john hempton fairfax financial v sac unsealed emails & communications

8/4/2019 John Hempton Fairfax Financial V SAC unsealed emails & communications

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Message#: 933

Message Sent: 07/08/2002 13: 11 :36From: [email protected] And Lucas Hempton Jenniferl l lTo: [email protected] MANAGEMENT, L111266j34288SUbject: 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) l ist on the NYSE.

The company however is relatively strong because they own 1 billion facevalue in S&P puts. So shor t that f raud has the beta of long the S&P.

JH

- Original Message -

From: "MWMONTGOMERY, ROCKER MANAGEMENT, L" <[email protected]>To: <[email protected]>

Sent: Tuesday, July 09, 2002 12:54 AMSUbject: Re:

> sorry so late in responding, i was at the farm all last week. willcheck

> around and see what i f ind.>

>

>

>

CR 00662



Message#: 12246Message Sent 12/02/2002 19:50: 03

From: [email protected],AUIJohn Hemptonlll

To: [email protected] 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 <[email protected],au>

>Bcc: jhempton@bigpond,netau

>

>Fairfax...

This email and any files transmitted with it are confidentialand intended solely for the use of the individual or entity towhom they are addressed. If you have received this e-mailin error please notify: [email protected],

We scan all outbound messages forthe presence of

viruses, however we cannot assure you that any messageis clean.

postmaster@platinum,com.au~ ~ ~ - ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~

CR 006628



From:Sent:

To:cc:Subject:

James ChanosMonday, August 12, 2002 09:20 AM

Charles HobbsDouglas MillettFW: FFH Earnings

Same as our take .. .

- - - - - Forwarded by James Chanos/kynikos on 08/12/2002 08:25 PM - - - - -

"Per ry , Je f f " <[email protected]>08/12/2002 05:09 AM

To: " ' [email protected]'" <[email protected]>

cc:SUbject : n ~ FFH Earnings

- - - - -O r i g i na lMessage - - - -

From: Cohen, AndrewSent : Sunday, A ug ust 11, 2002 8:04 PM

To: Per ry , J e f f ; Behrens, Evan

Cc : Fontana , For res t ; Sap an sk i, L ar ry ; Zigmond, Gary; Cohen AcctSUbject : FFH EarningsF a ir fa x r ep o rt ed Q2 earn ings Friday evening. Despi te pos i t i ve datapoin t s fromSigma, I do not be l i eve the qua r t e r marked an im provem ent, and in fac t ,

showed de t e r i o r a t i on from Ql an d the much-hyped inves tor meeting in New York:

Tota l combined r a t i o o f 103.2%, unchanged from Ql, down from 108.3% a year ag oCanadian o p er at io n s' s eq u en ti al combined r a t i o to 96.6%, 300 bp s improvementUS ope r a t i ons ' sequenia1 combined r a t io o f 108.5% from 106.9% in Ql - c lea r ly

a nega t ive and emphasizes weak condi t ions a t C&F (106.3%) an d TIG (110.1%) the C&F IPO remains v i r tua l l y imposs ib le with dec l in ing operating performanceMgmt expec t s C&F r a t i o below 105% dur ing 2H - should be i n t e res t ing ...

Gross and net premiums wr i t ten inc reased s l i gh t ly - the obvious quest ion i sthe soundness and p ro f i t ab i l i t y of t he u nd er ly in g po l i c i e s - EPS decl ined to

C$2.95 vs . C$3.27 a yea r ag o - higher e f fec t ive tax ra t e , a cc ou nt in g f ornon-cont ro l l ing i n t e r e s t s an d inc reased shares outs tanding were responib lefo r dec l ine

Cash and. marke tab le s ecu r i t i e s declined to C$55lMM - wel l below Mgmt's s t a t edgoal o f C$800MMUses inc luded: TIG c ap it al c al l , SwissRe payment, hedging contrac ts

Sources: sa le of S&P 500 puts for C$106MMFFH still owns C$500MM o f not iona l value S&P puts with 986 s t r ike pr ice

Bond po r t f o l i o , despi te telecom los ses , inc reased as % of por t fo l io as FFHr e a l l oca t e s from common equi ty - they do no t break out ga ins / los ses on

po r t f o l i o , bu t 80% c u rr en tl y i n f ixed-income, which a ls o s erv es to providemore income to hold ing company

Prem Watsa changes h is goal for hold ing company cash a t a lm ost ev ery tu rn whereas h is previous goal was for 5x i n t e r e s t coverage in holding company

cash, he now cavea ts t h a t to include eq uity account ing for Linday Morden

No discuss ion o f r es erv e l eve l s and dividend capac i ty in th e in te rim r ep or ts

- wi l l have to wai t un t i l Q4 .Vir tua l ly no s e l l - s i de converage as FFH IR and corpora te pol icy i s notcoopera t ive - wi l l work to get react ion from o the r shor t s ...

Andy

ject To Protective Order Confidential K001598



From:Sent:

To:Subject:

James ChanosFriday, November 15, 2002 08:06 [email protected]@kynikos; Charles Hobbs; Mark HeimanFW: FFH Update - Conversation with Moody's Analyst


"Perry, Je f f " <[email protected]>

11/15/02 03:00 PM

To: '" j [email protected] ' " <[email protected]>

cc:SUbject: n ~ FFH Update - Conversation with Moody's Analys t

- - - - -Or ig inal Message - - - -

From: Cohen, AndrewSent : Friday , November 15, 2002 2:15 PM

To: Cohen AcctCc : Sapanski, Larry; Fontana, Forres t : zigmond, Gary; Pohly, Rob:Shapiro , Glenn sub jec t : FFH Update - Conversat ion with Moody's Analys tBased upon re l ease l a s t n igh t put t ing FFH under review. C re di t a na ly st i s

openly negative on FFE's Q3 earn ings q ua li ty , o p er at io n al performance an dprospects

th inks FFH wi l l take reserve h i t in Q4 as does not bel ieve company has notadequate ly rese rved , espec ia l ly a t TIGon ly g ain s comfor t when ac tua l rese rves are takenquest ions su s t a inab i l i t y of gains in investment po r t f o l i oi s focused on RHINO r e f inanc ing as poten t i a l use of cash; CIBC ana ly s t th inks

FFH may have pay 50% i n cash: expire in February 2003quar te r f i l l ed with gains on investments and swaps as under ly ing opera t ions

de te r io ra te .review process should take a b ~ u t 30 days - from ana ly s t ' s tone, sounds asthough downgrade i s imminent

downgrade ( cur r en t ly Ba2 - j unk } would not have immediate impact - however,as FFH par en t ' s bank l i n e s r o l l of f , might impact ab i l i t y to re fin an ce (a t

minimum, .higher cos t )

AndyAndrew B. Cohen

SAC Capi ta l Advisors777 Long Ridge RoadStamford, CT 06902

Telephone: (203) 614-2163

Fax: (203) 321-3382

[email protected]

To Protective Order Confidential KOO14



Message#: 15865Message Sent 08/18/200220:09:16

From: [email protected] Eavis/IITo: [email protected] MANAGEMENT, '-111266134288Attachment 336168553 16512300.htm .Subject Out this week, studying

Manulife and Fairfax Financial, when I am not trying to rescue my rhododendronsfrom 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 EavisNew [email protected]

www.eavis.com

IDENTIAL REDACTEDCR 006627



James ChanosSunday, August 18,2002 09:13 PM

"Peter Eavis" <[email protected]>

Re: Out this week, studying

i s on e of our l a rge s t shor t s . JC

"Pe te r Eavis" <[email protected]>

08/18/2002 08:08 PM

To : <Undisc losed-Recip ient : ;>

cc :

Subjec t : Out t h i s week, studying

and Fai r f ax Financ ia l , when I am not t r y ing to rescue myfrom t h i s Bib l i c a l drought.

if yo u have an y thoughts on these .

Pete r

n a lso be reached on 845 279 7724 if something r ea l l y ju icy crops up.

Phoebe and Vic to r i a EavisYork

To Protective Order CoIJfidential K0015986



From:Sent:

To:Subject:

James Chanos

Monday. August 19, 2002 12:23 AM

"Peter Eavis" <[email protected]>

Re: out this week., studying

No problem. Let me know when. Enjoyed the HI s to ry in th e NYT. JC

"Pe t e r Eavis" <[email protected]>08/18/2002 08:15 PM

To : " Jame s Chano s" <[email protected]>

cc:

SUbj ec t: R e:· Out t h i s week, s tudying

Good to know. Hempton expla ined t h i s s tory to me a whi le ago, bu t I was

swamped, and noW I have some brea th ing room I wanted to get back in . We

should compare no t e s a t some po in t .

- - Pete r

- - - - - Orig ina l Message - - - - -

From: "James Chanas" <[email protected]>To : "Pe t e r Eavis" <[email protected]>

Sent : Sunday, A ug us t 1 8, 2002 5:13 PM

Subjec t : Re: Out t h i s week, s tudying

To:

cc:Subjec t : Out t h i s week,

845 279 7724 if something rea l ly j u i cy crops up.

08/18/2002 08:08

PM

and Vic tor ia Eavis

>> Fa i r fax i s one of our l a r g e s t sho r t s . JC

>>>> "Pe te r Eavis"> <[email protected]><Undisc losed-Recip ient : ;>

>>

s tudying>>>>>>>> Manu li fe an d F a ir fa x F in an ci al , when I am no t t r y ing to rescue my> rhododendrons from t h i s Bib l i c a l drought .>> Email if you have any thoughts on these .

>> -- Pe te r

>> Can a l so be r eached on

>>

> @-@-@-@-@-@-@-@-@-@-@-@-@-@-@>> Peter , Phoebe

> New York

> [email protected]> www.eavis.com

>>>

To Protective Order Confidential K00159



Message#: 12806

Message Sent 121D412002 04:19:02From: ~ I H E M P T O N @ B I G P O N D . N E T . A U I J o h n And Lucas Hempton Jenniferlll

To: [email protected] MONTGOMERYIROCKER MANAGEMENT, LI11266134288Attachment 345442739 20617889.htmS u ~ e c t : -

Monty,

Just so you know - I have convinced my boss to have a bit of a go at FairfaxFinancial.

Can youlayoff 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

CR 006630



Message#: 24287Message Sent: 12/30/200209:14:15From: [email protected] And Lucas Hempton Jenniferlll

To: [email protected] MANAGEMENT, L]1126613428B

Attachment 347706853_82218229.htmSUbject: Fw Fairfax Financial Holdings...

- Original Message --From: Jennifer, John and Lucas Hempton

To: [email protected]: Tuesday, December 31,200212:48 AMSUbject: 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 pureand simple. Here it is.

Fairfax is a leveraged holding company owning regulated and underperforminginsurance companies in the USA (and to a lesser extent Canada).

The company relies on getting cash out of the regulated holding companies toservice the parent company debt and to keep up the largish cash holding in theholding company.

The problem is that it has insufficient caplial in the regulated subsidiariesgiven the poor performance of the holding company.

So it has relied on reinsurance. Reinsurance of course being the equivalent tocapital atthe regulated subsidiary allowing cash out of those subsidiaires.

The reinsurance companies however have been bumt - witnessed by CDN11.8 billionin reinsurance recoverables in the consolidated accounts. This is byfar thelargest such number in the wond.

The reinsurance companies will not Willingly lend their capital again - but theneed for cash from the substandard subsidiaries goes on.

So they reinsure intemally - usually wrth subsidiaries based in DUblin.

How do the subsidiaries based inDubl in get by - they have assets being lettersof credit from the holding company. Go on - find the statutory statements ofthe Dublin subsidiaries and prove the point.

If you look at the holding company bank lines they have become progressivelymore drawn (now about 700 million) to provide those letters of credit.

So the holding company gets cash out of the regUlated subsidiaries by indirectlyproViding them with the bank lines - which is why I figure this is a ponzischeme.

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 Fair faxto the gunnels - I amabout a third of the short interest. I can't see how they are anything otherthan a bust. (Just work outwhat bad reserving is being hidden by thenon-requirement to work it out because it is reinsured with the reinsurance

CONFIDENTIAL CR 00664



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 - pleasereply.

John Hempton

SYdney, Australia

COf\IFIDENTIAL



From:

Sent:

To:Subject:

Mark Heiman

Wednesday, December 11,200211 :06 PM

James Chanos; Douglas Millett

Fairfax

I j u s t got off the phone w ith ZBI's insurance ana lyst , Michael Ting. He j u s t

t a lked to a new insurance analys t a t Morgan Keegan, and apparent ly t ha t

ana ly s t i s about to i n i t i a t e FFRX a t "Underperform," with the thes i s beingt h a t they are ext remely under-reserved in to the $3-$5 BN area . Also, the re

may be an a r t i c l e in Forbes or Fortune soon t h a t wi l l be s imi la r ly c r i t i c a l .

Ting sa id he thought t h a t analys t was one of the bes t P&C ana lysts he hasta lk ed to , and w an ted to give us the heads-up , as well as hear how we' recoming a t it-

Subject To Protective Order Confidential K00



From:Sent:To:Subject:

James ChanosWednesday, December 18, 2002 08:01 PM

[email protected]

Fairfax


Mark Heiman12/16/02 04:46 PM

To: James Chanos/kynikos@kynikos, Douglas Millett /kynikos@kynikos, Charles

Hobbs/kynikos@kynikos

cc:subjec t : Fa i r fax

Jus t spoke to John Gwinn a t Morgan Keegan, an d he was more c r i t i c a l of FFRX

than I ' v e ever heard a s e l l s id e a na ly st . It looks l i k e h is c r i t i c i sms o f

from the top to the bot tom--every th ing from underwri t ing to accoun t ing to

dishonesty. He gave me h is bas ic s , as he i s somewhat r e s t r i c t ed because he

hasn ' t o f f i c i a l l y launched. It wil l be i n t e res t ing to see how much of t h i sthe people who run the r e sea rch department t he re wi l l l e t him publ ish!

Reserve valua t ion : Gwinn looked a t the s t a t u to r y f inanc ia l s an d bel ieves the

reserve def ic iency i s gr ea t e r than the s ta tu tory cap i t a l of the en t i r ecompany, which could put it in rece iversh ip . He espec ia l ly th inks t h i s i s

the case with r espec t to Crum and Fors te r ' s an d TIG's asbes tos l i a b i l i t y .

Investments: How wi l l t he y r ep la ce the bond gains t h a t they took in the 3Q?

The bond por t f o l i o of an insurance company rea l ly isn't supposed to be runfo r cap i t a l gains and market t iming--Gwinn poin ts ou t t h a t t h a t i s not the

bus iness of insurance . Also , Prem Watsa ' s ca ree r was made v ia equi ty

invest ing , so th e fixed income s ide i s n ' t even h is area of expe r t i s e . He

also has h ea rd rumors t h a t they are burying some r e a l junk as wel l .

Swiss Re t r ansac t ion i s a f inanc ing ra ther than a re insurance t r e a t y , whichwou ld weaken the balance shee t an d a f fec t coverage r a t i o s .

High re insurance recoverables- - Ieading to n eg ativ e earned su rp lu se s .

Accounting i s sues r eg ar di ng th e double counting of surplUS cap i t a l as it

moved throughout subs . He th inks the r egu la to r s , e s p ec i al ly Ca l if o rn i a won ' t

be as l en i en t as they have been in the pas t .

Poor opera t ing cash f lows d i sgu i sed i n "pecul ia r" language.

ject To Protective Order Confidential K001



-

From:Sent:

To:

Subject:

Name th e t ime .

Gwynn, John D [[email protected])

Monday, January 06,20039:01 AM

Fontana, Forrest

RE: hope you had a nice holiday!

- - - - -O r ig ina l Message- - - - - .From: Fontana, Fo r r e s t [mai l to :For res t [email protected]]

Sent : Monday, Janua ry 06, 2003 8:57 AM

To : Gwynn, John D

SUbject : RE: hope you had a nice hol idayl

you a va ila ble to touch-base on Fai r f ax sometime t h i s week?

For res t Fontana, CFA

Por t fo l i o Manager

SAC Cap i t a l

72 Cummings Po in t Road

Stamford, CT 06902

"'* please !\fOTE th e new SAC Cap i t a l phone # given our move *'"

CT:

MA:

Ce l l :

Fax.:

203-890-3303

781-756-0633

781-929-6490

240-465-3244

Forrest@Sl'.C.com

[email protected]

AOL 1M: FNFontana

- - - - -O r i g i n a l Message- - - - -

From: GWynn, John D [mailto:[email protected]]

Sent : Thursday , January 02, 2003 9:36 AM

To: Fontana , Forres t

SUbject : RE: hope you had a n ice hol iday!

Per our conve r s a t i on . Hope your new year i s a happy one.

- - - - -O r i g i n a l Message - - - - -

From: Fontana , For r e s t [mai l to :For res t [email protected]]Sent : Tuesday, December 31 , 2002 1:55 PM

To : Gwynn, John D

Sub jec t : hope you had a nice hol iday!

John,

year i s here .

CONFIDENTIAL

j u s t fo l lowing up now t h a t the ho l idays a re coming to a c lo se and new

wanted to go over some of the numbers behind our dicuss ion when you

MK00060776

SUB ..IECT TO PROTECTIVE ORDER



were in Boston , pa r t i cu l a r th e reserves of TAP.

I am in Boston a l l th i s week.

ta ke c are ,

Forres t

Forres t Fontana, CFA

Por t fol io Manager

** please NOTE the new SAC Capi ta l address & phone # given our move **SAC Capi ta l Advisors , LLC

72 Cummings Point Road

Stamford, CT 06902

CT:

MA:Cel l :

Fax:

203-890-3303

781-756-0633

781-929-6490

240-465-3244

[email protected]

[email protected]

AOL 1M: FNFontana

* * * * * * * ~ * * * * * * * * * * * ~ * * * * * * * * * . * * * * * * * * * * * * ~ * * * ~ * * * * * * ** * * * * * * * * * * * . ' . * * * * * * * * * * * * * *****************

Morgan Keegan & Co. , Inc . DOES NOT ACCEPT ORDERS AND/OR

INSTRUCTIONS REGARDING YOUR ACCOUNT BY E-MAIL. Transact ional de ta i l s

do n ot s up er se de normal t r ade confi rmat ions or s ta tem en ts . T he in fo rm a tio n

conta ined in t h i s t ransmission i s pr iv i l eged and con f i den t i aL It i sintended fo r th e use of

the ind iv idual o r en t i ty named above. The informat ion conta ined here in is

based on

sources we be l i eve r e l i ab le bu t i s not considered a l l - inc lus ive . opinionsa re our cu r r en t

opinions only and a re sUbject to change without not ice . Offer ings a re

sub jec t to p r io r

sa le and/or change in pr i ce . Pr ices , quotes, r a t e s and yield,s a re sUbj e ~ t

to change

without not ice . Margan Keegan & Co. , Inc . , member NYSE, NASD and SIPC, _c a

regis te red broker -dealer s ub si di ar y o f Regions Financia l Corpora t ion.Inves tments a re

NOT FDIC INSURED, NOT BANK GUARANTEED and MAY LOSE VALUE. Morgan

Keegan & Co. , Inc . re se rv es th e r igh t to monitor a l l e lec t ron ic

correspondence.

http://www.morgankeegan.com

* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * ~ * * * * * * * * ** * * * * * * * * * * * * * * * * * * * * * * * + k * *****************

CONFIDENTIAL

MK0006077

SUBJECT TO PROTECTIVE ORDER



From:

To :

Sent:Subject:

"Gwynn, John D" <[email protected]>

"Fontana, Forrest" <[email protected]>

Monday, January 06. 2003 1:09 PMRE: 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:[email protected]]

Sent: Monday, January 06, 2003 11:42 AM

To: Gwynn, John DSubject: 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 ManagerSAC Capital


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

[email protected]

[email protected] 1M: FNFontana

----Original Message---

From: Gwynn, John D [maiJto:[email protected]]

Sent: Thursday, January 02, 2003 9:36 AMTo: Fontana, ForrestSUbject: RE: hope you had a nice holidayl

Per our conversat ion Hope your new year is a happy ons.

----Original Message----

From: Fontana, Forrest [mallto:[email protected]]

Sent: Tuesday, December 31, 20021:55 PMTo: 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




\

· f l

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

For res t Fontana, CFA

Portfolio Manager

** please NOTE the new SAC Capi ta l address & phone given our

move **

SAC Capi ta l Advisors, LLC


Stamford, CT 06902

CT:

MA.:

Cel l :

Fax:

203-890-3303

,91-756-0633

781-929-6490

240-465-3244

CONFIDENTIAL

[email protected]

[email protected]

AOL 1M: FNFontana

~ * * * * * * * * * * * * * ~ * . * * * . * * ~ * * * * . * * * ~ * * * * * * * * ~ * * * ~ * * * * ~ * * * * * ~ * * * ~ * ~ *• * * * * ~ * * ~Morgan Keegan & Co., Inc. DOES NOT ACCEPT ORDERS ANDIOR

INSTRUCTIONS REGARDING YOUR ACCOUNT BY E-MAIL. Transactional de ta i l s

do not supersede normal t rade confirmations or statements. The informatiocontained in th i s t ransmission is privi leged and confidentia l . I t i s in ten

t he i nd iv id u al or ent i ty named above. The information contained herein i s

sources we believe re l iable but i s not considered a l l - inc lus ive . Opinions

opi ni on s onl y and are subject to change without notice. Offerings a re subsale and/or change in price . Prices, quotes, rates and yields are sub jec t

without notice. Morgan Keegan & Co., Inc. , member NYSE, NASD ~ n SIPC, i s

regis tered broker-dealer subsidiary of Regions Financial C orporation. Inv

NOT FDIC INSURED, NOT BANK GUARANTEED and MAY LOSE VALUE. MorganKeegan & Co , Inc reserves the r ight to monitor a l l elec t ron ic correspond

http://www.rnorgankeegan.com* * ~ ~ * * ~ ~ * * * ~ . * * ~ * * * ~ * ~ . * ~ * . * * * * ~ * w * ~ * * * * * * ~ * * * * * * ~ * * * * * * ~ * * * * ~ * * ~ * * * * * ~ * * .

9/14/2006

MK00021093




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From:Sent:

To:SUbject:

Check, Geoffrey [[email protected]]Friday, January 17, 2003 10:30 AMDaily - ExchangeNew Research Coverage - Fairfax Financial Holdings, FFH, U

Emp lo yee s an d members o f t h e i r immediate family a re prohib i t ed from e f fe c ti n g t ra n s ac ti o ns as

l i s t ed below in the fol lowing s ecu r i t y due to new coverage by the Research Dept . :

No Sales : F a ir fa x F i nanci al Holdings FFH NR to U

This r e s t r i c t i on ends a t the c lose of bus iness Tuesday, January 21, 2003.

CONFIDENTIAL

MK00215204




From:

Sent:

To:

Subject:

Mark HeimanThursday, January 16, 2003 05:10PM

James Chanos; Douglas Millett; Charles HobbsFFH

Ju s t go t o f f the p h o n e w i t h Gwynn a t Morgan K e e g a n - - h i s piece t ha t r ips FFHapa r t i s s u p p o s e d to b e p u b l i s h e d t o m o r r o w . S h o u l d b e i n t e r e s t i ng to s e e ho w

the s t r e e t r e a c t s . I a lso t a lked w i t h hi m a b o u t the i m p o r t a n t s ta tu tory

cap i t a l i s sues Ch u ck a n d I h a v e b e e n l o o k i n g i n t o , a n d I th ink t h pic ture i scoming t oge the r o f w h a t i s rea l ly h a p p e n i n g he re . A l s o , I e x p e c t Condon

s h o u l d pub l i sh on it s o o n a s w e l l a s h is deadl ine wa s l a s t w eek .

ject To Protective Order Confidential K00I31



Exhibit 20filed under seal



FFH I n t r a ~ D a y Trading Data Jan. 17, 2003Date 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 4001/17/2003 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




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

1/17/200312:14 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




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 6868.04 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 3001/17/2003 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




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 68.6568.69 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 13001/17/2003 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




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 65.819800

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 11001/17/2003 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 4001/17/2003 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




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 6.6.212300

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



From:Sent:To:Subject:

Fox, JohnMonday, May 21, 2007 3:4 :10 PM

n.niakan@copperrivermgt comRe: What was date of Joh Gywnns first report on FFH

Call me 9012194602

---- Original Message -----From: Navid Niakan <n.niakan@copperrivermg .com>

To: Fox, JohnSent: 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.

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NOTICE: This email message and any attachm nt to this email message contains confidential information that may be

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REGARDING YOUR ACCOUNT BY E - ~ I L . Transactional details do not supersede normal tradeconfirmations 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

CR 006506



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CR 006507



Message#: 18626Message Sent 04/13/2004 10:25:19From: JCHANOS@KYNIKOS,COMIJimChanoslllTo: [email protected] ROCKERIROCKE PARTNERS LPI112661268153Subject: RE: some of the "impossit:>le" shorts are staron to get hit-

FFH._

-Or ig ina l Message-

From: DAVID ROCKER, ROCKER PARTNERS LP [mai o:[email protected]]Sent Tuesday, April 13, 2004 10: 12 AM

To: Jim ChanosSubject: 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 mostfrustrating stocks that the shorts have had a rough timewith?-Iooking to get a bit more aggressive-feeling feisty

NFIDENTIAL REDACTEDCR 006772



Message#: 10221

Message Sent: 09/2712004 11:57:56From: [email protected] LYNDEIR CKER PARTNERS, L.P1112661307034

To: [email protected]: 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 00679



Message#: 10287Message Sent 0912712004 13:33:53From: [email protected]\John Fa IIITo: [email protected] LYNDEIROC R PARTNERS, L.PI112661307034SUbject RE: FFH

Nothing pUblished, Russell, however, I know he might ave some $$ in hismind. call me when you get some spare time...Thank John Fox800-321-7549

--Original Message-

From: RUSSELL LYNDE, ROCKER PARTNERS, L.P [ ailto:[email protected]]Sent: Monday, September 27,2004 10:58AMTo: Fox, JohnSUbject: FFH

John-Has John Gwynn come out with a revisede51ima eof what FFH is onthe hook

for in the Florida hurricanes?

Morgan Keegan & Co., Inc. DOES NOTACCEPT ORO RS AND/OR INSTRUCTIONS REGARDINGYOUR ACCOUNT BY

E-MAIL. Transactional details do not supersede norma trade confirmations orstatements. The information containedin this transmission is privileged and confidential. It is in ended for the useof the individual or entity named above. The

information contained herein is based on sources we b leve reliable but is notconsidered all-inclusive. Opinions areour current opinions only and are sUbject to change wit ut notice. Offerings

are sUbject to prior sale and/or changein price. Prices, quotes, rates and yields are sUbject to hange withoutnotice. Morgan Keegan & Co., Inc., memberNYSE, NASD and SIPC, is a registered broker-dealer s bsidiary of RegionsFinancial 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



S&P Announces: Odyssey Re Holding Corp.'s Operating Companies 'A- ' Ratings Affirmed; Outlook

Stable

912 words27 September 200411:44 AM

Business WireEnglish(c) 2004 Business Wire. All Rights Rese ed.

NEW YORK - (BUSINESS WIRE) - Sept 27, 2004 - On Sept. 27, 2004, Standard & Poor's Ratings Servicesaffirmed 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) improvedbusiness position, improved operating p rformance, conservative investment portfolio, and good liquidityposition. Capital adequacy has remained supportive of the rating level. Partially offsetting these positivefactors are the group's potential exposur to further reserve developmentfor prior years, relatively shorttrack record of strong operating earnings since its partial IPO in 2001, and majority ownership by lower-ratedFairfax Financial Holdings Ltd. (FFH; BB Stable/-).

Outlook

Standard & Poor's expects the premium rowth rate to be in the single digits orto f latten in 2004 and 2005,which reflects declining premium rates in property and certain casualty lines and management's desire toadhere 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 currentaccident 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 furtherimprovements 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, asdemonstrated 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 geographicallybut also by line of business and distr ibut i n source. In addit ion to offering a combination of pro rata and

excess-of-Ioss property/casualty reinsur ce capacity to U.S. insurers, the group has significantly expandedits presence in Europe and Asia and, mo e recently, began offering program business and medicalmalpractice 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'sfocus on underwriting better-quality busi ess. In addition, this group's net operating results have been lessaffected by reserve additions for prior ye rs, partially because of significant retrocession arrangements put inplace to protect the balance sheet prior t 2001 as well as relat ively f lat writings during the peak of the softmarket 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 performanceremained strong in the first half of 2004, ith a combined ratio of94.9% and an ROR of 9.2%.

- Strong investments and liquidity. Odys ey Re's investment and liquiditycharacteristics are strong basedon 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% inshort-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 $234million.

- Capital adequacy consistent with the r t ing. The operating companies' capital adequacy ratio was 116% atyear-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 mill ion in remaining indemnifications fromstop-loss arrangements. Standard &Poo s expects the group's capital adequacy ratio to improve throughthe 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). Al l rights reserved.



flat growth in writings during the period.

_ Adequate financial flexibility. Standard Poor's believes ORH's financial flexibility improved substantiallyfollowing its partial IPO in 2001 but is parti Ily constrained by its majority ownership by FFH. Financialleverage at ORH (as measured by total d t to total capital) increased moderately over the last two yearsbut remained reasonable for the rating ran ea t 21.4% as of June 2004. Interest coverage has remainedconsistently strong at 10.8x in 2002, 14.9 in 2003, and 9.8x through the first half of2004.

A- /S tab l e / -

A-/S tab le

BBB-/Stable/-

BBB-

Rat ings L i s tOdyssey Ameri ca Reinsurance Co

Clearwater Insurance Co .Hudson Spec ia l ty Insurance Co.

Counterpar ty c r ed i t r a t ing

Financ ia l s tr en g th r at in g

Odyssey Re Holdings Corp.Counterpar ty c r ed i t r a t ing

Senior unsecured debt ra t ing

""T

_ Majority ownership by FFH. FFH owns 1% of ORH's outstanding shares. Standard & Poor's views FFH'slevel of ownership as one of the limiting fa tors of the rating.

Document BWR0000020040927e09r004 v

2006 Dow Jones Reuters Business lo t ractive l lC (trading as Factiva). All r ights reserved.



Morgan

Keegan

EQUITY R E S E A R C H N O T E

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To Protective Order KOO0417



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To Protective Order K000417



Gw nn, John D

From:

Sent:To:Subject:

Attachments: .

Jennifer, John and Lu as Hempton [email protected]]

Wednesday, Decemb r 01, 2004 5:01 AMKris 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 I lpm. 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 fil ings 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 <[email protected]>

To: John Gwynn (work) <[email protected]> .

-------- Original Message --------

Subject: FFHL (luxembourg) a d disclosure requirements1

CONFIDENTIALMK00023803




4. ..

Date: Wed, 01 Dec 2004 07 37:44 +1100

From: Jennifer, John and Lu as Hempton <[email protected]>

To: [email protected]. k, [email protected]

Please reply to indicate that yo have received this.

2

CONFIDENTIAL

MK00023804SUBJECT TO PROTECTIVE ORDER



Trevor JAmbridgeChief finllllcial officer

Fairfax Financial Holdings

95 Wellington StreetWestSuite 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

approximatelyusn 1biUion in ancial assets Bnd I was hoping that'you could helpme. I mustbe 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 stockbol mgs. I have not found it though -llIld I have donesome looking.

I would very muc.h appreciate fyou cantell 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. OdysseyRe, Crum and Forster, TIG and iill

entities, nSpirc Re, FFHL Lux bourg, by implication Fairfax Gibraltar and various

Europe/lD runoff'entities (such RTverstoneUK). I have Dot found accounts for

some entities such as Fairfax B ados andOld Lyme C;;ompany Bermuda, I g u ~ s itsentirely possible that the differe ce is in fuese entities. .

rJcnow it is likely there is some . grhave 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 amatter of the lItmostimportanc . ItgDCS to very safety and sOllDdness of one of thebiggest insurers in NorthArne

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 outrageoUSthat I am worried. Even though I ess there is II simple explanation I have copiedthis 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 calculationsare not the source ofmy

error.

cc:

V hem Watsa, CbiefExecutive fficer, Fairfax Financial.

Kevin J. DanceyCEO, CllIIadian Senior Partner, ricewa.terhouseCoopvrs Canada

The United Smtes [email protected]

CR 004694



Holdings of th e Consolidated irf:u:Financial

The 2003 annual report of Fair Financial Holdings listed the following

invesiments:

31December 2003· USD

mnUons

Cash and short term InvestmentsCash held in Crum & Forsterinte 5t escrow

account

Marketable securities

Total parent company cash re s

Portfolio inveslments

Subsidiary cash and short term i vestments

Bonds

Prafarred stocks

Common stocks

Inveslrnents In Hub. Zenrth and <lven!

Real estateTotal 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

12 2 17.0

12,155.9 12,400.8

CONFIDENTIAL

The company has (consistent th CanadianGAAP) stated the assets at historic cost

The market value dataWIlS incl ded. and has been presented here.

'Holdings of Northbridge Fi n 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 shorttenn lnvestments5,392 5,392

Investments

SubsIdiary cash and short term In estments 421,517421,517

Bondsn9,978 766,260

Preferred slocks175,764 177.834

Common sIDcks311,331 398,260

Investment in Hub87,953 112,244-

Real estate12,243 18,400

Total investments1.188,766 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 February2004,

.The exchange rate at yellI end s .7738 usn per Canadian dollar (source FFH 2003

annual report). Translating tb amolIDts into USDmillioDs is as follows:

USD millionAs statad market IIdlua

Cash and shortterm Illvest!l1an4.2 4.2

Investments

Subsidiary cash and short term nvestments 326.2 326.2

Bonds503.5 508.4

- Preferred s t o c ~ . s136.0 137.6

Common stocks240.9 308.2

Investment In Hub 6B.1

86.9

Real estate9.5 14.2

Total lr>Vestments1,384 1,481

CONFIDENTIAL

Holdings of Crum& Fors

We can also work out the

lOQ filing for the fist q20()3. These figures are glv

ts forCmm & Forster - because it has SEC filings. The

of 2004 contains (audited) financial datafor 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 1086.5 894.2Cash and cash equIvalents 2081.9

FairfaxFinancial Holdings balance sheetwith thet Crum & Forster owns considerable holdings inlding (ORR) which are already consolidated into thecount separately. We can however back these out

fonowing table is extracted (with notes) from the S4.

This table conforms to the data ontainedin the S4 filed with the SEC on 15 March2004.

One difficulty ill reconciling tilCrom & Forster statements is

Northbridge and Odyssey ReFFH statements and which we

with infonnation iu the S4. Th

~ 'lS1 $77.786

ownorshli> turu:rrtllpeP,;,eml>or SI.lDa3 .. . :n.aml>e- !t :IOlB

Conylnll C/U"'& nm.Cost 141•• 1'orm.r Ilrutuial

~ 9 2 . 4 5 \ $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 a M 5 . 6 5 ~ U,li0q 20.70/0

9.156 9 ~ 9 B 111.4% 4 6 . c ~5,tl25 7,llJl9 1.4% 'liID.41%

1,216 ::I,US 1..2% roo.o'K;;'725 3,123 93 '" 100.0%

2UO/Oti,66Z

22,794

Dtlcatul:lllr 31:, 20DZ

CilrryjngCDIt. v .l_

tbl' ~ i : f l t K b6\tlltot 'Sberu. ElM omlad lit IiJlr.....tut.

on tho <o=lldo:hd bolln. . """ '"o:nd . .. ~ , n l l d lorlRlg.theeql4lty

U> "" loa, """"Dd.,.d l>olon<.e ~ H ! l Inri , .. ./1d at f : d T V O ~

, """t:Stl1frrts fire t l : 1 ! h j ~ h . ,!it'tlJIttIe$.

01 2 r r M ~ n t s lilre Whtdtod lrl atnrrbl\"!:lttd IImflllod.

;J ~ e . . r F t I:I! hdntl!d fn hlced rom. s«u[ft

ZMIth N s ~ o r t a I l n r u t " " " ' "{mp.' " ••••••••••• , .

Northbridge PIn.tldaicotpDmljorr .

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 lrbmatIofJ81Urnlt"d

rommOlll shares'•••• , .Hub \ntDmBtlonsl Ul'nltEd

debantuf<l .

We can now recoru;!nJct the C annual statement as it wouldappear in the Faiif=

Financial HoldingE annuals't tement.

CR 004697



As reconstructed \0 beconsistent with the FFH annual

accounts

Cash In C&F esclOlll a=un tFixed income securities

Equity securities

Other assets

Cash

StrategIc Investments (ZenithNational 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 marketvalue

47.3

637.0

193.7

26.6

2034.6

117.El

B2.6

17.8

8.0

3.1

at costwheregiven Notes

AI; f rom FFH annual rep art

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 OdysseyExcludedbecause itwill be included

5.0 with nSplre

Excluded because It Is not "investedassets" within the meening of the FFH

3.7 annual statement.

Now wee

Fortunately O!UI is pretty s imp 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 valueOther 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 (wbichholdsTIGlInternational i nsunmceco 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 (forthe wh Ie of Fairfax) in it (ScheduleY). It shows 1hat tbis

CR 004698



CONFIDENTIAL

holding is held by ClelUWatcr. eClearwater statutory statement shows this at $60Iml1ion carrying value. I could btract 60 roilJion to avoid fue double count [I BIDnot surehowever 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 whichwe can find balance sheets. Th are several however only 11G Insurance Company

(California domicile) is large. e SCllOOulc D bond holdings are as below:

CR 004699



ooz"'T]

om

()

;U

oo.t>-...j

o

GUS/? De. <:I1ption Inte"",IRaI" Malurlty Garry Value Par ValU8 FalrYalue Actual Cost. . . .91Z803BF9 U n ~ ! > d Sial"" TT93. Bd 0.00 1510BI2025 41,035,230 111,B20.000 34.01B,216 39,946,M;9912B03BJ1 United Stste.sT",a. Bd

0.00 15f11/2026 4,124,057 14,500,000 4.117,Il:IT ~ , O Z ~ , ~ 2 : 591200MS2 Unned Sl>Il!J8 Tm.! Bd 0.00 1510212020 612.405 1,400,000 5E14,B52. 573,88B91280JBJ1 Veiled Slate.1m"" Bd 0.00 15111120:<6 8,630,088 30,343.000 B,617,321 B,430.8031112aoJBJ1 UriledSlatesTrl!as ad 0,00 1511112026 20,101,225 70,676,000 20,071.488 19,637.049912803AU7 ' United Slates1188BBd 0.00 1510812,020 33,779,753 71,720,000 29,579,254 32,888,489912B038L6 U n l t s ~ Stal.... Tma. Bd 0.00 15/0B12,027 8,957,390 31,000.000 B,447,903 B.487.B409128038E2 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 4.028,825912610ECB UnH.d Stete.Tre"" Bds 8.88 1510212019 54.3e1,192 38,000,000 54.32ll,144912810EDB UnHed Stat... Tma. Bd. 8.13 1510B12019 170,455,649 119,515.000 181,52'3,690 172,2Tll,183912810ECB UnU.d Stole.Tres. ed s 9.sa 15/t)212019 4,291,673 3.00ll,OOO 4.289.064 4,31G,2M912610009 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,U3912810EP9 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 ,51329128100:><3 United Slaw Bds 7.50 15/1112016 36,360 28,000 35,648 36.935

912810CJW5 UnitedSlate!; neal! Bds 7.25 151OS12016 6,806,970 . 7 , 1 1 ~ , O O O a , B 7 ~ , 4 3 8 8,936,963912810EP9 UnHed SlBm. TreB9 ad s 7.13 1S10212OZ3 70,055 70,000 87,366 70,059

912810EMS Unftod S I : o ! a ~ Tma!' Ed . 7:lJi 15108/2022 2,243,951 1,695,000 2.139,209 2:lJi8,B01912S10EC8 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 . 46,155,489912610FM5 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 151 111202.4 40,485,330 28,000,000 36,519,22.4 40,705,000

912828BJ8 vnned 5lBlea Treastits 2.00 a'loSl2oos 10.047.166 10,000,000 10,064,450 10,053.12591282751'.6 UnRed Slates Treas tits 4,75 1510212004 2,S(I.4,697 2,500,000 2,511,132 2.582,422

91262BAL4 UnitedStale> Traa& tits 1.ll8 3010912004 M,528,124 86.000,000 86,498.432 68,935.439912629AL4 UnHod Slat99 Tma& tits 1.88 3010912004 2,813,843 2,800,000 2,614,728 2,522.9849128272U5 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 ~ l , 7 1 9 501,016

912827088 Unllod State" Tr"". Nt. 7.25 1510912004 4,030,332 4.000,000 ~ , 1 5 1 , 5 i 3 4 4,331.464



ooZ11

omz--\

»r

(' )

;U

oo..p,..

--.Jo-> .

912.B27ZB2 United StalesTrells Nts 6.50 1511012006 408,227 400.000 445,547 415,938

91282BAWo Unhd Sla198 Treas NIB1.63 3110312005 250,441 250,000 250,B60 250,006

9128V5M UnttedSl:>ta; Traas N194.75 1510211004 1,30.2.437 1.300,000 1,304,241 1,382.859

91282n85 Un',ted Sial"" Treas Nls6,50 15'0512005 76,522 75.000 00,156 79,407

91282.8AEOUnited Slalss Tres. NIB

2.B8 3OI0SJ:1.004 30,834,807 30,825,000 3 1 , 1 ~ , 2 7 5 30,863,531

pn.01oo001-(119SS9BUS Go'/-IssuerObllg766.428,731 1,02.0,269,000

726.809,624 765.0611,2.75

1107UZ.CSI B<ilish Columbia PItlV MedllI115.88 1erotlIZ 02!l 20,978,063 20.893,790 22,473,5tl9 18,829,078

373382US7 GeorgIa SI3.25 11ll9l2.014 2,497 . 3,000 2,899 2,316

S8344ZEW5 Manllnll. ProvMod TelIl1 Nls 4.35 2911012032 6,964,597 B.9S4.S97 7,388,810 5,748.759

PI1-1100001.1199900 S ~ T e < T - I " " u " , ObliZT.943,157 V.8Bl.8B7 Q9,8S5,ZlB 24.577,151

.75 2011012008 318,739 317,W; 3S7,B64 3Zll,425

Pll_1800oo1-1899998Pol Sub-l••oor Obll

31362ADGB FBdBJ1II NatlMigA80n Gtd MI10.00 110912017 193 194 194 193

4581a2BY7 InterAmem a_v Bk6,95 11Ol312Q25 1.448,153 . 1,,430.000 1,711,lZZ l,4G5,1170

Pl1.250oo01.259999B Spec Rev-Issuer Obi1,448,346 l,430,ll14 1.711,318 1,466,172

04775HCH8 Mania Gas U CoMedium Ter6.55 2() '11/202/l 2,593,820 2,675.000 2.964.90B 2,SU,J01

G711858BOO Old.homs Gas a E l6 cCo6.50 15'0712017 1,004,834 1,000,000 1.0Q4,961 1,04 UlOO

P!1.3200oo1-J2GIl998 Pu b Ub'hls!;uer Obi3.593,65<1 3,675,000 4.059,8B9 3.5ll4.601

61];lB2.C,J5 M0lY8n GlyTrCo NewYorkN 0.34 20109/2011 18.771.56B 26,335,000 18,2ll9.656 18.n1.5ll8

63935KAAl Navigator Gs s Trans Pic10.50 3010&12007 3.900,000 13.000.000 5,4GO,ooO 3,900.000

000000000 parm.JIII An By Euro-DS£.u8.13 2W912010 3,834.506 20,161,809 3,634,505 10,247.9li2

886.!i2SAL8 l ie", 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' Llc5,69 6/W1200B 11,580,573 12,423.UTT 1 1 . ~ e a , 2 7 0 11,516,700

pt1-3000001-39999!1Blnd,Ml$o-!sBuerDb

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



j

- ~ - - - - - - - - _ . - - -

We also have similar data for the equities;

CUSIP Oe.CIiplicn

BooI'JAd)

Numb.,Of

llharesCarry VBluB

FairV.lu.Aclual

Cost

()

;::a

oo--. j

oN

D55535104 Muend1aner Ruectvel1!idlBlUng 318.000.00 36,5&4.644 38,554.644

Pt2S1-6700001-679e998C cmmS lk-Banks. T 3,2134.449.00 1 3 ~ , 1 1 2 , 5 5 9 155,112,559

36916201 Arbor MemSvcs 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 RusselMetals 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 ZsnllhNaa In. COrp 2,966,449.00 96,55",915 96,557,915

Exdud.d blleau•• they art! counted elsllWhor.

3 0 4 6 ~ l o a FairmontIn. 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""YRe 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 TigAmem Spe<::IBIly Ins Co 600,000.00 16.249,069 15,249,059

87256@100 Ti9 Hldg. 4 Inc 1,000,00 100,401,772 100,40 1,n 2

67246#107 Tig IndtyCo - CaUf 23,500.00 22,266,178 22,266,178

87247#106 Tig Ins Co Mk:h150.000,00 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

87249ltl04 TIS Specially Ina Co - Callf 41,000.00 28,201,758 28,201.756

P12SHlSOoo01·699999SCcmm 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

on8,56S

11,867,437

261,666

23,305.468

205,732.512

83,000,572

9 9 . 2 2 7 . ~ 2 7157,378.098

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 pe r 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 118structures and get the [ollowinusn 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 ofTIG Insurance; Company (Car mia) whose statements I have dissected above. To

the extent that they are consoli ated into TIG Insurance Company they are beingdouble counted. Doublecoan g of course makes the financial asset shortfall even

mon: pronounced.

CR



rth American finnnciaJ assetboldin of

Toul

Norlh

C&F ORH TIG ll G entities Amerlca

Investments

Cash In C&F eSl:row account

& otherholdeo 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,

Adventwhen 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

TotalInvestments

1485.7 305S.7 4238.0 1400.14-«J.D

10559.0

in Fairfax releases that nSpire Re is the consolidation

'5 is highly problematic because nSpire Reha s onlyillioD in cash. This is 784 million of the missing

the organisational chart in Schedule Y of the ORR

LindseyMorden, 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

overestimatedbecause it includ s a holding in TRGwhich 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 atmarket (see the table at the top of

this note). To iliat you should d the 47 million in thee&F escrow account as it is

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?- if the

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 inbonds and 478

money. nSpireRe (according

statutory statement) consolida

(Hungary), Icelandic operatio

CR 004704



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 differencebetween Euro and USD is trivi at this level. The Gibraltaropemtion wasmerged

into Luxembourgby 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 26million in bonds a 6 million in cash. These accounts are in GPB - soyou 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 HoweverI have be accounts for Heraldglen for 2002. HeraIdglen wasthe main Kingsmead capitel pro .der. It shows no assets anything like large enoughto make up the difference.

After 'taking account of all thes ent it ies I suspect that I3lll approximately $1 billionshort.

It's likely the difference is in B bados or Bermuda and I do not have accounts forthem. However I was always der the impression that the main such operation is

Wentworth - and that appears be a subsidiary ofFairfaxLuxembourg in the ORRSchedule Y table. In that case i 's f i l r ~ a d y counted. (Does the FFHL Luxembourgaccount consolidate its subsidi .es or is it aJl unconsolidated account?)

Of course there is somethingmi sing. Can you please tell me what it is?

Thanks in adVaJlce

CR 004705



Exhibits to

Certification ofMichael 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

[email protected]

Dear Susan Wolburgh Jenah

Acting Chair

Ontario S e c u r i t i ~ s 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 li tt le b it daft - but it hardly bodes well for the Canadian financial markets if they require

Americans to police some obvious - and well d o c u m e n t e ~ mischief in Canada.

I am assuming of course that the lack ofvisible action by the OSC is an oversight rather than by design.

Butjust to make sure I thought I would send you another copy ofmy letter toMr Brown.

Thanks in advance.

John Hempton

14 September 2005

Confidential- for use by the OSC and retained experts only

CR 005253




JohnHempton

84 Hopetoun Avenue

Vaucluse NSW 2030

Australia

61293376349

[email protected]

David A. Brown, Q. C.Chair, Ontario Securities Commission

. 20 Queen Street West, Suite 1903

Toronto ONM5H 3S8

Canada

DearDavidBrown

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 (andthe balance sheets) of parties that have purchased them. These products goby 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 of these 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 SwissRe NewMarkets

in Bermuda, MunichRe via the partly owned Inter-Ocean alsoin 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 Spitzerand the SEC to the head offices

ofthese companies requesting information on the salesof "non-traditional insurance products".

There is also a peculiarly Canadian example where the sellerof 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 subsidiariesof Fairfax Financial. Spitzer will probably not know about this policy. [This

policy may have been partially or wholly commuted in the 3rdquarter 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 userof 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 of the curve.

I have attached an explanation of how these fmite policies work and have also attached evidence/detailsas to

the existence and terms of the Swiss Re, London Life, Chubb and Inter-Ocean policies.


CR 005254




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 Hempton15 December 2004


CR 005255



Confidential - Fo r 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 islandin 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 (providedA 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 - i f 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 t he OSC and retained experts only

CR 005256



Confidential- Fo r 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 no t worked out how artificial this accounting treatment is then reread it. A company enters into

a transaction whichwill cost it over $50 million over 14 years and reports an immediate gain on it of $250million. 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 t ransaction 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 (FAS113) 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 cen t 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 HannoverRe wouldpay the $450 million in seven years not 14.5. This would mean Hannover would bear some loss.

I f 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 withHll:I. .

General observation here - the Berkshire policymay have been legitimate in that it had "risk transfer" bu t itstill 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

industry promotes as "legitimate financial reinsurance" is still fraud

There is a second characteristic of the HIHlHannoverRe 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 tobe 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? Becausethey 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 theyare 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 th e characteristics of the HIHlHannover Re contract. In particular they have afunds 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 benefitswlry in exCfSS ojeconomic benefits-

they are thus abusive ways ojfaking Fairfax's accounts. .


CR 005257



Confidential - For use by the OSC and retained experts only

Fairfax also has particularly peculiar accounting for retroactive reinsurance. See th e following.

Accounting standards for retroactive insurance used at Fairfax.

ACCOUNTll\fG METHOD OF ACCOUNTING

STANDARD

US Statutory accounting - AJI "gains" from retroactive reinsurance contracts ar e to be included inSSAP62 "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 i n cash.

US GAAP accounting "Gains" from retroactive reinsurance can be counted in profit amortized over

standard - FAS 113 the period in which the gain is expected to be received. Fairfax backs ou t the

gains on retroactive reinsurance in its US GAAP reconciliation following this

rule - see the following quote from the 2003 Fairfax annual report. "I n Canada,

recoveries on certain stop loss reinsurance treaties (including with Swiss Re) protecting Fairfax, Crum &

Foster and TIG arerecorded 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 settlementperiod over which the company

cxpects to receive 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 Adetails the critical paragraph of the US GAAP standard (FASI13) and the Canadian standard (D7). The

differences between these standards are slight - and it is not clear why they produce approximatelyUSD500

million in cumulative difference between Fairfax's US and Canadian GAAP equity. I f this 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 t he 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 prospective finite 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


CR 005258




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 paidwhen 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 bean 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 accidentyear protection on a prospective basis or adverse

development protection related to prior aCcidentyears on a retroactive basis. Coverage under these contracts is

generallytriggeredwhen our loss ratio for the subject period exceeds a specified level, orwhen reserves in respect ofal l

periods prior to a certain date exceeda statedamount. We cede losses andLAE to our reinsurers in excesso fthosespecified levels or amounts, along with the related written and earnedpremiums. We will recover the ceded losses and

LAEfrom our reinsurers aswe settle the related claims, which may occur over severalyears. These contracts may

provide for future payments to be made by us when we make claims under suchpolicies, and generallyprovide that

interest expense is charged to us, fo r 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 of these 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 whenwe 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 policywith Swiss Re (see attached Press

Release dated 20May 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 thanUSD600

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 of the 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 theywill 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 ofFairfax:). The Fairfax: press release is attached.

This cover was in two parts. The first part was purely retroactive - and cost USD I03 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 a llowFairfax an option on some more cover.

The additional coverwas purchased for USD53 million for an additional USDI 00 mil lion 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 detailswill be found by Spitzer and the SEC who

have issued subpoenas to Chubb on non-traditional insurance products. You should also be able to findmore accurate details.

The London LifeIFairfax policies. London Life and Casualty Re, a Barbados based subsidiary ofGreat

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.

Effective December 31,1999 (and amended during 2000), the Company entered into a reinsurance

agreement with ORC whereby 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 utilizeprospective 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




believed wa s requiredunder NAiC SAP. The Department di d no t approve this request bu t did permit

the Company to utilize retroactive reinsurance treatment rather than deposit accounting. A s o f

December 31 2001, reserve cessions totaling 320million ha d been made under this treaty, al l o f

which were reported as adverse development inyears subsequent to 1999.

During 2001, this reinsurance agreement an d two (2) otherprospective agreements between the

Company and OR C were novated, with LondonLife an d Casualty Reinsurance Company (ULondon

Life") assuming the obligationso fORC. The terms o f theagreements remainedsubstantially

unchanged The Department approved the Company's accountingfor this change as a novation,

with theprevious accounting treatment maintained

.The critical observation here is that llG requested that the company be permitted to utilize prospective

reinsurance accounting treatment when recording activity under this agreement rather, rather than deposit

accounting as management believedwas 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 of two 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 th e OS C and retained experts only

CR 005261



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 recordedliabilities relating to the underlying

reinsured contracts. Ijthe recorded liabilities exceed the amountspaid, reinsurance receivables shall be increased to

reflect the diffirence and the resulting gain deferred. The deferred gain shall be cimdrtizedover the estimated remaining

settlement period. Ijthe amounts and timing ofthe reinsurance recoveries can be reasonably estimated, the deferredgain

shall be amortizedusing 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.

If the 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 of short-term insurance contracts shouldbe recognized in the balance sheet

as prepaid reinsurance 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 shouldbe recognized as reinsurance

receivables to the extent thesepremiums do not exceed the recorded liabilities relating to the reinsuredportion o f the

underlying short-term contracts. When the reinsured liabilities exceed the reinsurance premiums, the reinsurance

receivables shouldbe increased to reflect this excess andgain. The gain shouldbe deferred on the balance sheet and

amortizedover the estimated remaining settlementperiod. Ijthe amounts and timing ofthe reinsurance recoveries can be

reasonably estimated, the deferred gain should be amortizedusing the effective interest rate inherent in the amount paid

to the reinsurer and the estimatedtiming andamounts ofrecoveriesfrom the reinsurer. Otherwise, the proportion of

actual recoveries to total estimoted recoveries should determine the amountofamortization.

I f the premiums cededfor retroactive reinsurance are greater than the reinsuredportion ofrecordedliabilities relating to

the underlying short-term insurance c o n t r a c ~ the cedingenterprise 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 ~ nletter to fairfaxconcerning A. ••

Gwynn, John D [[email protected]]Wednesday, January 12, 20057:32 AMFW: Advent capital valuation in Fairfax accounts

letter to fairfax concerning Advent Capital valuation.doc

***For i n s t i t u t i ona l use only.***

***This ona lys i s has been prepared sole ly fo r th e addressed pa r t i e s and i s no t in tended

fo r d i s t r i bu t i on o r use by any o th e r i nd iv id u al o r

en t i ty .***

***Please read a l l d i sc l os u r es c o nt ai n ed in t h i s email and/or any a t t ached document/so

***

- - - - - o r i g i n a l Message-----From: Jenn i fer , John an d Lucas Hempton (mailto:[email protected]]Sent : Wednesday, January 12, 2005 5:49 AMTo: b mart [email protected] ; kevin. j [email protected]; [email protected]; Ambridge,

Trevor; p watsa@fair fax .caSubject : Advent c ap i t a l va lua t ion in Fa i r fax accounts

Dear Mr Martin

Here i s another l e t t e r which I hope you c an f orw ard to Mr Watsa. I have copied it to

[email protected] hoping h is emai l addres s i s cons i s ten t with yours . Otherwise you ca n

send it on.

I have a lso copied it to your aud i t o r and the SEC. The SEC should have t h i s only fo r

t he i r record .

Thanks in advance

John Hempton

REDACTED





John Hempton

&4 Hopetoun Avenue

Vaucluse NSW 2030

Australia

61293376349

[email protected]

Trevor J Ambridge

Chief financial officer


95 Wellington Street West

Suite 800

Toronto, Ontario, CanadaMSJ 2N7

Dear Sirs

This is another quick note to ask clarification. You have no t answered my previous

questions to my satisfaction and they are meaningful so I have again copied this to

your auditor.

AI, fa r as I can see the valuation ofAdvent Capital has not been written down in

Fairfax's accounts.

AB you know Advent has had a shocking time. The 2001 year has been part icular ly

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] December2004.

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 cal l

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. I ts 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




I am writing to ask what the valuation basis for Advent is in Fairfax's consolidatedaccounts 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 [email protected]

CONFIDENTIAL

MK00037416




3



JohnHempton

84 Hopetoun Avenue

VaucluseNSW 2030

Australia

61 29337 6349

[email protected]

Kevin J Dancey

Senior Partner and ChiefExecutive Officer

Price Waterhouse Coopers

Canada

Sent via email

Dennis Nally

Chairman's Office - US FirmPricewaterhouseCoopers LLP

300 Madison Avenue

24th Floor

New York, New York 10017

United States of America

Sent via email to Cynthia Paoli.

[email protected]

Dear Senior Partners ofPrice Waterhouse Coopers

I am writing to alert you to possible inappropriate financial transactions between Odyssey Re (an Americaninsurance 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 isquestionable whether a true "sale" occurred and hence whether the statements ofFairfaxwere correct afterthis "sale". They were signed off-but that is in the past. "Sale" is also a relatively minor problem.

CR 00528



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 fromFairfax and its Irish subsidiaryNspire Re (I have a

copy of the guarantee documents from Nspire). It is also capitalised withGBPllO 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 forFairfax 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 secondquarter oj 2004, Odyssey Americapledged 11Omillion SI99.5million) ojUs.

treasury notes andplaced them on deposit at Lloyd's on behalfojAdvent Capital (Holdings) PLC

("Advent "). Advent is 46.8% owned by Fairjax and its affiliates, including 15.0% by the Company.

OdysseyAmerica retains the right to withdraw thejunds atLloyd's at any time upon l80-daysadvance 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.

Now I 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 OdysseyRe's business. Erosion of the separation between

Odyssey's finances and Fairfax's threatens Odyssey's relatively high credit rat ing and hence threatensthe very viability of Odyssey's business. I have spoken with rating agencies who have been concerned on

precisely this point.

I have also spokenwith staff at OdysseyRe (who will remain nameless to protect their careers). They weredisgusted 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 somewho 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 of funless 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 ofminorities at Odyssey by Fairfax. The current inadequate controls should make it

impossible for you to s ign an audit s ta tement for Odyssey as they fail the financial control tests.

Sincerely

John Hempton

1 February 2005

cc:

Trevor J AmbridgeChief financial officer


V PremWatsa, ChiefExecutive Officer, Fairfax Financial,

The United States SEC via

[email protected]

CR 005287



Confidential

Jolm Hempton

84Hopetoun Avenue

Vaucluse NSW 2030

Australia

61 2 93376349

[email protected]

Kevin JDancey

Senior Partner and ChiefExecutive Officer


Canada

Sent via email

Dennis Nally

Chainnan's Office - US Firm

PricewaterhouseCoopers LLP

300 Madison Avenue

24th FloorNewYork, NewYork 10017

United States ofAmerica


[email protected]

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). Bothcompanies you audit. There is a

(NYSE) listed IDinority in Odyssey Re. My concernhere 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 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 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

GBP 11 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 orhas been tight

The solution to this has beento 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, OdysseyAmerica pledged 11Omillion

$199.5million) ofus. treasurynotes andplaced them on deposit at Lloyd's

on behalfo fAdvent 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 timeupon 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 OdysseyAmerica 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 OdysseyRe has

a substantially better credit rating than the parent and protecting that credit rating is

critical for Odyssey Re's business. Erosion of th e separation between Odyssey's

. finances and Fairfax's threatens Odyssey's relatively high credit rating and

hence threatens the very viability ofOdyssey'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 somewho 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 of funless two things

happen. Firstly the money should be repaid to Odyssey by Fairfax. More importantly

however controls should be pu t in place to prevent the abuse ofminorities at Odyssey

by Fairfax. The current inadequate controls should make it impossible for you tosign an audit statement for Odyssey as they fail the fmandal control tests.

Sincerely

John Hempton

1 February 2005

cc:

Trevor JAmbridge

Chief financial officerFairfaxFinancial Holdings



[email protected]

MAXo06314-3



33



JohnHempton

84 Hopetoun Avenue

Vaucluse NS W 2030

Australia

61 2 9337 6349

[email protected]

Trevor J Ambridge



95 Wellington StreetWest

Suite 800

Toronto, Ontario, Canada M5J 2N7

Dear Trevor

I am just 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 ofFairfax. 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 je t time from the company for private use that is fine but it should be disclosed as a related party

transaction. !fthey were using company je t time for private use thatismore problematic.

I fit 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 o f course assuming that the use of the corporate je t for private purposes was approved by th e board. I fit was not then th e Watsa family are guilty o f theft. It is precisely this behaviour for which Kozlowski of

Tyco fame is currently in front of a jury. It is also (o f 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. I t 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 i t 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:


KevinJ.

DanceyCEO, Canadian Senior Partner, PricewaterhouseCoopers Canada


[email protected]

CR 005267



3



John Hempton

84 Hopetaun AvenueVaucluse NSW 2030

Australia61293376349

[email protected]

Trevor JAmbridge.Chief financial officerFairfax Financial Holdings

95 Wellington StreetWestSuite 800

Toronto, Ontario, CanadaMSJ 2N7

Dear Trevor

I amwriting 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 & Forsterwhichcovered the asbestos losses appears to be retroactive in which case it should be reversed in theUS GAAPreconciliation 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 remainingindemnification of$100 from SwissRe 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 of this Cover (at least as a full 100 million) is new. It does not appear in earlierspecifications 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 werebreathed in by underlying claimants (which could be decades ago) and hence any gain on this treaty should

be treated as retroactive insurance.

CR 005298



I f it is treated as retroactive insurance it should not contribute to "earned surplus" (and hence to dividendcapacity) at US Fire. But more importantly it should be reversed for US GAAP. (This is clear from reading

FAS113 and the relevantNAlC SAP.)

It might actually be that you have an offsetting loss on retroactive reinsurance so implicitly the

transaction is being reversed under US GAAP.

I f 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.

I f 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 PriceWaterhouse Coopers

and to the SEC. PriceWaterhouse Coopers should test the economic content and the retroactive nature ofthis 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 of the 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:


Kevin J. Dancey

CEO, Canadian Senior Partner, PricewaterhouseCoopers Canada

CR 005299




[email protected]

CR 005300



35



Confidential

John Hempton

84 Hopetoun Avenue

VaucluseNSW 2030

Australia

61293376349

[email protected]

Trevor J Ambridge




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 th e Advent680 'o n review for a p o s s ~ b l e 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 £1 02m. 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% ofAdvent 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 i ts capital and ( a c c o ~ d i n g toInsurance Day) you are not keen to support i t It's a bi t rich to carry i t 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 no t think that you are carrying Advent on your balance sheet at

the wrong value. Fairfax is an honest company. 1batway you will no t need to restate

the accounts that you have just published fo r 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.

Bu t in that case Advent (and possibly 780) should be consolidated into Fairfax'saccounts 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 i f thereIS.

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,

JohnHempton

11 February 2005

CC:


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

VaucluseNSW 2030

Australia

61293376349

john.hempton@gmaiLcom

Kevin J DanceySenior Partner and ChiefExecutive Officer


Canada

Sent via email

Dennis Nally

Chairman's Office - US Firm


300

Madison Avenue24th Floor

New York, New York 10017



[email protected]

Trevor J Ambridge


FairfaxFinancial Holdings


Suite 800

Toronto, Ontario, CanadaM51 2N7

Dear Sirs

I am writing concerning the appropriateness of tax sharing payments at Fairfax Financial Holdings and the

possible perversion of the 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 debtholders 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.

I f no such protections exist then appropriate security should be placed over Fairfax holding company moneysto 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 ofOdyssey, Crum and Fairfax) as to how the protections work.

Thanks again for your understanding.

John Hempton

13 February 2005

cc:

Trevor J Ambridge





[email protected]

CR 005297



37



Confidential

John Hempton

84 Hopetoun Avenue

Vaucluse NSW 2030

Australia

61293376349

j [email protected]

Kevin J Dancey

Senior Partner and ChiefExecutive OfficerPrice Waterhouse Coopers

Canada

Sent via email

Dennis Nally

Chairman's Office - US Firm


300 Madison Avenue

24th Floor

New York, NewYork 10017



[email protected]

Dear Senior Partners of Price Waterhouse Coopers

I am writing to detail th e issues that I think I might need to be spelt out in the

disclosures of Fairfax Financial (and its US operationsCrum & Forster and TIG) to

meet the tests in Section 302 of the Sarbannes Oxely Act. I could (o f course) be

totally mistaken about the nature ofFairfax'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

(AppendixA 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 inorder to "fairly present in all material respects the fmancial condition aild results of

operations of the issuer" (as pe r Sarbanes Oxley Sec 302) several additionaldisclosures should be required.

MAX006316-1



Confidential

Firstly the extent of accounting benefit that the fmancial reinsurance produced inexcess of the present value of the economic benefit of the reinsurance obtained should

be detailed. In th e 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 overUSD400 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 t o 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

f l ie 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 "netof 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 l ike to lmow. (In a non GAAP balance sheet the reinsurance

recoverablesmight for instance be discounted by the rate at which the interest is

payable on the funds withheld. Also the funds vvithheld linemight 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

considerablymore disclosure if you are going to meet the tests in Sarbanes Oxley.

MAX006316-2



I understand that it is (appropriately) not your policy to discuss the accounts of a

PWC client. However I do look forward to reading th e new Sarbanes Oxley

disclosures in the annual reports ofFairfax and subsidiaries.

Yours sincerely

John Hempton

24 February 2005

CC:

Trevor J Ambridge



V Prern Watsa, ChiefExecutive Officer, Fairfax Financial,


e n f o r c e r n e n t ~ s e c . g o v

l\-1AX006316-3



38



.

From:Sent:To:

Subject:

Attachments:

i : f 1 f ~ ~letter to fairfaxconcerning b.•.

John Hempton [email protected]]Tuesday, March 01, 2005 2:36 PM

Gwynn, John D; Kris IorioFwd: Letter to fairfax concerning bed and breakfast capital

letter to fairfax concerning bed and breakfast capital.doc

For your amusement.

- - - - - - - - - - Forwarded message - - - - - - - - - -From: Jenn i f e r , John and Lucas Hempton <[email protected]>

Date: Wed, 02 Mar 2005 07:33:17 +1100

SUbject : Le t t e r to f ai rf ax concerning bed and b re ak fa st c a pi ta l

To :' ''Ambr idge, T r evo r" < t [email protected]>, b [email protected],k e v i n . j . d a n c e y @ c a . p w c . c o m ~ [email protected] -

Can peop le p l ease acknowledge r ece ip t of t h i s .

Brad - can you as usual forward to Prem Watsa.

Thanks.

John Hempton


SUBJECT TO PROTECTiVE ORDER



John Hempton

84 Hopetonn Avenue

Vaucluse NSW 2030Australia

61293376349

john.hempton@gmaiLcom

Trevor J AmbridgeChief financial officer


95 Wellington StreetWest

Suite 800Toronto, Ontario, CanadaM5J 2N7

Bed and breakfast capital

Dear Trevor

It's more that two weeks since I la st wrote to you- and I should notforget my

friends.

AJ; you know I think there are plenty of issues with Fairfax that require more-full

disclosure. I t may be too late to have more full disclosure in your annual report but I

am hoping. The repor t ismeant 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 i s and hence make Fairfax look

stronger than it might in reali ty be. Unt il now I have not been worried about the

regulatory aspects of such tricks - bu t 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 capitalwithin 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 LindseyMorden 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). I t appears that all this stuff constitutes

attempts to mislead about financial strength of the kind envisaged by Sarbanes

Oxley.

MK00078212




) f\IFIn!=MTIAI

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 [email protected]

MK00078213




39



From:

Sent:

To:

Subject :

JOHN HEMPTON <[email protected]>

Monday, December 20, 2004 03:58:53 PM

MONTGOMERY, MW <[email protected]>

Fwd: Email ing: l e t t e r to osc.doc

Attachment: 714410198331 l e t t e r t . doc

- - - - - - - - - - Forwarded message - - - - - - - - -

From: John Hernpton <[email protected]>

Date: Wed, 15 Dec 2004 12:00:30 +1100

Subjec t : Emai l ing: l e t t e r to osc .doc

To: [email protected]

Your f i l e s a re a t tached and ready to send w ith th i s message.

**********************************************************************

This email i s from Plat inum Asse t Management (Plat inum),

which i s the r eg i s t e r ed business name of Platinum Asse t

Management Limited A.B.N. 25 063 565 006, A.F.S.L.

221935 as t r us t ee o f the Pla t inum Asset Management Trus t . Level 4, 55

Harr ing ton s t r ee t , Sydney NSW 2000 Aus t r a l i a . Phone 61 2 9255 7500.

The i nf ormat io n con ta in ed in or a t t ached to t h i s email i s

in tended so le ly fo r the use of th e named r ec ip i en t ( s ) and

may be c on fi de nt ia l o r p r i v i l eged . I f you are not the

intended r e c ip i en t , any use, di sc losur e or copying of th is

informat ion i s unau thor i sed and proh ib i t ed . I f you have

rece ived t h i s e-mai l in e r r o r please no t i f y :

postmaster@plat inum.com.au and de le te the emai l

from your records .

Platinum does n o t r ep re se n t, w arra nt o r guarantee t h a t

the i n t eg r i ty of t h i s communica ti on ha s been maintained

nor t h a t the communicat ion i s f ree o f e r ro r s , virus or

in te r fe rence .

Any pe rs on a l i n fo rma ti on in t h i s emai l must be handled in

accordance w ith the Pr ivacy Act 1988 (Cth). You can asked to be

removed from any e-mai l messages bye-mai l ing

postmaster@plat inum.com.au.

**********************************************************************

CR 007387



Confidential - For use by the OSC and retained experts only

JOM Hempton

84 HopetouD Avenue

VaucluseNSW 2030

Australia

61 293376349

[email protected]

David A. Brown, Q.C.Chair, Ontario Securities Commission

20 Queen StreetWest, Suite 1903-

Toronto ONM5H 358

Canada

DearDavid 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) ofparties 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 of these 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 bymajor 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 ofFairfax Financial. Spitzer will probably not know about this policy. [This

policy may have becn partially or wholly commuted in the 3rdquarter 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 possiblethough that the problem will emerge in the unpleasant

manner in which finite reinsurance raised itself in Australia (lITH) and the UK (IndependentReinsurance

Insurance Group). I think it is better to be ahead of the curve.

I have attached an explanation of how these finite policieswork 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 007388



Confidential-For use by the OSC and retained experts only

I have also attached (a t 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 th e 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 th e OSC and retained experts only

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 forsomeone 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 - ifA has a reserve event (loses 450 million) they do not show this loss - they only showthe premium as an expense. (And that expense does not even go directly through the P&L - it just

reduces current yearwritten 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 rateswap. The lower income years 1 to 14 is reported as lower "investment income"


CR 007390




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).

I f 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 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 lessdefined 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 ofputting 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 meanHanover 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 policymay have been legitimate in that it had "risk transfer" bu t it. still faked lillI 's accounts. Finite insurance that has $]0 worth ofrisk transfer butproduces $]00worth of

accounting benefit (without economic benefit) is still egregious as it stillfakesaccounts. What the insuranceindustrypromotes as "legitimate financial reinsurance" is stillfraud

There is a second characteristic of the HIHlHanoverRe 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. Aretroactive 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! I f they have happened.

thenwhy 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".

john hempton fairfax financial v sac unsealed emails & communications

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