NASD and SIPC, is a registered broker-dealer
subsidiary of Regions Financial Corpor tion. Investments are NOT FDIC INSURED, NOT BANK
GUARANTEED and MAY LOSE VALUE Morgan Keegan &Co., Inc. reserves the right to monitor all
electronic correspondence.
http://www.morgankeegan.com
CONFIDENTIAL
CR 006507
23
Message#: 18626
Message Sent 04/13/2004 10:25:19
From: JCHANOS@KYNIKOS,COMIJimChanoslll
To: DROCK@bloomberg.netIDAVID ROCKERIROCKE PARTNERS LPI112661268153
Subject: RE: some of the "impossit:>le" shorts are staron to get hit-
FFH._
-Original Message-
From: DAVID ROCKER, ROCKER PARTNERS LP [mai o:OROCK@bloomberg.net]
Sent Tuesday, April 13, 2004 10: 12 AM
To: Jim Chanos
Subject: some of the "impossible" shorts are starting to et hit-
some of the "impossible" shorts are starting to get hit-
••••etc. Do you have a short list ofthe most
frustrating stocks that the shorts have had a rough time
with?-Iooking to get a bit more aggressive-feeling feisty
CONFIDENTIAL REDACTED
CR 006772
24
Message#: 10221
Message Sent: 09/2712004 11:57:56
From: RLYNDE@bloomberg.netIRUSSELL LYNDEIR CKER PARTNERS, L.P1112661307034
To: JOHN.FOX@MORGANKEEGAN.COMIIII
Subject: FFH
John-Has John Gwynn come out with a revised estim te of what FFH is on the hook
for in the Florida hurricanes?
CR 006796
25
Messag e#: 10287
Message Sent 0912712004 13:33:53
From: JOHN.FOX@MORGANKEEGAN.COM\John Fa III
To: RLYNDE@bloomberg.netIRUSSELL LYNDEIROC R PARTNERS, L.PI112661307034
SUbject RE: FFH
Nothing pUblished, Russell, however, I know he might ave some $$ in his
mind. call me when you get some spare time... Thank John Fox
800-321-7549
--Original Message-
'.J From: RUSSELL LYNDE, ROCKER PARTNERS, L.P [ ailto:RLYNDE@bloomberg.net]
Sent: Monday, September 27,2004 10:58 AM
To: Fox, John
SUbject: FFH
John-Has John Gwynn come out with a revisede51ima eof what FFH is on
the hook
for in the Florida hurricanes?
Morgan Keegan & Co., Inc. DOES NOT ACCEPT ORO RS AND/OR INSTRUCTIONS REGARDING
YOUR ACCOUNT BY
E-MAIL. Transactional details do not supersede norma trade confirmations or
statements. The information contained
in this transmission is privileged and confidential. It is in ended for the use
of the individual or entity named above. The
information contained herein is based on sources we b leve reliable but is not
considered all-inclusive. Opinions are
our current opinions only and are sUbject to change wit ut notice. Offerings
are sUbject to prior sale and/or change
in price. Prices, quotes, rates and yields are sUbject to hange without
notice. Morgan Keegan & Co., Inc., member
NYSE, NASD and SIPC, is a registered broker-dealer s bsidiary of Regions
Financial Corporation. Investments are
NOT FDIC INSURED, NOT BANK GUARANTEED and AY LOSE VALUE. Morgan Keegan & Co.,
Inc. reserves the right to . ..-
monitor all electronic correspondence.
http:/twvvw.morgankeegan.com
CR 006797
2f
S&P Announces: Odyssey Re Holding Corp.'s Operating Companies 'A-' Ratings Affirmed; Outlook
Stable
912 words
27 September 2004
11:44 AM
Business Wire
English
(c) 2004 Business Wire. All Rights Rese ed.
NEW YORK - (BUSINESS WIRE) - Sept 27, 2004 - On Sept. 27, 2004, Standard & Poor's Ratings Services
affirmed its 'A-' counterparty credit and fi ancial strength ratings on Odyssey Re Holdings Corp.'s
(NYSE:ORH) operating subsidiaries: Od ssey America Reinsurance Corp., Clearwater Insurance Co.
(formerly Odyssey Reinsurance Corp.), nd Hudson Specialty Insurance Co. At the same time, Standard &
Poor's affirm/;'d its 'BBB-' counterparty cr dit rating on ORH. The outlook is stable.
The ratings are based on the operating c mpanies' (collectively referred to as Odyssey Re) improved
business position, improved operating p rformance, conservative investment portfolio, and good liquidity
position. Capital adequacy has remained supportive of the rating level. Partially offsetting these positive
factors are the group's potential exposur to further reserve development for prior years, relatively short
track record of strong operating earnings since its partial IPO in 2001, and majority ownership by lower-rated
Fairfax Financial Holdings Ltd. (FFH; BB Stable/-).
Outlook
Standard & Poor's expects the premium rowth rate to be in the single digits or to flatten in 2004 and 2005,
which reflects declining premium rates in property and certain casualty lines and management's desire to
adhere to strict underwriting guidelines. arnings are expected to remain strong, with a combined ratio of
96%-99% and an ROR of 6%-9% for the emainder of 2004 and into 2005, reflecting expected strong current
accident year results partially offset by p tential reserve additions for prior years. Capital adequacy is
expected to improve modestly through th remainder of 2004 (to the 121 % range), with further
improvements expected in 2005.
Major Rating Factors
- Improved business position. As the 18 ,-largest reinsurer in the world and sixth-largest in the U.S.,
Odyssey Re is realizing the benefits of it opportunistic strategy and improved market conditions, as
demonstrated by strong revenue growth nd much-improved underwriting results over the last three years.
During this period, the group's business- ix diversification improved significantly, not only geographically
but also by line of business and distributi n source. In addition to offering a combination of pro rata and
excess-of-Ioss property/casualty reinsur ce capacity to U.S. insurers, the group has significantly expanded
its presence in Europe and Asia and, mo e recently, began offering program business and medical
malpractice coverage on a primary basis in the U.S. market.
- Improving operating performance. Ody sey Re's earnings have improved considerably since 2001,
reflective of improved premium rates and terms and conditions in the marketplace as well as management's
focus on underwriting better-quality busi ess. In addition, this group's net operating results have been less
affected by reserve additions for prior ye rs, partially because of significant retrocession arrangements put in
place to protect the balance sheet prior t 2001 as well as relatively flat writings during the peak of the soft
market period in the late 1990s. The gro p reported a GAAP combined ratio of 99.1 % and an ROR of7.9%
in 2002. In 2003, the combined ratio and OR were 96.8% and 8.4%, respectively. Operating performance
remained strong in the first half of 2004, ith a combined ratio of 94.9% and an ROR of 9.2%.
- Strong investments and liquidity. Odys ey Re's investment and liquidity characteristics are strong based
on management's conservative allocatio and the high quality of the investment portfolio. As of June 30,
2004, about 57% of invested assets wer held in mostly high-grade fixed-income instruments, with 4.7% in
short-term investments and 16% in cash. In addition, following a period of negative cash flows through 2001,
the group's cash flow position improved Ignificantly in 2002 and 2003, with cash flow from operations
reaching $564 million in 2003. Cash flow emained strong through the first six months of 2004 at $234
million.
- Capital adequacy consistent with the r ting. The operating companies' capital adequacy ratio was 116% at
year-end 2003, which includes Standard Poor's estimate of a potential reserve deficiency of 4%-8% of
Odyssey Re's reserve base. Currently, th group has $130 million in remaining indemnifications from
stop-loss arrangements. Standard &Poo s expects the group's capital adequacy ratio to improve through
the remainder of 2004 and into 2005, giv n the expectation of continued strong earnings and single-digit or
2006 Dow Jones Reuters Business Int ractive LLC (trading as Factiva). All rights reserved.
flat growth in writings during the period.
_ Adequate financial flexibility. Standard Poor's believes ORH's financial flexibility improved substantially
following its partial IPO in 2001 but is parti Ily constrained by its majority ownership by FFH. Financial
leverage at ORH (as measured by total d t to total capital) increased moderately over the last two years
but remained reasonable for the rating ran eat 21.4% as of June 2004. Interest coverage has remained
consistently strong at 10.8x in 2002, 14.9 in 2003, and 9.8x through the first half of 2004.
A-/Stable/--
A-/Stable
BBB-/Stable/--
BBB-
Ratings List
Odyssey America Reinsurance Co
Clearwater Insurance Co.
Hudson Specialty Insurance Co.
Counterparty credit rating
Financial strength rating
Odyssey Re Holdings Corp.
Counterparty credit rating
Senior unsecured debt rating
""T
_ Majority ownership by FFH. FFH owns 1% of ORH's outstanding shares. Standard & Poor's views FFH's
level of ownership as one of the limiting fa tors of the rating.
Document BWR0000020040927e09r004 v
2006 Dow Jones Reuters Business lot ractive llC (trading as Factiva). All rights reserved.
27
Morgan
Keegan
EQUITY RESEARCH NOTE
H,OLOIN
LIMnED
Insurance
Estimate Change
October 5,2004
Morgan Keegan /l. Company, Inc.
n1cmbers NcwYork Stack Exchangc, Inc,
'F'"F"--H-' E'"S"'''-['01'' '.' -f" .,prl ,n-,ij .:ii'''i -E'i"i:c 1-"'··..... ·t ,- .. j' rF"o"·'i1. r''I'H' ," u"'r'r·I";j,.'·a'o'O'e"
"......' .. A"•. , Fg oo.P-Q. ': . , :.·..liL .:.".",lJ:__ ..
.'
$.!p'1;ls,QTI. WIth :up- iii: biUrpUf In ... "
(ax;nordih,gdo' Ris'k Mana.gemen't E,o·Jnti'OliIs]'t0.Q'4· likely win go 'GiDWn 'as ifhe:
most ex:p,ensIit.e, 1l.I.8; n:uirieElffi:e is'easofibn ie'.· rd.
.'
pacK'igg,1if.!9$;iprrYJn wlhtfs· '1 $"0: mp.h :(wtliotii radIaled-nul .m7lf/$, flIltn'
lIbe: storm; hEaded·orr: 'B: northeast·· Ek ,thr.ougb Alabama( spawnIng
multiple f6fnaiif.(i)Bsjas! it pf6glessBCl .
•• a .. wll1o'S: or
up to Indiall Ptl' St'· L"e ITIOf;ld'EI oo;tQe;/:!ven"l1lg
":'f', ···t· " : ,.•.., ;- .•-:}" ..,.. :.. ,. ·.. ''';-, .. ":,-; ,', L.,;
o Sep emb:e.r 20, lil(:1;ar .he: IDea II) where Hl/rnc.aus<frances
ashore :earlier lo&.epternl'b.er.: l!itte, 'st0r.m :c t ,cHUO.S-S: mueh :of, the·
lieteteCbifitifflUlmginoffllJleasU5fd)'Ig>ffi'e'6't"9JfL
Th£tQ'$::Q4 E:$.lim1ilt?: reliisiQn 'from
paitfax's.: preliminary' tiet re to; Ih r.rlb.ahes Ghat/ay" Rf,ances, Juan
antI ,J:eatlnei t@:$/1 35 .' :ay ,e:f.i'sed ioss andll6ss.
€ OfjYSJf andef,'--)&:. F.brlSfi:li' ..
. ;t'lf3;{' 4E Q'3itiJfE' . FYt04E" i=¥¥it.4E;·
. IQ,- pf,?:;;r f\jjiW ,GUg
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K0004171
MOJ;gan.KEi£:s·an&Ct5,.. apes ,aod Witli ·GOi'fipanle.s\W,i-iZe.rf!I;J
iii its; afJf1SUlft lifwr abrH(wa:tefhat1Me:ftrm rnai"
..;;1: tWtik'f tIirg: tJ:@ rSI1QJl, .
fePOrtas1 tln1¥ a '$in Ie in
iA'l.eslment ...
aup Ggr;tffip?tJgn St QE:!9,inning QJIl 2i
Subject ,- "r .. ' .
OQmpany
Falif@ Hhlt1Tl;mJs iq ftt ttra, o.f
ap'erating assets) boated ,inJhe, United "&tate5_ Tf;Ie compBBY' ISiprir.rcip:ally:enga-@ed in!pdrnarY" property-castJ81ty.losuranoo.
opetlltionsLTfue: majQ:p C{ r1aBian sUhsIdiaries: Ere oonsoli.dated unfult .Morm"tidfIB

Qf imp (f pdl·.n. In ..tlt ys..cmr tf,Je: ®mp:a !'¥-'$.. ...J,L ..
rl;:SlJlts\ lC£lpitaT 9?ins' I£In\=J <;1; resl1lf Of mgn,y
op.erating ,subs1tllanes. V@; bBliev.e·1tlat the: conI r1uafiofi ·Of reserve :Sff.ef.igtbe.fiifi9." :6DmEJirrei! ,WJt!3: tba higIT :degfeanf
f1baI1i31.al is&ietag'6 :eiJipI0¥.zfl o;y'tfffl' Wiflsl't'es§ finaf:itiii'ali[exihiUfy' IKrtilaity, 8Uii'ij,9 lit.e,·
2Qri.:};2Q,Q'$ ;QQfiCtj'tAS :1Jj 19hiMed bf MfiI(zallQ1'I liif t'iff.;;:b:al$J1aa, fo,ndfug
mec.hanl:Sms:., Mi\hipllllncloqe; tra-nac.t.ions ,pnd tnfet..ioo:mffa-ny' l!;lffe:ns ;dfcrediI:f:acfi1tJes;

;:!r;)e1¥9t the' prE?palfltir,,;ln 9 'thi$,' in pprt po !;>anki'ng
revenue: but nof ibased upom' speciffainvEstment b nking servjces 1rarns:actions;. .,
MK:PERFORM1l:NeER'A.TINGS:
'0: =,QUliPBRWORM tOiQu.fp:efformth 3S: &, pi SlIm'; oy.eldhEl: nBif e
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M=' W1J.liRKET iCB'l:rsiheS5' or balance(s'!ilee r1s'k '!lot ma'feJTially' clifferenf trlilmthe, 8ltEragei. mS', p;utiJic: Gomp"aoy),
Q:=.0,OIYSERV,A.'fIVE ofb:aJance: soa nskmatflJliallylieL0Ni/, itliatofitlie: a¥.e'r.ag,e: u.s.. p'rlblia
Subject To Protective Order
KOO04172
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Subject To Protective Order
K0004173
2E
Gw nn, John D
From:
Sent:
To:
Subject:
Attachments: .
Jennifer, John and Lu as Hempton Oohn.hempton@gmail.com]
Wednesday, Decemb r 01, 2004 5:01 AM
Kris Iorio; John Gwyn (home); Gwynn, John D
[Fwd: [FWd: FFHL (Lu embourg) and disclosure requirements]]
FFHL Luxembourg 12 March 2004.pdf; Letter to Catherine Regan.doc
FFHL Luxembourg Letter to Catherine
12 March 2004.... Regan.doc... I have spo en to Catherine Regan's office. She was in
last night to Ilpm. Today she i in the London office. They are filing court
papers for an additional Part VI filing (consolidating insurance company
vehicles). I guess they promise to do that.
Apparently Riverstone is draftin a response to my attached letter.
This surprises me. But this is in ormation that I got from Catherine Regan's
personal assistant.
John H.
PS. I am trying to work out a f II disaggregation of the asset holdings of
Fairfax. I have managed to bac ORH and Northbridge out of C&F but need
the relevant stat filings for bac ngout these assets from TIG.
Then I can include ORH and No hbridge at face.
Do you have the relevant year e d 2003 stat filings at Northbridge?
Thanks. I guess this is a John G request.
John H
-------- Original Message --------
Subject: [Fwd: FFHL (Luxembo rg) and disclosure requirements]
Date: Wed, 01 Dec 200407: 5:53 +1100
From: Jennifer, John and lu as Hempton <john.hempton@gmail.com>
To: John Gwynn (work) <John.Gwynn@morgankeegan.com> .
-------- Original Message --------
Subject: FFHL (luxembourg) a d disclosure requirements
1
CONFIDENTIAL
MK00023803
SUBJECT TO PROTECTIVE ORDER
4
. ..
Date: Wed, 01 Dec 2004 07 37:44 +1100
From: Jennifer, John and Lu as Hempton <john.hempton@gmail.com>
To: catherine.regan@rsml.co. k, enforcement@sec.gov
Please reply to indicate that yo have received this.
2
CONFIDENTIAL
MK00023804
SUBJECT TO PROTECTIVE ORDER
29
CONFIDENTIAL
Trevor J Ambridge
Chief finllllcial officer
FairfaxFinancial Holdings
95 Wellington Street West
Suite 800
Toronto, O n ~ o , Canada MSJ 2 7
Dear SUs
I have been having an extended empt to disaggregate the vanoUl; bond and stock
positions at Fairfax Financial Ho dings. I am finding it somewhat difficult to locate
approximately usn1biUion in ancial assets Bnd I was hoping that'you could help
me. I must be missing somethin because the idea that so many assets are missing
seems preposterous.
I guess the answer is thus simpl explained - there is some missing entity with
considerable bond and stock bol mgs. I have not found it though -llIld I have done
some looking.
I would very muc.h appreciate fyou can tell me what financial assets (bonds,
stocks, holdings in Zenith etc) re In what entities. I believe I have account> for
all key Fairf-ax entities (Northb e. Odyssey Re, Crum and Forster, TIG and iill
entities, nSpirc Re, FFHL Lux bourg, by implication Fairfax Gibraltar and various
Europe/lDrunoff' entities (such RTverstone UK). I have Dot found accounts for
some entities such as Fairfax B ados and Old Lyme C;;ompany Bermuda, I g u ~ s its
entirely possible that the differe ce is in fuese entities. .
rJcnow it is likely there is some . g rhave missed.. I lmow thus there is likely to be
an easy expla.nation for my pro len;ls. However as r can't find it rfigure this is a
matter of the lItmostimportanc . ItgDCS to very safety and sOllDdness of one of the
biggest insurers in North Arne
CR 004693
CONFIDENTIAL
ThiB issue is so important _ and t suggestion that approximately $1 billion in asse1l:
simply do not exist even though ey appear in your audited account is so outrageoUS
that I am worried. Even though I ess there is II simple explanation I have copied
this letter to your auditor Price W terhouse Coopers in Canada.. I have also copied it,
only for the record, to the US SE
I hope to hear from you shortly.
PS. The attached contains my ro gh thoughts on where the assets might be and what
is missing. Again there is quite dea.l which is rough in this calculation - but fuo
. scale ofmissing assets is so vast t my rougb calculations are not the source ofmy
error.
cc:
V hem Watsa, CbiefExecutive fficer, Fairfax Financial.
Kevin J. Dancey
CEO, CllIIadian Senior Partner, ricewa.terhouseCoopvrs Canada
The United Smtes SEC via
enforcement@sec.goV
CR 004694
Holdings of the Consolidated irf:u: Financial
The 2003 annual report of Fair Financial Holdings listed the following
invesiments:
31 December 2003· USD mnUons
Cash and short term Investments
Cash held in Crum & Forster inte 5t escrow
account
Marketable securities
Total parent company cash res
Portfolio inveslments
Subsidiary cash and short term i vestments
Bonds
Prafarred stocks
Common stocks
Inveslrnents In Hub. Zenrth and <lven!
Real estate
Total subsidiary cash and sho term
Investments
At market
As In booK
value
346.4
346.4
47.3
47.3
16.5
16.5
410.2
410.2
5,710.6
5,710.6
4,728.3
4,644.6
142.3
143.9
1.173.9
1.428.5
3B7.6
456.0
122
17.0
12,155.9
12,400.8
CONFIDENTIAL
The company has (consistent th Canadian GAAP) stated the assets at historic cost
The market value data WIlS incl ded. and has been presented here.
'Holdings of Northbridge Fin cia!
The Canadian aSBets llIe eBsi1y ound. Norfubridge Financial Holdings (which holds
the Camdian assets) is listed. s lillDual report - in Canadian doilllIlllists the
following:
CR 004695
(Cdn$ thousands)
As slated
Merket valu9
2003
Cash and short tenn lnvestme
nts
5,392
5,392
Investments
SubsIdiary cash and short term
In estments
421,517
421,517
Bonds
n9,978
766,260
Preferred slocks
175,764
177.834
Common sIDcks
311,331
398,260
Investment in Hub
87,953
112,244-
Real estate
12,243
18,400
Total investments
1.188,766
1,914,535
The market value statistics do at corne from the annual report - rather they corne
from page 10 of the result pres release dated 6 February 2004,
.The exchange rate at yellI end s .7738 usn per Canadian dollar (source FFH 200
3
annual report). Translating tb amolIDts into USD millioDs is as follows:
USD million
As statad
market IIdlua
Cash and short term Illvest!l1an
4.2
4.2
Investments
Subsidiary cash and short term
nvestments
326.2
326.2
Bonds
503.5
508.4
- Preferred s t o c ~ . s
136.0
137.6
Common stocks
240.9
308.2
Investment In Hub
6B.1
86.9
Real estate
9.5
14.2
Total lr>Vestments
1,384
1,481
CONFIDENTIAL
Holdings of Crum & Fors
We can also work out the
lOQ filing for the fist q
20()3. These figures are glv
ts for Cmm & Forster - because it has SEC filings. The
of 2004 contains (audited) financial data for year end
below;
CR 004696
USD millions 2003 at book At cost
Fixed Income securttles 537.0 620.7
Equity securities 311.3 273.5
Othar Invested assets
138.2
Totallnveslmenls 1086.5 894.2
Cash and cash equIvalents 2081.9
Fairfax Financial Holdings balance sheet with the
t Crum & Forster owns considerable holdings in
lding (ORR) which are already consolidated into the
count separately. We can however back these out
fonowing table is extracted (with notes) from the S4.
This table conforms to the data ontained in the S4 filed with the SEC on 15 March
2004.
One difficulty ill reconciling til
Crom & Forster statements is
Northbridge and Odyssey Re
FFH statements and which we
with infonnation iuthe S4. Th
'lS1 $77.786
ownorshli> turu:rrtllpe
P,;,eml>or SI.lDa3 ... :n.aml>e- !t :IOlB
Conylnll C/U"'& nm.
Cost 141•• 1'orm.r Ilrutuial
$1lI7,66Q 17.&<j(, .;1.4'l'l
i'S,05S oIl;!,1>4D 15.2" 71.0%
17.824 17,824 1.20/0
U,li0q 20.70/0
9.156 111.4%
5,tl25 7,llJl9 1.4% 'liID.41%
1,216 ::I,US 1..2% roo.o'K
;;'725 3,123 93'" 100.0%
2UO/O 4ti,66Z
22,794
Dtlcatul:lllr 31:, 20DZ
Cilrryjng
CDIt. v..l_
tbl' b6\tlltot 'Sberu. ElM omlad lit IiJlr.....tut.
on tho <o=lldo:hd bolln.."""'" o:nd ... lorlRlg.theeql4lty
U> "" loa, """"Dd.,.d l>olon<.e Inri , .../1d at
, """t:Stl1frrts fire h ,!it'tlJIttIe$.
01 lilre Whtdtod lrl atnrrbl\"!:lttd II
mflllod.
;J I:I! hdntl!d fn hlced rom. s«u[ft
ZMIth
{mp.' " •••••••••••, .
Northbridge PIn.tldai
cotpDmljorr .
C!dyIsay RI> Holdlngs Cot",! ••••
Russgl MEta,1s I",.'." .
Awent C8¢tBI (Ilolclill9,j PLC'
me: Holdfnt/ Ql<porrtlon" ••.••
HWlC p.,;h. RJfolcf ••••• _ ..
MFXche'folIi/Q ffoldlrt\lt, Inc.' •• , ••
Hub lrbmatIofJ81 Urnlt"d
rommOlll shares'•••• , .
Hub \ntDmBtlonsl Ul'nltEd
debantuf<l .
We can now recoru;!nJct the C annual statement as it would appear in the Faiif=
Financial HoldingE annual s't tement.
CONFIDENTIAL
CR 004697
As reconstructed \0 be
consistent with the FFH annual
accounts
Cash In C&F esclOlll a=unt
Fixed income securities
Equity securities
Other assets
Cash
StrategIc Investments (Zenith
National and Advent Holdings)
Excluded assets
Northbridge Financial
Odyssey Re Holdings
TRG Holding Corponetlon
MFX E x c h a n ~ 8 Holdings
USD
mmions
At market
value
47.3
637.0
193.7
26.6
2034.6
117.El
B2.6
17.8
8.0
3.1
at cost
where
given Notes
AI; from FFH annual repart
620.7
Excludes Zenith National and Advent
171.9 Capital Holdings
Excludes Northbridge, Odyssey. TRG
holcllngs and MFX
Cash minus the escrow account
101.6
Excluded because 1have already
75.1 inclUded e5 NorthbrJdge
Excluded becauge I will Include as
17.6 Odyssey
Excluded because it will be included
5.0 with nSplre
Excluded because It Is not "invested
assets" within the meening of the FFH
3.7 annual statement.
Now wee
Fortunately O!UI is pretty simp e - it has a 10K and no holdings in any other Fairfax
entities. (It does however have ontingent guarantees on several Fairfax: European
runoff operations.)
ASS!:TS
Investments and cash:
Fixed Income securlties, at fair v lue (amortized cost
$1,005.376 and $1.964,758, res cllvely)
Equity securities:
Common stocks, at faIr value (CD $376,215)
Common stocks, at equity
Short-tenn irrvestments, at CDst hich approximates
fair value
Other invested assets
Gash and cash equivalents
Totallnvastments and cash
1,597.688
447,700
117.489
21B,208
267,504
1,588,669
4,237,248
CONFIDENTIAL
Strangely these assell! include Dille interest in TRG HoldingE (wbichholds
TIGlInternational insunmce co pany and which I will double coUDl: later by including
the assets ofTIG.) The Odyss y America Statutory Statement for 2003 hM a
corporate structure (for the wh Ie of Fairfax) in it (Schedule Y). It shows 1hat tbis
CR 004698
CONFIDENTIAL
holding is held by ClelUWatcr. e Clearwater statutory statement shows this at $60
Iml1ion carrying value. I could btract 60 roilJion to avoid fue double count [I BID
not sure however that the Cl aler carrying ya}ue is the same as fue ORR carrying
value sol do nat bother doing s .}
TlG
Next we sbould consider the ass ts of11G. There are several 11G entities fOT which
we can find balance sheets. Th are several however only 11G Insurance Company
(California domicile) is large. e SCllOOulc Dbond holdings are as below:
CR 004699
o
o
z
"'T]
o
m

()
;U
o
o
.t>-
-...j
o
o
GUS/? De. <:I1ption
Inte"",IRaI" Malurlty Garry Value Par ValU8 FalrYalue Actual Cost
. . . .
91Z803BF9 Sial"" TT93. Bd 0.00 1510BI2025 41,035,230 111,B20.000 34.01B,216 39,946,M;9
912B03BJ1 United Stste.s T",a. Bd
0.00 15f11/2026 4,124,057 14,500,000 4.117,Il:IT
91200MS2 Unned Sl>Il!J8 Tm.! Bd 0.00 1510212020 612.405 1,400,000 5E14,B52. 573,88B
91280JBJ1 Veiled Slate. 1m"" Bd 0.00 15111120:<6 8,630,088 30,343.000 B,617,321 B,430.803
1112aoJBJ1 Uriled Slates Trl!as ad 0,00 1511112026 20,101,225 70,676,000 20,071.488 19,637.049'
912803AU7 ' United Slates 1188BBd 0.00 1510812,020 33,779,753 71,720,000 29,579,254 32,888,489
912B038L6 Stal.... Tma. Bd 0.00 15/0B12,027 8,957,390 31,000.000 B,447,903 B.487.B40
9128038E2 Uniled Slale!; Treas Bd 0,00 15/0212025 M,848,608 238,800,000 74,628,935 88,421,720
1 4057 14500000 4,117.9ST 4.028,825
912610ECB UnH.d Stete. Tre"" Bds 8.88 1510212019 54.3e1,192 38,000,000 54.32ll,144
912810EDB UnHed Stat... Tma. Bd. 8.13 1510B12019 170,455,649 119,515.000 181,52'3,690 172,2Tll,183
912810ECB UnU.d Stole. Tres. eds 9.sa 15/t)212019 4,291,673 3.00ll,OOO 4.289.064 4,31G,2M
912610009 Unlllld .stalll. TrM' Bel. 9.313 1SIOZJ2006 .
82.424 80,000 92,403 90,665
912810EM6 Vnlled Stat... Tree. Bel. 7.25 1510812022 137,632 110,000 138,828 138,U3
912810EP9 United Stales T"",. Bels 7.13 151021'2023 40,223 30,000 37,443 40,432
912B10EG9 Unned 513199 Treaa Bds 8.75 15JO!lI202ll 54,711,534 37.920.000 64,OB2,BOO 55,317,5132
9128100:><3 United Slaw Bds 7.50 15/1112016 36,360 28,000 35,648 36.935
912810CJW5 United Slate!; neal! Bds 7.25 151OS12016 6,806,970 . 8,936,963
912810EP9 UnHed SlBm. TreB9 ads 7.13 1S10212OZ3 70,055 70,000 87,366 70,059
912810EMS Unftod Tma!' Ed. 7:lJi 15108/2022 2,243,951 1,695,000 2.139,209 2:lJi8,B01
912S10EC8 VnHed Slate. TroB9 Bd. a8S 1510212019 4.281,673 3,000,000 4,269,064 4,316,250
912610EC8 Uniled SlB1a&Trees Bds 8.88 1510212019 47,BB9.797 33,500,000 47,694,548 . 46,155,489
912610FM5 United Slam. Tmso 8do 6.25 1510512030 26.108.385 21,950,000 25,329,949 26,193,168
912810ES3 United S"'laB Tfel!Is Bd. 7.5ll 151111202.4 40,485,330 28,000,000 36,519,22.4 40,705,000
912828BJ8 vnned 5lBlea Treas tits 2.00 a'loSl2oos 10.047.166 10,000,000 10,064,450 10,053.125
91282751'.6 UnRed Slates Treas tits 4,75 1510212004 2,S(I.4,697 2,500,000 2,511,132 2.582,422
91262BAL4 United Stale> Traa& tits
1.ll8 3010912004 M,528,124 86.000,000 86,498.432 68,935.439
912629AL4 UnHod Slat99 Tma& tits 1.88 3010912004 2,813,843 2,800,000 2,614,728 2,522.984
9128272U5 UnRod StaIB. T",a. Nil; 6.63 15'05'2007 997,729 961,000 1,110,255 1.015,466
912827Z62 UnHed Stala!l Treas tits 8.50 1511012006 106.082 105,000 116,958 101,166
B128ZMWO United Stale. Tres. Nil> 1.53 31/03I2Q05 5oo,8B2 500,000 501,016
912827088 Unllod State" Tr"". Nt. 7.25 1510912004 4,030,332 4.000,000 4,331.464
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912.B27ZB2
United Stales Trells Nts
6.50
1511012006 408,227 400.000
445,547
415,938
91282BAWo
Unhd Sla198 Treas NIB
1.63 3110312005 250,441
250,000
250,B60
250,006
9128V5M
Untted Sl:>ta; Traas N19
4.75 1510211004 1,30.2.437 1.300,000
1,304,241
1,382.859
91282n85
Un',ted Sial"" Treas Nls
6,50 15'0512005 76,522
75.000
00,156
79,407
91282.8AEO
United Slalss Tres. NIB
2.B8 3OI0SJ:1.004 30,834,807 30,825,000

30,863,531
pn.01oo001-(119SS9B US Go'/-Issuer Obllg
766.428,731
1,02.0,269,000
726.809,624
765.0611,2.75
1107UZ.CSI
B<ilish Columbia PItlV MedllI11
5.88 1erotlIZ02!l
20,978,063 20.893,790
22,473,5tl9
18,829,078
373382US7 GeorgIa SI
3.25 11ll9l2.014
2,497
. 3,000 2,899
2,316
S8344ZEW5
Manllnll. Prov Mod TelIl1 Nls
4.35 2911012032 6,964,597
B.9S4.S97
7,388,810
5,748.759
PI1-1100001.1199900 Obli
ZT.943,157 V.8Bl.8B7
Q9,8S5,ZlB 24.577,151
.75
2011012008 318,739
317,W;
3S7,B64
3Zll,425
Pll_1800oo1-1899998 Pol Sub-l ••oor Obll
31362ADGB
FBdBJ1II Natl Mig A80n Gtd MI
10.00
110912017
193 194
194
193
4581a2BY7 Inter Amem a_v Bk
6,95
11Ol312Q25 1.448,153
. 1,,430.000
1,711,lZZ
l,4G5,1170
Pl1.250oo01.259999B Spec Rev-Issuer Obi
1,448,346
l,430,ll14
1.711,318
1,466,172
04775HCH8
Mania Gas U Co Medium Ter
6.55 2()'11/202/l
2,593,820
2,675.000
2.964.90B
2,SU,J01
G711858BOO
Old.homs Gas a El6c Co
6.50 15'0712017
1,004,834 1,000,000
1.0Q4,961
1,04 UlOO
P!1.3200oo1-J2GIl998 Pub Ub'hls!;uer Obi
3.593,65<1
3,675,000
4.059,8B9
3.5ll4.601
61];lB2.C,J5
M0lY8n Gly Tr Co New York N
0.34
20109/2011 18.771.56B
26,335,000
18,2ll9.656
18.n1.5ll8
63935KAAl Navigator Gss Trans Pic
10.50
3010&12007
3.900,000 13.000.000
5,4GO,ooO
3,900.000
000000000
parm.JIII An By Euro-DS£.u
8.13
2W912010 3,834.506
20,161,809
3,634,505
10,247.9li2
886.!i2SAL8
lie", prlnolp<ll-Proteclecl ct
2.511 15/1112027
45.152,533
,45,240,000
48,975,406
45,530,000
96045#AA0 W1ll1ams communl""Ilon' Llc
5,69
6/W1200B
11,580,573
12,423.UTT

11,516,700
pt1-3000001-39999!1Blnd, Ml$o-!sBuer Db
B4,2-Hl,200
117.179,686
ae,547.1l40
89,g6S,250
TIGln.
CO
all3.983.6ZT
1.170.732,543
849.391,991
BB4,992.eT4
Summary
BI>3,983,827
1.170.732,543
849,391.991
8114,eIl2,B74
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We also have similar data for the equities;
CUSIP Oe.CIiplicn
BooI'JAd)
Numb., Of llhares Carry VBluB FairV.lu. Aclual Cost
()
;::a
o
o

--.j
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N
D55535104 Muend1aner Ruectvel1!idlBlUng 318.000.00 36,5&4.644 38,554.644
Pt2S1-6700001-679e998 Ccmm Slk-Banks. T 3,2134.449.00 155,112,559
36916201 Arbor Mem Svcs Inc:: '1,278,492.00 13,550,946 13,850,948
46581@1OS Ivans Inc T3.630,W 1,947,488 1,947,488
781903804 Russel Metals Inc 391.700.00 2,684,378 2.664,376
1't?!::i.RAnfl!1/l1-AAg99llfl Comm Stk-lnd g, Ml 1]44.022..00 18.462.814 18.462.814
22237@107 Cc..",t,}'1'Iid9 Corp 1.000.00 1,319,963 1.319,963
V6s92R94ll HMc AslB Fund O1'casla-Cl. C 1,065,256.33 24,647' ,770 24.647.770
Total> 236,660,584 238.580,584
969390109 Zsnllh Naa In. COrp 2,966,449.00 96,55",915 96,557,915
Exdud.d blleau•• they art! counted elsllWhor.
Fairmont In. Co 556,000.00 25,738,733 25,738,733
67612W108 Ody.aay Rs Hldgs Corp 12.660,966.00 199,853,349 199,853,349
87612@107 Odys""Y Re Hldg. 100 10 94,907,319 94.907.319
87755#100 Old Lyme Insurance CompBny 200,000.00 36.573,552 38,573,552
872B4@lD6 Tig Amem Spe<::IBIly Ins Co 600,000.00 16.249,069 15,249,059
87256@100 Ti9 Hldg. 4 Inc 1,000,00 100,401,772 100,401,n2
67246#107 Tig Indty Co - CaUf 23,500.00 22,266,178 22,266,178
87247#106 Tig Ins Co Mk:h 150.000,00 21,609,447 21,609,447
87248'109 Ti9 In. CD Ny 5,000.00 5,391,336 5,391,356
87249'108 TIQ Premier 11\9 Co - CBIII 27.200.00 37,443,468 37,443,468
87249ltl 04 TIS Specially Ina Co - Callf 41,000.00 28,201,758 28,201.756
P12SHlSOoo01·699999S Ccmm S!fI-PBrem, '15,330,932.33 615,603,734 615,603.734
589,636,961.00 saO,635,981.00
37,675,036
120,735,806
11,126,651
o
n8,56S
11,867,437
261,666
23,305.468
205,732.512
83,000,572

157,378.098
79,607,631
38,573,552
27,197,548
97,554,466
9,8711,868
4,005,140
2,791,643
97,136,007
'2.3,851,469
660.652,981
s37,oes,av.00
CONFIDENTIAL
As per usual we would like to elude the cross holdings from the equity holdings.
Doing this I get 849 million in ond holdings at market and 333 million in stocks
(including 96.5 million in Zeni .) The TIG smtntory statement (Ilttached) also
indlcates 218 mllUon in casb oldings.
We also need to look at the ass ts of the various TIG structures. 1can't be bothered
piecing them together - becau they are all small. I have looked at the various 118
structures and get the [ollowin
usn millions 2003 Bonds Cash Stock
TIG American Specialty
3 10 0
TlG Indemnity Company
10 11 0
TIG Insurance Company of Mlch
10 11 0
TIG Premier InSurance Compan
22 7 0
TIG Specialty Insurance Campa y
13 14 0
TIG Insurance Company of New ork 2 4 0
TIG Lloyds Insurance Company
0 2 0
Old Lyme Insurance Company 0 Rhode
Island
65 25
Ranger Insurance Company
62 135 34
Totals
187 219 34
I may be double counting som of these entities as they are (mostly) subsidiaries of
TIG Insurance; Company (Car mia) whose statements I have dissected above. To
the extent that they are consoli ated into TIGInsurance Company they are being
double counted. Double coan g of course makes the financial asset shortfall even
mon: pronounced.
CR
rth American finnnciaJ asset boldin of
Toul
Norlh
C&F ORH TIG llG entities Amerlca
Investments
Cash In C&F eSl:row account
& other holdeo cash 4.2 47.3 51.5
Subsidiary cash and short
term Investments 326.2 2034.5 1607.0 216.0 219 4604.7
Bonds 606.4 637.0 1598.0 849.0 187 3679.4
Preferred stocks 137.6 137.6
Common s t D e k ~ 30B.2 193.7 585.0 236.6 34 1337.5
.'
Investment in Hub, Zenith,
Advent when separately
identlfied 66.9 117.6 96.5 301.0
Real estate 14.2 14.2
Other assets (some
problems as they are not
necessarily financial assets) 28.6 268.0 294.6
Total Investments 1485.7 305S.7 4238.0 1400.1 4-«J.D 10559.0
in Fairfax releases that nSpire Re is the consolidation
'5 is highly problematic because nSpire Re has only
illioD in cash. This is 784 million of the missing
the organisational chart in Schedule Y of the ORR
Lindsey Morden, Fairfax Liquidity Management
• some Barbados entities and a f-ew other things.
Note there are several aVE TES in this table - for instance ORR is
overestimated because it includ s a holding in TRG which in tum O"WllS TIG (and
hence is double counted). I ga er this over-count is about 60 million. ]t'5 likely 1hat
there is more than 100 million' double counting elsewhere - but it is finicky to pick
it apBIt
Anyway - we get totalfuumci assets of 10.6 billion as an OVERESTIMATE.
a..-e 12.4 billion at market (see the table at the top of
this note). To iliat you should d the 47 million in the e&F escrow account as itis
counted here. So where are the remaining 1.&5 billion. I have been looking
everywhere I can find. (This ssing amount could be well over $2 bilJi0I?- ifthe
double counting is removed.)
Tracking the missing appro' ate couple of billion
The only big non-North Amen an operation outside ORR (which is counted anyway)
is European runoff.
We have been told several tim
vehicle for European runoff.
306 million in bonds and 478
money. nSpire Re (according
statutory statement) consolida
(Hungary), Icelandic operatio
CONFIDENTIAL
CR 004704
CONFIDENTIAL
FFHL Luxembourg - statement also attached- has very small sums. In the 12 March
annual accounts (FFHL LuX ch ged balance date) the 2003 numbers are shown as
having 21 million in cllEh but D • g else. These are Buros but the difference
between Euro and USD is trivi at this level. The Gibraltar opemtion was merged
into Luxembourg by the 12 h balance date and this did not appear to involve the
movement of substantial finau assets.
The main UK consolidation ye ele - Riverstone UK. holdings (balance'sheet also
attached) which acts as the co lidator of Sphere Drake, Sphere nrake (Bennuda),
the French operation (CIR) an various other entities like Riverstone Stockholm has
in it only 26 million in bonds a 6 million in cash. These accounts are in GPB - so
you can add about 80% to put it into usn. But this is still too small to make up the
difference..
There could be some assets esc wed at LJoyds which are counted in the cOIlBolidated
balance sheet However I have be accounts for Heraldglen for 2002. HeraIdglen was
the main Kingsmead capitel pro .der. It shows no assets anything like large enough
to make up the difference.
After 'taking account of all thes entities I suspect that I3lll approximately $1 billion
short.
It's likely the difference is in B bados or Bermuda and I do not have accounts for
them. However I was always der the impression that the main such operation is
Wentworth - and that appears be a subsidiary ofFairfax Luxembourg in the ORR
Schedule Y table. In that case i 's f i l r ~ a d y counted. (Does the FFHL Luxembourg
account consolidate its subsidi .es or is it aJl unconsolidated account?)
Of course there is something mi sing. Can you please tell me what it is?
Thanks in adVaJlce
CR 004705
)
)
)
)
) ,
)
) ,
Exhibits to
Certification of Michael J. Bowe
Volume II of IV
30
)
)
)
)
)
)
)
Confidential- For use by the OSC and retained experts only
John Hempton
84 Hopetoun Avenue
Vaucluse NSW 2030
Australia
61 2 9337 6349
john.hempton@gmail.com
Dear Susan Wolburgh Jenah
Acting Chair
Ontario Commission
Almost 9 months ago I wrote to your predecessor - Mr David Brown QC about finite and financial
reinsurance at Fairfax Financial Holdings. .
Given the scale of the abuse it strikes me as strange that your organisation has not taken the running on this
issue. Fairfax - as you probably know - has just received a subpoena on the matter from the US SEC.
Now I might be a little bit daft - but it hardly bodes well for the Canadian financial markets if they require
Americans to police some obvious - and well mischief in Canada.
I am assuming of course that the lack ofvisible action by the OSC is an oversight rather than by design.
But just to make sure I thought I would send you another copy of my letter to Mr Brown.
Thanks in advance.
John Hempton
14 September 2005
Confidential- for use by the OSC and retained experts only
CR 005253
)
)
)
)
)
Confidential- For use by the OSC and retained experts only
John Hempton
84 Hopetoun Avenue
Vaucluse NSW 2030
Australia
61293376349
john.hempton@gmail.com
David A. Brown, Q. C.
Chair, Ontario Securities Commission
. 20 Queen Street West, Suite 1903
Toronto ONM5H 3S8
Canada
Dear David Brown
As you are aware, New York Attorney General Elliot Spitzer and the United States SEC are investigating the
sale of highly artificial (re)insurance policies that are designed essentially to manipulate the earnings (and
the balance sheets) of parties that have purchased them. These products go by the names "finite
(re)insurance", "financial (re)insurance", "time and distance policies" or other euphemisms.
You may not be aware that the one of the largest purchasers ofthese insurance products is the Canadian
listed Fairfax Financial Holdings. Attached is a letter which details several finite reinsurance products
purchased by Fairfax Financial Holdings and sold by major reinsurers (Swiss re via Swiss Re New Markets
in Bermuda, Munich Re via the partly owned Inter-Ocean also in Bennuda, Chubb via Federal).
In all these cases Spitzer and the SEC have or should have the documents which describe policies sold to
Fairfax and its subsidiaries. Identical subpoenas have been issued by Spitzer and the SEC to the head offices
ofthese companies requesting information on the sales of"non-traditional insurance products".
There is also a peculiarly Canadian example where the seller of the finite reinsurance was Great Western
Life through its Barbados based subsidiary London Life & Casualty Re. However in this case the policy was·
sold to US based subsidiaries ofFairfax Financial. Spitzer will probably not know about this policy. [This
policy may have been partially or wholly commuted in the 3
rd
quarter of2004.]
I suggest that both through information obtained from Fairfax Financial and from Great Western Life you
could aid Spitzer and the SEC in their investigations. Alternatively you could ignore it. I am very familiar
with finite reinsurance however and the largest and most problematic user of this product I know (Fairfax
Financial) is Canadian domiciled. It's possible though that the problem will emerge in the unpleasant
manner in which finite reinsurance raised itself in Australia (HIH) and the UK (Independent Insurance
Group). I think it is better to be ahead ofthe curve.
I have attached an explanation of how these fmite policies work and have also attached evidence/details as to
the existence and terms of the Swiss Re, London Life, Chubb and Inter-Ocean policies.
Confidential- for use by the OSC and retained experts only
CR 005254
Confidential- For use by the OSC and retained experts only
) I have also attached (at Attachment A and in the text) a suggestion as to the egregious misapplication of
Canadian GAAP (notably D7) by Fairfax Financial Holdings.
I am happy to discuss these issues with you further. I should disclose that I am short Fairfax Financial
Holdings based on the finite reinsurance issue.
I have contacted your organisation before and have felt my complaints slipping into a black hole. It is
because this issue is (a) so important and (b) so topical that I have chosen to contact you directly.
Thanks in advance for taking the time to investigate these matters fully.
)
) John Hempton
15 December 2004
)
Confidential- for use by the OSC and retained experts only
CR 005255
) .
Confidential - For use by the OSC and retained experts only
First - bow does a finite policy work:
It is possibly easiest to start with a simple policy. Imagine a reinsurance transaction that runs as follows:
An insurance company (A) thinks it might be under-reserved. So it does what insurance companies
do when they think they might have a problem. They go and buy reinsurance.
They want "protection" against being $450 million under-reserved - and they go around looking for
someone to sell this protection.
The company selling the protection (8) however is not foolish. It knows that an insurance company.
wanting to reinsure its reserves probably has suspect reserves. (Lets face it, reinsurance companies
know quite a lot about adverse selection.)
So the reinsurance company wants to price this policy so that there is very little or no chance of loss.
They offer the following policy. B sells a policy to A for $200 million. However the $200 million is
not paid to B - but rather to a non-recourse Subsidiary ofB (lets call it C) placed in a tax haven island
in the Caribbean. (Fairfax uses Barbados for Canadian operations and Bermuda and Ireland for US
operations.) C has no capital at all other than the premium paid into it.
C promises to pay A $450 million if their reserves tum out to be inadequate. However they promise
to pay A only in 14 years. Moreover A enters into a total return swap with C whereby A pays C 7
percent per annum compoUnd on the premium and C pays A the return on a Lehman bond index. We
thus know (provided A remains solvent) that in 14 years C will have about 515 million less fees in it.
(1.07/\ 14 * 200= 515.7... )
Thus at the end of 14 years C can pay A the full 450 million. Of course A fully funded their
reinsurance recoverable and B was never at risk (the policy was with a subsidiary) and C was never
really at risk (it had no assets other than the policy).
That said - if A has a reserve event (loses 450 million) they do not show this loss - they only show
the premium as an expense. (And that expense does not even go directly through the P&L - it just
. reduces current year written premium!)
Essentially what happens is the ceding company (A) books a gain on the reinsurance contract of$250
million (450 million minus 200 premium). This "gain" offsets the losses from reserve deterioration
(say 450 million). It enables the company to report only 200 million ofloss (pre tax) when the
reserves are inadequate rather than the full 450 million (pre tax) ofreserve inadequacy.
This "gain" happens without any economic loss from the reinsurers (B or C). The gain now is offset
by the lower investment income that will be reported over years 1 to 14 because ofthe interest rate
swap. The lower income years 1 to 14 is reported as lower "investment income"
Confidential - for use by the OSC and retained experts only
CR 005256
)
)
I.
Confidential- For use by the OSC and retained experts only
One interpretation is that the company has used the transaction to produce a "discounting ofreserves"
- however this is an unreasonable interpretation because there is no link between the period of the
reinsurance contract and the period under which the underlying claims payout. Also the 7 percent
discount rate might be artificially high (and can be made artificially higher).
If you have not worked out how artificial this accounting treatment is then reread it. A company enters into
a transaction which will cost it over $50 million over 14 years and reports an immediate gain on it of $250
million. This is as warped as Enron's accounting.
The transaction I give you above is REAL. It actually happened pretty well precisely as stated between HIH
and Hannover Re.
The transaction as I state it however is not reported this way under GAAP. The international accounting
standards as well as the US Statutory Standard (NAlC SAP62), US GAAP (FAS 113) and Canadian GAAP
(D7) require that a transaction have risk transfer or it gets deposit accounting. "Risk transfer" is more or less
defined as "reasonable possibility ofloss for the reinsurer" and the standard accounting interpretation of this
is a 10 per cent chance of a 10 per cent loss. The transaction could be made AustralianlInternational GAAP
compliant by the simple means ofputting an earthquake rider in. Say for example with the HIH transaction
- ifthere is an earthquake in Sydney with more than $5 billion in insured damages then Hannover Re would
pay the $450 million in seven years not 14.5. This would mean Hannover would bear some loss.
Ifyou think the earthquake rider is fanciful- don't. This was exactly the clause that Berkshire Hathaway
inserted in its finite (read fake) reinsurance contracts with Hll:I. .
General observation here - the Berkshire policy may have been legitimate in that it had "risk transfer" but it
still faked IllH's accounts. Finite insurance that has $10 worth ofrisk transfer but produces $100 worth oj
accounting benefit (without economic benefit) is still egregious as it stillfakes accounts. What the insurance
industrypromotes as "legitimate financial reinsurance" is still fraud
There is a second characteristic of the HIHlHannover Re transaction and that is that it is retroactive.
Retroactive simply" means that it is reinsuring events that have happened before the policy is put in place. A
retroactive contract is likely to be prima-facie suspect. The reason is obvious - why would you want to
insure events that have already happened? Answer: because they have happened! If they have happened
then why would anyone write a reinsurance contract with you? Because they are not taking much risk.
Therefore contract likely to be "fake" or in insurance jargon "finite".
The following accounting standards specify how retroactive contracts should be accounted for (even if they
are legit -the standard knows no way to tell if they are legit). .
Fairfax has numerous retroactive contracts including contracts involving Swiss Re and Chubb. Both these
contracts involve all the characteristics of the HIHlHannover Re contract. In particular they have a
funds withheld account and an interest crediting rate of 7%. These contracts may involve some risk
transfer but they are of the form which produces accounting benefits wlry in exCfSS ojeconomic benefits-
they are thus abusive ways ojfaking Fairfax's accounts. .
Confidential- for use by the OSC and retained experts only
CR 005257
Confidential - For use by the OSC and retained experts only
Fairfax also has particularly peculiar accounting for retroactive reinsurance. See the following.
Accounting standards for retroactive insurance used at Fairfax.
ACCOUNTll\fG METHOD OF ACCOUNTING
STANDARD
US Statutory accounting - AJI "gains" from retroactive reinsurance contracts are to be included in
SSAP62 "surplUS" (insurance speak for capital) but to not as "earned surplus" but rather
as "special surplus". In most states a company cannot pay a dividend out of
"surplus" unless it is "earned surplus". The result is that the accounting
standard lets you record your fake earnings but not take them out in cash.
US GAAP accounting "Gains" from retroactive reinsurance can be counted in profit amortized over
standard - FAS113 the period in which the gain is expected to be received. Fairfax backs out the
gains on retroactive reinsurance in its US GAAP reconciliation following this
rule - see the following quote from the 2003 Fairfax annual report. "In Canada,
recoveries on certain stop loss reinsurance treaties (including with Swiss Re) protecting Fairfax, Crum &
Foster and TIG are recorded at the same time as the claims incuned are ceded. In the U.S., these
recoveries, which are considered to be retroactive reinsurance, are recorded up to the amount of the
premium paid with the excess of the ceded liabilities over the premium paid recorded as a deferred gain.
The deferred gain is amortized to income over the estimated settlement period over which the company
cxpects to recei ve the recoveries and is recorded. in accounts payable Illld accrued liabilities."
Canadian GAAP Fairfax just accounts for the gain on retroactive reinsurance absolutely straight
accounting standard -D7 - that is it adds to profit (or reduces losses) and adds to the shareholder equi'ty.
The method that Fairfax uses maximizes the extent to which their accounts are
faked.
As you can see Fairfax uses particularly egregious accounting for retroactive reinsurance relying on
Canadian GAAP. This accounting treatment and the contracts that produce ids precisely the thing that
Spitzer is investigating.
There is also considerable doubt as to whether Fairfax is applying Canadian GAAP correctly. Attachment A
details the critical paragraph ofthe US GAAP standard (FASI13) and the Canadian standard (D7). The
differences between these standards are slight - and it is not clear why they produce approximately USD500
million in cumulative difference between Fairfax's US and Canadian GAAP equity. Ifthis difference has no
basis (something you decide on) then you have a clear course of action in forcing a restatement by Fairfax.
Prospective finite insurance
The problem with retroactive financial reinsurance is that while it fakes the Canadian GAAP accounts
perfectly adequately it does not produce useful statutory capital (particularly "earned surplus" in the US).
(The observation that Canadian GAAP accounts are faked adequately is subject to the concern that Fairfax's
interpretation of Canadian GAAP is dodgy - see Attachment A)
The solution is to set up prospectivefinite deals. In a prospective finite deal the company writes business
and pays substantial premium to the reinsurer only when it cedes the loss. However substantial time elapses
Confidential- for use by the OSC and retained experts only
CR 005258
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} ;
Confidential- For use by the OSC and retained experts only
between when the reinsurance recoverable is actually collected and when the premium is paid. Also, it is
common that a "funds withheld" account is established and that interest is charged on the account as per the
HIHlHannover Re policy.
I can't stress how artificial this is. The premium is only paid when the loss is ceded to the reinsurer. This is
the equivalent ofbeing able to insure my house only after I have become aware ofa loss being caused by my
house burning down. Any policy in which you pay the premium only when you cede the loss is likely to be
an accounting abuse. Its simply not commercial to write reinsurance contracts which allow people insurance
after their house burns down unless there is a side agreement or the insurance contract does not pass
meaningful risk or the like. This is an absolute gimme. Such contracts are certain signs that someone is
playing a not-straight game.
Unfortunately such contracts are commonplace at Fairfax. For example the following paragraph from Crum
and Forster'sl debt offering documents suggests that these policies are used:
Our corporate aggregate reinsurance provides either current accident year protection on a prospective basis or adverse
development protection related to prior aCcident years on a retroactive basis. Coverage under these contracts is
generally triggered when our loss ratiofor the subject period exceeds a specified level, or when reserves in respect ofall
periods prior to a certain date exceed a stated amount. We cede losses andLAE to our reinsurers in excess ofthose
specified levels or amounts, along with the related written and earnedpremiums. We will recover the ceded losses and
LAEfrom our reinsurers as we settle the related claims, which may occur over several years. These contracts may
provide for future payments to be made by us when we make claims under such policies, and generally provide that
interest expense is charged to us, for the benefit ofthe reinsurers, on anypremiums withheld by us. Interest rates
specifiedin these contracts are between 7.0% to 7.5%.
This paragraph also reveals another twist - which makes the accounts look doubly fake. There is a risk
when writing one ofthese policies in which the reinsurer is reimbursed for certain losses by being paid 7.0-
7.5% on funds withheld. The risk is that the underlying claims will pay too fast - and hence the "interest"
will not be earned for long enough. In this case the contracts "may provide for future payments to be made
by us when we make claims under such policies".
Specific finite reinsurance policies used to fake Fairfax's accounts
The Swiss Re New Markets policy: Fairfax entered a large policy with Swiss Re (see attached Press
Release dated 20 May 1999.) This policy was retroactive with a funds withheld account on which interest is
credited at 7%. So far Fairfax has ceded just shy ofUSDl billion to this policy and have less than USD600
million in the "funds withheld account". They have thus received more than USD400 million in accounting
benefits under this policy.
The question is does the policy have USD400 million in cost to Swiss Re or is the policy ofthe type which
produces accounting benefits way in excess ofthe economic benefit to Fairfax.
I Crum & Forster is a US domiciled subsidiary of Fairfax. It has publicly issued debt and and hence files with the SEC. These
filings are a useful source for finding Fairfax parent company accounting abuses.
Confidential - for use by the OSC and retained e:x:perts only
CR 005259
Confidential - For nse by the OSC and retained experts only'
The answer is the latter. Swiss Re have assured me that the policy cost them less than USD40 million. It
) has had USD400 million in accounting benefits to Fairfax. In which case Fairfax has faked its accounts to at
least USD360 million.
Both Spitzer and the SEC have issued subpoenas to Swiss Re so they should know about this policy. AJJ it
fakes the accounts of a Canadian company you should also be involved in this investigation.
The Inter-OceanlMunich Re/Crum & Forster policies. Fairfax subsidiary Crum & Forster has
.substantial policies with Inter-Ocean Re. These policies are backed by Munich Re.
Inter-Ocean is a specialist Bennuda based finite reinsurer. It has a small amount of capital. Crum & Forster
has considerable stop-loss contracts with Inter-Ocean. (These are the contracts detailed above.) The S4
which I have indicates that the letter-of-credit facilities associated with these contracts are provided by Inter-
Ocean's major shareholder - Munich Re.
Both Spitzer and the SEC have issued subpoenas to Munich Re. Provided those subpoenas eAiend to
Munich Re's Inter-Ocean affiliate then they will be informed of this contract.
The ChubbfTIG contract. Chubb Re (Bermuda) Ltd, on behalf of the Federal Insurance Company (a
subsidiary of Chubb) wrote an adverse development cover (a finite retroactive reinsurance cover) covering
some losses at TIG Insurance Company (a subsidiary of Fairfax:). The Fairfax: press release is attached.
)
).
This cover was in two parts. The first part was purely retroactive - and cost USDI03 million covering
USD200 million of losses. Approximately USD18 million was a fee to Chubb from Fairfax for aid in faking
Fairfax's accounts. The rest was put into a trust account arrangement to which Fairfax had to credit interest
at 7%. There was also an additional fee ofUSD5 million which was paid by Fairfax: to Chubb so as to allow
Fairfax an option on some more cover.
The additional cover was purchased for USD53 million for an additional USDI 00 million in cover. This
included an additional fee to Chubb ofUSD5 million. Again there was 7 per cent interest.
These details are approximate and I am sure more accurate details will be found by Spitzer and the SEC who
have issued subpoenas to Chubb on non-traditional insurance products. You should also be able to find
more accurate details.
:> ' The London LifeIFairfax policies. London Life and Casualty Re, a Barbados based subsidiary of Great
Western Life has been involved in fmite reinsurance transactions with Fairfax on a grand scale.
This transaction is revealed in the statutory accounts ofTIG - a California domiciled subsidiary of Fairfax.
) i
Effective December 31,1999 (and amended during 2000), the Company entered into a reinsurance
agreement with ORCwhereby ORC agreed to indemnify the Company up to 340 million in the
aggregate jor certain losses incurredprior to December 31, 1999for a total cost oj$115.1 million.
TIG requested that the company bepermitted to utilize prospective reinsurance accounting treatment
when recording activity under this agreement rather, rather than deposit accounting as management
Confidential- for use by the OSC and retained experts only •
CR 005260
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I .
Confidential- For use by the OSC and retained experts only
believedwas required under NAiC SAP. The Department did not approve this request but didpermit
the Company to utilize retroactive reinsurance treatment rather than deposit accounting. As of
December 31 2001, reserve cessions totaling 320 million had been made under this treaty, all of
which were reported as adverse development in years subsequent to 1999.
During 2001, this reinsurance agreement and two (2) other prospective agreements between the
Company and ORC were novated, with London Life and Casualty Reinsurance Company (ULondon
Life") assuming the obligations ofORC. The terms oftheagreements remained substantially
unchanged The Department approved the Company's accountingfor this change as a novation,
with the previous accounting treatment maintained
. The critical observation here is that llGrequested that the company be permittedto utilize prospective
reinsurance accounting treatment when recording activity under this agreement rather, rather than deposit
accounting as management believed was required under NAiC SAP.
Management believed that deposit account was required. Under NAlC SAP deposit accounting is required
when the policy does not transfer risk - that is when it is entirely artificial.
The policy between the subsidiaries oftwo Canadian companies is thus entirely artificial- designed purely
to fake accounts. I do not believe that Great Western Life or any of its subsidiaries have been issued
subpoenas by Spitzer or the SEC. Thus you have an opportunity to proactively investigate fake insurance
accounting.
Confidential- for use by the OSC and retained experts only
CR 005261
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I .
Confidential- For use by the OSC and retained experts on1r
Attachment A- does Fairfax apply Canadian GAAP correctly to retroactive contracts?
As noted above, Fairfax partially reversed the faking of its accounts via retroactive reinSurance for its US
GAAP reconciliation. However the full "accounting benefit" of retroactive reinsurance is recognized for
Canadian GAAP. [Remember I put "accounting benefit" in scare-quotes because it is substantially larger
than the economic benefit obtained by Fairfax from these policies.]
The critical section in the US GAAP is
Amounts paidfor retroactive reinsurance that meets the conditions for reinsurance accounting shall be reported as
reinsurance receivables to the extent those amounts do nat exceed the recorded liabilities relating to the underlying
reinsured contracts. Ijthe recorded liabilities exceed the amounts paid, reinsurance receivables shall be increased to
reflect the diffirence and the resulting gain deferred. The deferred gain shall be cimdrtized over the estimated remaining
settlement period. Ijthe amounts and timing ofthe reinsurance recoveries can be reasonably estimated, the deferred gain
shall be amortized using the effective interest rate inherent in the amount paid to the reinsurer and the estimated timing
and amounts ofrecoveries from the reinsurer (the interest method). Otherwise, the proportion ofactual recoveries to
total estimated recoveries (the recovery method) shall determine the amount ofamortization.
Ifthe amounts paidfor retroactive reinsurance exceed the recorded liabilities relating to the underlying reinsured
/ contracts, the ceding enterprise shall increase the relatedliabilities or reduce the reinsurance receivable or both at the
time the reinsurance contract is entered into, so that the excess is charged to earnings. [Source: FASIl3.]
The critical section from Canadian GAAP is as follows:
Premiums paidfor prospective reinsurance ofshort-term insurance contracts should be recognized in the balance sheet
as prepaidreinsurance premiums (assets) and should be amortized to income aver the remaining cnntrad period in
proportion to the amount ofinsurance protection provided. Ijthe amountspaid are subject to adjustment and can be
reasonably estimated, the basis for amortization should be the estimated amount.
Premiums paidfor retroadive reinsurance ofshort-tenn insurance contracts should be recognized as reinsurance
receivables to the extent these premiums do not exceed the recorded liabilities relating to the reinsuredportion ofthe
underlying short-term contracts. When the reinsured liabilities exceed the reinsurance premiums, the reinsurance
receivables should be increased to reflect this excess and gain. The gain should be deferred on the balance sheet and
amortized over the estimated remaining settlement period. Ijthe amounts and timing ofthe reinsurance recoveries can be
reasonably estimated, the deferred gain should be amortized using the effective interest rate inherent in the amount paid
to the reinsurer and the estimated timing and amounts ofrecoveriesfrom the reinsurer. Otherwise, the proportion of
actual recoveries to total estimoted recoveries should determine the amount ofamortization.
Ifthe premiums cededfor retroactive reinsurance are greater than the reinsuredportion ofrecorded liabilities relating to
the underlying short-term insurance c o n t r a c ~ the ceding enterprise shouldeither reduce the reinsurance recoverable or
increase the related liabilities, or both, at the time the reinsurance contract is entered into, so that the excess is charged
immediately to income. [Source: D7]
On a literal reading of this it is pretty hard to see how Fairfax manages to book gains immediately under
Canadian GAAP and has to defer them under US GAAP.
Confidential - for use by the OSC and retained experts only
CR 005262
31
=
From:
Sent:
To:
Subject:
Attachments:
! { ~ · i ~ n
letter to fairfax
concerning A.••
Gwynn, John D [John.Gwynn@morgankeegan.com]
Wednesday, January 12, 20057:32 AM
FW: Advent capital valuation in Fairfax accounts
letter to fairfax concerning Advent Capital valuation.doc
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***For institutional use only.***
***This onalysis has been prepared solely for the addressed parties and is not intended
for distribution or use by any other individual or
entity.***
***Please read all disclosures contained in this email and/or any attached document/so
***
-----original Message-----
From: Jennifer, John and Lucas Hempton (mailto:john.hempton@grnail.com]
Sent: Wednesday, January 12, 2005 5:49 AM
To: b martin@fairfax.ca; kevin.j.dancey@ca.pwc.com; enforcement@sec.gov; Ambridge,
Trevor; p watsa@fairfax.ca
Subject: Advent capital valuation in Fairfax accounts
Dear Mr Martin
Here is another letter which I hope you can forward to Mr Watsa. I have copied it to
P_Watsa@fairfax.ca hoping his email address is consistent with yours. Otherwise you can
send it on.
I have also copied it to your auditor and the SEC. The SEC should have this only for
their record.
Thanks in advance
John Hempton
REDACTED
CONFIDENTIAL
MK00037414
SUBJECT TO PROTECTIVE ORDER
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John Hempton
&4 Hopetoun Avenue
Vaucluse NSW 2030
Australia
61293376349
john.hempton@gmail.com
Trevor J Ambridge
Chief financial officer
Fairfax Financial Holdings
95 Wellington Street West
Suite 800
Toronto, Ontario, Canada MSJ 2N7
Dear Sirs
This is another quick note to ask clarification. You have not answered my previous
questions to my satisfaction and they are meaningful so I have again copied this to
your auditor.
AI, far as I can see the valuation of Advent Capital has not been written down in
Fairfax's accounts.
AB you know Advent has had a shocking time. The 2001 year has been particularly
hard hit having World Trade Center losses. I gather this year is not yet closed
because of uncertainty regarding WTC losses. This is despite plans to close it Oate)
on 3] December 2004.
My sources at Lloyd's suggest that the year could not be closed earlier because that
would involve payment of the reinsurance to close and hence a capital call. This call
would have been sufficient to cause a "serious headache" to AdVent Capital
Moreover Moody's has just downgraded on Syndicate 780 from B Average to B
Negative based on concerns about its capital base. Its capacity full to £153 million for
2005; whereas it had planned on capacity of £200 million. This is a serious problem
for Advent who is the managing agent for this syndicate.
CONFrDENTIAL
MK00037415
SUBJECT TO PROTECTIVE ORDER
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J :
I am writing to ask what the valuation basis for Advent is in Fairfax's consolidated
accounts and what would be required to happen at Advent before Fairfax were to
consider it impaired? This is of course important in assessing the integrity of
Fairfax's accounts.
Thanks in advance
John Hempton
cc:
V Prem Watsa, ChiefExecutive Officer, Fairfax Financial,
Kevin J. Dancey
CEO, Canadian Senior Partner, PricewaterhouseCoDpers Canada
The United States SEC via
enforcement@sec.gov
CONFIDENTIAL
MK00037416
SUBJECT TO PROTECTIVE ORDER
32
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)
)
)
) !
John Hempton
84 Hopetoun Avenue
Vaucluse NSW 2030
Australia
61 29337 6349
john.hempton@gmail.com
Kevin J Dancey
Senior Partner and ChiefExecutive Officer
Price Waterhouse Coopers
Canada
Sent via email
Dennis Nally
Chairman's Office - US Firm
PricewaterhouseCoopers LLP
300 Madison Avenue
24th Floor
New York, New York 10017
United States of America
Sent via email to Cynthia Paoli.
Cynthia.Paoli@us.pwc.com
Dear Senior Partners of Price Waterhouse Coopers
I am writing to alert you to possible inappropriate financial transactions between Odyssey Re (an American
insurance holding company) and Fairfax Financial (a Canadian insurance holding company). Both
companies you audit. There is a (NYSE) listed minority in Odyssey Re. My concern here is for the minority
in Odyssey Re.
Background
Fairfax Financial inherited a holding in a Lloyds underwriting operation (Kingsmead) when it purchased (the
clearly problematic) insurance company TIG.
Kingsmead was not a success. It was "sold" to Advent Capital (the old privately held Caudle underwriting
operation in the UK) for a stake in Advent. Fairfax (not TIG) guaranteed that the net assets of the
Kingsmead syndicates were sufficient to meet liabilities when the "sale" was made. Given the guarantee it is
questionable whether a true "sale" occurred and hence whether the statements ofFairfax were correct after
this "sale". They were signed off-but that is in the past. "Sale" is also a relatively minor problem.
CR 005285
This guarantee came back to haunt Fairfax.. Eventually Fairfax. "solved" the Kingsmead problem by starting
a new Lloyd's syndicate (Syndicate 3500) which wrote reinsurance to close for the Kingsmead syndicates.
Syndicate 3500 is capitalised with a full guarantee from Fairfax and its Irish subsidiary Nspire Re (I have a
copy of the guarantee documents from Nspire). It is also capitalised with GBPllO million in letters of
credit. The letters of credit are in turn secured by escrowed cash and bonds somewhere in Fairfax (probably
Nspire Re).
The provision of GBPllO million (approximately USD200 million) in letters of credit has been difficult for
Fairfax because Fairfax's liquidity is or has been tight.
The solution to this has been to get Odyssey Re to provide the approximately USD200 million in collateral
needed to back the letters of credit. This frees up approximately USD200 million at Fairfax or Nspire Re. It
has a similar effect on Fairfax. as a "loan" ofUSD200 million from Odyssey Re to the parent company.
This is disclosed in the (unaudited) second quarter 1OQ filed by Odyssey.
During the second quarter oj 2004, Odyssey Americapledged 11Omillion SI99.5million) oj Us.
treasury notes andplaced them on deposit at Lloyd's on behalf ojAdvent Capital (Holdings) PLC
("Advent "). Advent is 46.8% owned by Fairjax and its affiliates, including 15.0% by the Company.
Odyssey America retains the right to withdraw thejunds at Lloyd's at any time upon l80-days
advance written notice. In any event, the placement ojjunds at Lloyd's will automatically terminate
effective December3l,2008 and any remainingjunds at Lloyd's will revert back to Odyssey America
at that time.
NowI need to repeat this - Odyssey Re effectively lent its parent company approYimately USD200 million.
This happened despite the fact that Odyssey Re has a substantially better credit rating than the parent and
protecting that credit rating is critical for Odyssey Re's business. Erosion of the separation between
Odyssey's finances and Fairfax's threatens Odyssey's relatively high credit rating and hence threatens
the very viability of Odyssey's business. I have spoken with rating agencies who have been concerned on
precisely this point.
I have also spoken with staff at Odyssey Re (who will remain nameless to protect their careers). They were
disgusted by the raid Fairfax made on their credibility and their coffers. I would suggest that as auditors you
question the top dozen or so officers on this transaction. As long as this in confidence you will find some
who feel the transaction is inappropriate.
Whether this is theft disguised as a loan is for you as auditors to determine.
CR 005286
However I do not believe that the accounts should be signed off unless two things happen. Firstly the money
should be repaid to Odyssey by Fairfax. More importantly however controls should be put in place to
prevent the abuse of minorities at Odyssey by Fairfax. The current inadequate controls should make it
impossible for you to sign an audit statement for Odyssey as they fail the financial control tests.
Sincerely
John Hempton
1 February 2005
cc:
Trevor J Ambridge
Chief financial officer
Fairfax Financial Holdings
V Prem Watsa, ChiefExecutive Officer, Fairfax Financial,
The United States SEC via
enforcement@sec.gov
CR 005287
Confidential
Jolm Hempton
84 Hopetoun Avenue
Vaucluse NSW 2030
Australia
61 2 93376349
jolm.hempton@gmail.com
Kevin J Dancey
Senior Partner and Chief Executive Officer
Price Waterhouse Coopers
Canada
Sent via email
Dennis Nally
Chainnan's Office - US Firm
PricewaterhouseCoopers LLP
300 Madison Avenue
24th Floor
New York, NewYork 10017
United States of America
Sent via email to Cynthia Paoli.
Cynthia.PaOli@us.pwc. com
Dear Senior Partners of Price Waterhouse Coopers
I am writing to alert you to possible inappropriate financial transactions between
Odyssey Re (an American insurance holding company) and Fairfax Financial (a
Canadian insurance holding company). Both companies you audit. There is a
(NYSE) listed IDinority in Odyssey Re. My concern here is for the minority in
OdysseyRe.
Background
Fairfax Financial inherited a holding in a Lloyds underwriting operation (Kingsmead)
when it purchased (the clearly problematic) insurance company TIG.
KingsmeaJ wasoot a success. It was "sold" to Advent Capital (the old privately held
Caudle underwriting operation in the UK) for a stake in Advent. Fairfax (not TIG)
guaranteed that the net asse1s ofthe Kingsmead syndicates were sufficient to meet
liabilities when the "sale" was made. Given the guarantee it is questionable whether a
true "sale" occurred and hence whether the statements of Fairfax were correct after
this "sale". They were signed off - but that is in the past. "Sale" is also a relatively
minor problem.
MAX006314-1
Confidential
This guarantee carne back to hmmt Fairlax Eventually Fairfax."solved" the
Kingsmead problem by starting a new Lloyd's syndicate (Syndicate 3500) which
wrote reinsurance to close for the Kingsmead syndicates. Syndicate 3500 is
capitalised with a full guarantee from Fairfax and its Irish subsidiary Nspire Re (I
have a copy of the guarantee documents from Nspire). It is also capitalised with
GBP11 0 million in letters of credit. The letters of credit are in turn secured by
escrowed cash and bonds somewhere in Fairfax (probably Nspire Re).
The provision of GBPll 0 million (approximately USD200 million) in letters of credit
has been difficult for Fairfax because Fairfax's liquidity is or has been tight
The solution to this has been to get Odyssey Re to provide the approximately USD200
million in collateral needed to back the letters of credit. This frees up approximately.
USD200 million at Fairfax or Nspire Re. It has a similar effect on Fairfax as a "loan"
ofUSD200 million from Odyssey Re to the parent company.
This is disclosed in the (unaudited) second quarter lOQ filed by Odyssey.
During the second quarter of2004, Odyssey America pledged 11Omillion
$199.5million) of us. treasury notes and placed them on deposit at Lloyd's
on behalfofAdvent Capital (Holdings) PLC ("Advent")' Advent is 46.8%
owned by Faiifax and its affiliates, including 15.0% by the Company.
Odyssey America retains the right to withdraw the funds at Lloyd's at any time
upon 180-days advance written notice. In any event, the placement offunds at
Lloyd's will automatically terminate effective December31,2008 and any
remainingfunds at Lloyd's will revert back to Odyssey America at that time.
Now I need to repeat this - Odyssey Re effectively lent its parent company·
approximately USD200 million. 'This happened despite the fact that Odyssey Re has
a substantially better credit rating than the parent and protecting that credit rating is
critical for Odyssey Re's business. Erosion of the separation between Odyssey's
. finances and Fairfax's threatens Odyssey's relatively high credit rating and
hence threatens the very viability of Odyssey's business. I have spoken with rating
agencies who have been concerned on precisely this point
I have also spoken with staff at Odyssey Re (who will remain nameless to protect
their careers). They were disgusted by the raid Fairfax made on their credibility and
their coffers. I would suggest t . ~ a t as auditors you question the top dozen or so
officers on this transaction. As long as this in confidence you will find some who feel
the transaction is inappropriate.
Whcther this is theft disguised as a loan is for you as auditors to detennine.
MAX006314-2
Confidential
However I do not believe that the accounts should be signed off unless two things
happen. Firstly the money should be repaid to Odyssey by Fairfax. More importantly
however controls should be put in place to prevent the abuse of minorities at Odyssey
by Fairfax. The current inadequate controls should make it impossible for you to
sign an audit statement for Odyssey as they fail the fmandal control tests.
Sincerely
John Hempton
1 February 2005
cc:
Trevor J Ambridge
Chieffinancial officer
Fairfax Financial Holdings
V Prem Watsa, Chief Executive Officer, Fairfax Financial,
The United States SEC via
enforcement@sec.gov
MAXo06314-3
33
John Hempton
84 Hopetoun Avenue
Vaucluse NSW 2030
Australia
61 2 9337 6349
iohn.hempton@gmail.com
Trevor J Ambridge
Chief financial officer
Fairfax Financial Holdings
95 Wellington Street West
Suite 800
Toronto, Ontario, Canada M5J 2N7
Dear Trevor
I amjust writing to ask what the appropriate standard for disclosing executive pay is at Fairfax Financia1.
I understand ::Mr V Prem Watsa's son was in Monte Carlo for an insurance conference. That is fine. I do not
see Prem Watsa's son listed as an executive of Fairfax. That is also fine- he may well simply be studying
up so that he has the knowledge to take over from his father as CEO of the family business.
I understand however that he was travelling with the corporate jet. This raises issues. Ifhe (or Prem) were
purchasing jet time from the company for private use that is fine but it should be disclosed as a related party
transaction. !fthey were using company jet time for private use that is more problematic. If it is approved
by the board then it might be fair compensation - but it should be disclosed. At minimum it appears that
Fairfax has a disclosure problem.
I am of course assuming that the use of the corporate jet for private purposes was approved by the board. If
it was not then the Watsa family are guilty oftheft. It is precisely this behaviour for which Kozlowski of
Tyco fame is currently in front of a jury. It is also (of course) incumbent on the auditor to investigate
undisclosed executive remuneration, and if they find it to report the behaviour to the police for criminal
prosecution. It is not sufficient for the executive merely to repay the money - though that would appear a
necessary start.
CR 005266
Of course it is likely that there is simply a disclosure issue here rather than outright criminality. But as it is
incumbent on the auditor to check I have copied this letter to Price Waterhouse Coopers. For the record I
have also copied it to the United States SEC.
Yours sincerely
John Hempton
2 February 2005
CC:
V Prem Watsa, Chief Executive Officer, Fairfax Financial,
Kevin J. Dancey
CEO, Canadian Senior Partner, PricewaterhouseCoopers Canada
The United States SEC via
enforcement@sec.gov
CR 005267
34
John Hempton
84 Hopetaun Avenue
Vaucluse NSW 2030
Australia
61293376349
john.hempton@gmai1.com
Trevor J Ambridge.
Chief financial officer
Fairfax Financial Holdings
95 Wellington Street West
Suite 800
Toronto, Ontario, Canada MSJ 2N7
Dear Trevor
I am writing to clarify the US/Canadian GAAP reconciliation in the (unaudited) accounts that you published
on '10 February 2005.
In particular my concern is that the gain on the "stop 10ss77 insurance policy at Crum & Forster which
covered the asbestos losses appears to be retroactive in which case it should be reversed in the US GAAP
reconciliation accounts. No reversal appears.
Background
The 2003 annual report states the following:
[For asbestos at] C&F [the] survival ratio after reinsurance protection includes the remaining
indemnification of$100 from Swiss Re and $11.9 from Inter-Ocean ($100 limit less $88.1 ceded to
date).
The entire policy appears to have been claimed (to the precise 100 million dollar limit) in this quarter.
The Swiss re part ofthis Cover (at least as a full 100 million) is new. It does not appear in earlier
specifications ofyour stop loss covers. Whether it has existed for five or seven years however is irrelevant
to the main point.
There is no doubt in my mind that Swiss Re wrote this cover after the underlying asbestos particles were
breathed in by underlying claimants (which could be decades ago) and hence any gain on this treaty should
be treated as retroactive insurance.
CR 005298
If it is treated as retroactive insurance it should not contribute to "earned surplus" (and hence to dividend
capacity) at US Fire. But more importantly it should be reversed for US GAAP. (This is clear from reading
FAS113 and the relevant NAlC SAP.)
It might actually be that you have an offsetting loss on retroactive reinsurance so implicitly the
transaction is being reversed under US GAAP.
If so, could you identify the transaction. As Fairfax is both honest and competent in this form of
accounting I presume that appropriate risk transfer has taken place. I also assume that there is an
offsetting transaction. You and your auditors would not want any altercations with the NY Attorney
General.
If not, then I guess its incumbent on you to amend your accounts before they get to the auditor.
Unaudited accounts are allowed a few harmless errors.
As you have not been willing to take my questions on conference calls for the last two quarters I shall not
bother staying up tonight to ask you my questions. Rather I will continue answering them in this format.
Again - and whilst I think there is unlikely to be an issue - I have copied this to Price Waterhouse Coopers
and to the SEC. Price Waterhouse Coopers should test the economic content and the retroactive nature of
this policy.
On a secondary issue - it is convenient that your pre-existing cover ($100 million) and the amount found by
the independent review ($100 million) match. Surely the independent review gave a range. Most companies
disclose that range or pick something at the high end ofthe range. Can you disclose the range? It goes to
safety and soundness of your accounts and hence is useful information for the users on the accounts.
Thanks in advance.
John Hempton
11 February 2005
cc:
V Prem Watsa, ChiefExecutive Officer, Fairfax Financial,
Kevin J. Dancey
CEO, Canadian Senior Partner, PricewaterhouseCoopers Canada
CR 005299
The United States SEC via
enforcement@sec.gov
CR 005300
35
Confidential
John Hempton
84 Hopetoun Avenue
Vaucluse NSW 2030
Australia
61293376349
john.hempton@gmail.com
Trevor J Ambridge
Chief financial officer
Fairfax Financial Holdings
95 Wellington Street West
Suite 800
Toronto, Ontario, Canada M5J 2N7
Dear Trevor
As you well know (and has been the subject of a previous letter), and as has been
reported in 'Insurance Day', February 9h., 2005, p.3; Moody's has placed the Advent
680 'on review for a downgrade due to concerns over capital support.'
The syndicate is already on negative outlook. Insurance Day notes
... that support from Names has dropped from £107m (2004) to £71m
(2005). Corporate support (from Advent) has dropped from £102m. to £82m.
'Advent capital is supported by funds at Lloyd's that include a deposit of
£1 10m. from the Fairfax group, based on a five-year commitment by Fairfax
to support Advent until the end of this year. The £1 10m deposit represents
79% of Advent Capital's funds at Lloyd's and effectively underpins 43% of
syndicate 780's capacity for 2005. [...] Fairfax has indicated it is unlikely to
renew this arrangement'
'Moody's believes that Advent will face a further reduction in members'
agency capacity as members realign their capacity in view of a softening
market and syndicate 780's risk-based capital ratio being in excess of the
market average.'
I note that Fairfax does not appear to have taken a charge against the carrying value of
Advent holdings.
This is surprising because you provide the bulk of its capital and to
Insurance Day) you are not keen to support it It's a bit rich to carry it at full value
when you believe that it is of such reduced value that you should remove support and
hence cause its effective demise.
MAX006311-1
Confidentia'J
Now of course I do not think that you are carrying Advent on your balance sheet at
the wrong value. Fairfax is an honest company. 1bat way you will not need to restate
the accounts that you have just published for reasons of incorrect valuation.
I figure that you are playing hardball with Advent and possibly Syndicate 780 -
threatening to remove their capital so that you can get better terms - attempting to
exert controL Fair enough.
But in that case Advent (and possibly 780) should be consolidated into Fairfax's
accounts because they provide the bulk oftbe capital and exert effective controL You
will need to restate your accounts because of failure to consolidate properly.
There may be a third alternative - but I am unaware of it. Please inform me ifthere
IS.
As usual I have copied this note to your auditors (the matter is important to them) and
also copied it to the United States SEC (so they will have a complete record).
Thanks in advance,
John Hempton
11 February 2005
CC:
V Prem Watsa, Chief Executive Officer, Fairfax Financial,
Kevin J, Dancey
CEO, Canadian Senior Partner, PricewaterhouseCoopers Canada
. The United States SEC via
enforcement@sec,gov
MAX006311-1
36
John Hempton
84 Hopetoun Avenue
Vaucluse NSW 2030
Australia
61293376349
john.hempton@gmaiLcom
Kevin J Dancey
Senior Partner and ChiefExecutive Officer
Price Waterhouse Coopers
Canada
Sent via email
Dennis Nally
Chairman's Office - US Firm
PricewaterhouseCoopers LLP
300 Madison Avenue
24th Floor
New York, New York 10017
United States of America
Sent via email to Cynthia Paoli.
Cynthia.Paoli@us.pwc.com
Trevor J Ambridge
Chief financial officer
FairfaxFinancial Holdings
95 Wellington Street West
Suite 800
Toronto, Ontario, Canada M51 2N7
Dear Sirs
I am writing concerning the appropriateness of tax sharing payments at Fairfax Financial Holdings and the
possible perversion ofthe order of creditors away from policy holders, minorities and debt holders in Crum
& Forster and Odyssey Re and in favour of the parent company.
Background
Fairfax Financial has multiple US subsidiaries. The key ones are TIG Group which holds the historically
unprofitable TIG insurance company (now in run-oft), Crum & Forster (which has minority debt holders as
CR 005295
well as policy holders in its key subsidiaries US Fire and North River), and Odyssey Re (which has minority
equity holders as well as debt holders and policy holders).
Fairfax Financial Holdings is highly levered and has been cash constrained for several years at holding
company level.
Fairfax American group companies have a tax sharing agreement which allows companies with profits in the
group to make their tax payments to the US holding company rather than.to the IRS. Nothing wrong with
that.
Fairfax however has been selectively realising bond profits in the following manner. It holds very long
dated bonds or strips. Whenever rates fall and there is a profit on these strips the strips are sold locking in
the profit for GAAP and tax purposes. A very similar (often adjacent maturity) long dated strip is purchased'
in exchange.
The net effect of this is to realise GAAP and tax profits when there is very little economic substance - just
the sale ofone financial instrument and the near immediate purchase of a very similar financial instrument.
I understand that this causes no problems under Canadian GAAP however it does cause problems for
minorities in C&F and Odyssey.
In particular these are transactions with very little economic substance. But they do generate taxable income
(without real economic improvement) and hence mandate the payment of tax not to the IRS but to other
Fairfax group companies. (If the payments were external to Fairfax it is unlikely that Fairfax would do this.)
Essentially transactions with little economic substance take place at C&F and Odyssey directed by Fairfax
holding company and which benefit Fairfax holding company at the expense ofpolicy holders and minority
debt and equity holders. It does appear highly unlikely that an independent C&F or Odyssey would make
these transactions and bring forward this tax liability.
Now there might not be a problem here if the moneys paid by Odyssey and C&F to Fairfax entities in lieu of
tax were escrowed for considerable periods of time. However they would need to be escrowed whenever the
replacement bond or similar was on the balance sheet - which - given the maturity of the bonds involved -
could be over 20 years.
There may such protection for minorities. But in the absence of these protections it seems unlikely that you
could appropriately meet the tests in Sarbannes Oxley.
Ifno such protections exist then appropriate security should be placed over Fairfax holding company moneys
to ensure that minorities are fairly treated.
CR 005296
As Fairfax has always been concerned about minorities and policy holders I would like a full explanation (in
the annual financials of Odyssey, Crum and Fairfax) as to howthe protections work.
Thanks again for your understanding.
John Hempton
13 February 2005
cc:
Trevor J Ambridge
Chief financial officer
Fairfax Financial Holdings
V Prem Watsa, ChiefExecutive Officer, Fairfax Financial,
The United States SEC via
enforcement@sec.goy
CR 005297
37
Confidential
John Hempton
84 Hopetoun Avenue
Vaucluse NSW 2030
Australia
61293376349
j ohn.hempton@gmail.com
Kevin J Dancey
Senior Partner and Chief Executive Officer
Price Waterhouse Coopers
Canada
Sent via email
Dennis Nally
Chairman's Office - US Firm
PricewaterhouseCoopers LLP
300 Madison Avenue
24th Floor
New York, NewYork 10017
United States of America
Sent via email to Cynthia Paoli.
Cynthia.Paoli@us.pwc.com
Dear Senior Partners of Price Waterhouse Coopers
I am writing to detail the issues that I think I might need to be spelt out in the
disclosures of Fairfax Financial (and its US operations Crum & Forster and TIG) to
meet the tests in Section 302 of the Sarbannes Oxely Act. I could (of course) be
totally mistaken about the nature of Fairfax's accounts and the accounts of its US
subsidiaries. However if finite insurance is as prevalent at Fairfax as I think it is -
then there ate very substantial disclosures required to "fairly present in all material
respects the financial condition and results of operations of the issuer" as demanded
by Sec 302 ofSarbanes Oxley.
Background
As you know, I have previously written to Kevin Dancey about finite insurance at
Fairfax financial. I have given the area a more thorough coverage of the finite
insurance issues at Fairfax in a letter to David Brown QC, the Chair of the Ontario
Securities Commission- I have attached that letter for your consideration.
I can understand why you might consider some finite reinsurance GAAP compliant
(Appendix A to my letter to David Brown does raise some issues as to Canadian
GAAP. but does outline the nature of GAAP compliant finite reinsurance). But in
order to "fairly present in all material respects the fmancial condition aild results of
operations of the issuer" (as per Sarbanes Oxley Sec 302) several additional
disclosures should be required.
MAX006316-1
Confidential
Firstly the extent of accounting benefit that the fmancial reinsurance produced in
excess of the present value of the economic benefit ofthe reinsurance obtained should
be detailed. In the case of the Swiss Re policy (detailed in the note to David Brovvn)
Swiss Re have publicly stated that the economic loss to them on the policy is under
USD40 millioIL The accounting benefIt claimed by Fairfax is over USD400 million-
a number that suggests that there is a substantial difference between the accoUflting
numbers presented by Fairfax and economic reality. Disclosure of this difference is
precisely the sort of thing envisaged by Section 302.
The sort of disclosure that I imagine as to the Swiss Re policy would cover how much
interest is payable on funds vvithheld and for howmany years. Other obligations
under these policies (such as the obligation to pay further premiums when Uflderlying
claims are paid) should be detailed as they will have a: significant firtancialimpact on
Fairfax.
This information should also be provided for other problematic policies at Fairfax
(also raised in the David Brown note) and for the American subsidiaries which also
flie with the SEC.
A non-GAAP balance sheet (representing the true financial condition ofFairfax net of
this finite reinsurance) should also be presented - as this would "fairly present in all
material respects the financial condition ... of the issuer". The same should be done
for Crum & Forster. It is possible that Crum & Forster would have no equity in a "net
of finite reinsurance" balance sheet However this is the critical information about the
:fmancial condition ofCrum and Forster and hence should be disclosed. Rating
agencies for one would like to lmow. (In a non GAAP balance sheet the reinsurance
recoverables might for instance be discounted by the rate at which the interest is
payable on the funds withheld. Also the funds vvithheld line might be dropped from
liabilities. Other arrangements might be necessary to fairly discern the effects of
other finite insurance policies.)
Again the extent of the issues at Fairfax cannot be ascertained by their previously
signed GAAP accounts and there is little question in my mind that you must demand
considerably more disclosure if you are going to meet the tests in Sarbanes Oxley.
MAX006316-2
Confidential
I understand that it is (appropriately) not your policy to discuss the accounts of a
PWC client. However I do look forward to reading the new Sarbanes Oxley
disclosures in the annual reports ofFairfax and subsidiaries.
Yours sincerely
John Hempton
24 February 2005
CC:
Trevor J Ambridge
Chief financial officer
Fairfax Financial Holdings
V Prern Watsa, Chief Executive Officer, Fairfax Financial,
The United States SEC via

l\-1AX006316-3
38
.
From:
Sent:
To:
Subject:
Attachments:

letter to fairfax
concerning b.•.
John Hempton Uohn.hempton@gmail.com]
Tuesday, March 01, 2005 2:36 PM
Gwynn, John D; Kris Iorio
Fwd: Letter to fairfax concerning bed and breakfast capital
letter to fairfax concerning bed and breakfast capital.doc
For your amusement.
---------- Forwarded message ----------
From: Jennifer, John and Lucas Hempton <john.heropton@gmail.com>
Date: Wed, 02 Mar 2005 07:33:17 +1100
SUbject: Letter to fairfax concerning bed and breakfast capital
To:'''Ambridge, Trevor" <t ambridge@fairfaK.ca>, b martin@fairfaK.ca,
enforcement@sec.gov -
Can people please acknowledge receipt of this.
Brad - can you as usual forward to Prem Watsa.
Thanks.
John Hempton
CONFIDENTIAL
MK00078211
SUBJECT TO PROTECTiVE ORDER
John Hempton
84 Hopetonn Avenue
Vaucluse NSW 2030
Australia
61293376349
john.hempton@gmaiLcom
Trevor J Ambridge
Chief financial officer
Fairfax Financial Holdings
95 Wellington Street West
Suite 800
Toronto, Ontario, Canada M5J 2N7
Bed and breakfast capital
Dear Trevor
It's more that two weeks since I last wrote to you - and I should not forget my
friends.
AJ; you know I think there are plenty of issues with Fairfax that require more-full
disclosure. It may be too late to have more full disclosure in your annual report but I
amhoping. The report is meant to be published this weekend.
The issue I am concerned about is the frequent use of tricks at year end to make the
parent company cash balance look better than it is and hence make Fairfax look
stronger than it might in reality be. Until now I have not been worried about the
regulatory aspects of such tricks - but now it appears without full disclosure they
would be material to your Sarbanes Oxley issues. I am hoping that a full detailing
of bed and breakfast capital within Fairfax appears in the annual report.
You know the sort of"bed and breakfast capital" I am talking about. Having to
contribute capital to a subsidiary by year end but getting permission from the
regulator to make the contribution on 2 January making parent company cash appear
stronger. Also the substantial inter-company balances from your regulated entities to
your non-regulated entities at year end. I note for instance that TIG (and possibly
other companies) prepaid fees to Lindsey Morden thus allowing Lindsey Morden 10
return cash to Fairfax in previous periods. I also note that the TIG statutory
statements from 2003 suggest that there are very large amounts owed to TIG by other
Fairfax entities including the parent (numbers more that $50 million -very significant
with regard to parent company cash). It appears that all this stuff constitutes
attempts to mislead about financial strength of the kind envisaged by Sarbanes
Oxley.
CONFIDENTIAL
MK00078212
SUBJECT TO PROTECTIVE ORDER
r. () f\I FI n!=MTI AI
AB this issue involves Sarbanes Oxley disclosure I have copied this letter to your
auditor. I have also copied it (for the record only) to the United States SEC.
Thanks in advance for the additional disclosures in your annual report.
John Hempton
1 March 2005
cc:
V hem Watsa, ChiefExecutive Officer, Fairfax Financial,
Kevin J. Dancey
CEO, Canadian Senior Partner, PricewaterhouseCoDpers Canada
The United States SEC via enforcement@sec.gov
MK00078213
SUBJECT TO PROTECTIVE ORDER
39
From:
Sent:
To:
Subject:
JOHN HEMPTON <john.hempton@gmail.com>
Monday, December 20, 2004 03:58:53 PM
MONTGOMERY, MW <MWMONTY@bloomberg.net>
Fwd: Emailing: letter to osc.doc
Attachment: 714410198331 letter t.doc
---------- Forwarded message ----------
From: John Hernpton <hempton@platinum.com.au>
Date: Wed, 15 Dec 2004 12:00:30 +1100
Subject: Emailing: letter to osc.doc
To: john.hernpton@gmail.com
Your files are attached and ready to send with this message.
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CONFIDENTIAL
CR 007387
Confidential - For use by the OSC and retained experts only
JOM Hempton
84 HopetouD Avenue
Vaucluse NSW 2030
Australia
61 293376349
john.hempton@gmail.com
David A. Brown, Q.C.
Chair, Ontario Securities Commission
20 Queen Street West, Suite 1903--
Toronto ONM5H 358
Canada
Dear David Brown
As you are aware, New York Attorney General Elliot Spitzer and the United States SEC are investigating the
sale ofrughly artificial (re)insurance policies that are designed essentially to manipulate the earnings (and
the balance sheets) of parties that have purchased them. These products go by the names "finite
(re)insurance", "fmancial (re)insurance", "time and distance policies" or other euphemisms.
You may not be aware that the one of the largest purchasers ofthese insurance products is the Canadian
listed Fairfax Financial Holdings. Attached is a letter which details several finite reinsurance products
purchased by Fairfax Financial Holdings and sold by major reinsurers (Swiss re via Swiss Re New Markets
in Bennuda, Munich Re via the partly owned Inter-Ocean also in Bennuda, Chubb via Federal).
In all these cases Spitzer and the SEC have or should have the documents which describe policies sold to
Fairfax and its subsidiaries. Identical subpoenas have been issued by Spitzer and the SEC to the head offices
of these companies requesting information on the sales of "nQn-traditional insurance products".
There is also a peculiarly Canadian example where the seller of the finite reinsurance was Great Western
Life through its Barbados based subsidiary London Life & Casualty Re. However in this case the policy was
sold to US based subsidiaries of Fairfax Financial. Spitzer will probably not know about this policy. [This
policy may have becn partially or wholly commuted in the 3
rd
quarter of2004.] -
I suggest that both through information obtained from Fairfax Financial and from Great Western Life you
could aid Spitzer and the SEC in their investigations. Alternatively you could ignore it. I am very familiar
with finite reinsurance however and the largest and most problematic user ofthis product I know (Fairfax
Financial) is Canadian domiciled. It's possible though that the problem will emerge in the unpleasant
manner in which finite reinsurance raised itself in Australia (lITH) and the UK (Independent Reinsurance
Insurance Group). I think it is better to be ahead ofthe curve.
I have attached an explanation of how these finite policies work and have also attached evidence/details as to
the existence and terms of the Swiss Re, London Life, Chubb and Inter-Ocean policies.
Confidential - for use by the OSC and retained experts only
CONFIDENTIAL CR 007388
Confidential- For use by the OSC and retained experts only
I have also attached (at Attachment A and in the text) a suggestion as to the egregious misapplication of
Canadian GAAP (notably D7) by Fairfax Financial Holdings.
I am happy to discuss these issues with you further. I should disclose that I am short Fairfax Financial
Holdings based on the finite reinsurance issue.
I have contacted your organisation before and have felt my complaints slipping into a black hole. It is
because this issue is (a) so important and (b) so topical that I have chosen to contact you directly.
Thanks in advance for taking the time to investigate these matters fully.
John Hempton
15 December 2004
Confidential- for use by the OSC and retained experts only
CONFIDENTIAL
CR 007389
Confidential- For use by the OSC and retained experts OnlY
First - how does a finite policy work;
It is possibly easiest to start with a simple policy. Imagine a reinsurance transaction that runs as follows:
An insurance company (A) thinks it might be under-reserved. So it does what insurance companies
do when they think they might have a problem. They go and buy reinsurance.
They want "protection" against being $450 million under-reserved - and they go around looking for
someone to sell this protection.
The company selling the protection (B) however is not foolish. It knows that an insurance company
wanting to reinsure its reserves probably has suspect reserves. (Lets face it, reinsurance companies
know quite a lot about adverse selection.)
So the reinsurance company wants to price this policy so that there is very little or no chance of loss.
They offer the following policy. B sells a policy to A for $200 million. However the $200 million is
not paid to B - but rather to a non-recourse subsidiary ofB (lets call it C) placed in a tax haven island
in the Caribbean. (Fairfax uses Barbados for Canadian operations and Bermuda and Ireland for US
operations.) C has no capital at all other than the premium paid into it.
C promises to pay A $450 million if their reserves turn out to be inadequate. However they promise
to pay A only in 14 years. Moreover A enters into a total retum swap with C whereby A pays C 7
percent per annum compound on the premium and C pays A the return on a Lehman bond index. We
thus know (provided A remains solvent) that in 14 years C will have about 515 million less fees in it.
(1.071'.14 * 209= 515.7... ). .
Thus at the end of 14 years C can pay A the full 450 million. Of course A fully funded their
reinsurance recoverable and B was never at risk (the policy was witha subsidiary) and C was never
really at risk (it had no assets other than the policy).
That said - if A has a reserve event (loses 450 million) they do not show this loss - they only show
the premium as an expense. (And that expense does not even go directly through the P&L - it just
reduces current year written premium!)
Essentially what happens is the ceding company (A) books a gain on the reinsurance contract of $250
million (450 million minus 200 premium). This "gain" offsets the losses from reserve deterioration
(say 450 million). It enables the company to report only 200 million ofloss (pretax) when the
reserves are inadequate rather than the full 450 million (pre tax) of reserve inadequacy.
This "gain" happens without any economic loss from the reinsurers (B or C). The gain now is offset
by the lower investment income that will be reported over years 1 to 14 because of the interest rate
swap. The lower income years 1 to 14 is reported as lower "investment income"
Confidential- for use by the OSC and retained experts only
CONFIDENTIAL
CR 007390
Confidential- For use by the OSC and retained experts only
One interpretation is that the company has used the transaction to produce a "discounting of reserves"
- however this is an unreasonable interpretation because there is no link between the period of the
reinsurance contract and the period under wmch the underlying claims payout. Also the 7 percent
discount rate might be artificially high (and can be made artificially higher).
Ifyou have not worked out how artificial this accounting treatment is then reread it. A company enters into
a transaction which will cost it over $50 million over 14 years and reports an immediate gain on it of$250
million. This is as warped as Enron's accounting.
The transaction I give you above is REAL. It actually happened pretty well precisely as stated between HIH
and Hanover Re.
The transaction as I state it however is not reported this way under GAAP. The international accounting
standards as well as the US Statutory Standard (NAIC SAP62), US GAAP (pASll3) and Canadian GAAP
(D7) require that a transaction have risk transfer or it gets deposit accounting. "Risk transfer" is more or less
defined as "reasonable possibility ofloss for the reinsurer" and the standard accounting interpretation of this
is a 10 per cent chance of a 10 per cent loss. The transaction could be made AustralianfIntemational GAAP
compliant by the simple means of putting an earthquake rider in. Say for example with the lITH transaction
- if there is an earthquake in Sydney with more than $5 billion in insured damages then Hanover Re would
pay the $450 million in seven years not 14.5. This would mean Hanover would bear some loss.
If you think the earthquake rider is fanciful- don't. This was exactly the clause that Berkshire Hathaway
inserted in its finite (read fake) reinsurance contracts with IllH.
General observation here - the Berkshire policy may have been legitimate in that it had "risk transfer" but it
. still faked lillI's accounts. Finite insurance that has $]0 worth ofrisk transfer but produces $]00 worth of
accounting benefit (without economic benefit) is still egregious as it stillfakes accounts. What the insurance
industrypromotes as "legitimate financial reinsurance" is stillfraud
There is a second characteristic of the HIHlHanover Re transaction and that is that it is retroactive.
Retroactive simply means that it is reinsuring events that have happened before the policy is put in place. A
retroactive contract is likely to be prima-facie suspect. The reason is obvious - why would you want to
insure events that have already happened? Answer: because they have happened! Ifthey have happened.
then why would anyone write a reinsurance contract with you? Because they are not taking much risk.
Therefore contract likely to be "fake" or in insurance jargon "finite".
The following accounting standards specify how retroactive contracts should be accounted for (even if they
are legit - the standard knows no way to tell if they are legit). .
Fairfax has numerous retroactive contracts including contracts involving Swiss Re and Chubb. Both these
contracts involve an the characteristics of the IDHIHanover Re contract. In particular they have a
funds withheld account and an interest crediting rate of 7%. These contracts may involve some risk
transfer but they are of the form which produces accounting benefits way in e x . G ( ~ s s of economic benefits-
they are thus abushJe ways offaking Fairfax's accounts.
Confidential- for use by the OSC and retained experts only
CONFIDENTIAL
CR 007391

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