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CORRESP
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CORRESP

June 25, 2009

BY EDGAR

Securities and Exchange Commission

Division of Corporation Finance

450 Fifth Street, N.W. Mail Stop 6010

Washington, D.C. 20549

    Attention:

    Mr. Jim B. Rosenberg, Senior Assistant Chief Accountant

Mr. Don Abbott, Senior Staff Accountant

Mr. Frank Wyman, Staff Accountant

    Re:

    Fairfax Financial Holdings Limited (“Fairfax”)

Form 40-F for the Fiscal Year Ended December 31, 2008

Filed March 6, 2009

File No. 1-31556

Dear Sirs/Mesdames:

We hereby acknowledge receipt of the comment letter dated June 11, 2009 (the “Comment Letter”) from
the staff of the Division of Corporation Finance (the “Staff”) of the Securities and Exchange
Commission (the “Commission”) concerning the above captioned Form 40-F (the “Form 40-F”). We submit
this letter in response to the Comment Letter. For ease of reference, we have reproduced the text
of the comments in bold-faced type below, followed by Fairfax’s responses. The responses to each of
the comments are set forth in numbered paragraphs that correspond to the numbers of the Staff
comments. Page number references herein refer to the page numbers of the Fairfax 2008 Annual Report
appearing as Exhibits 2 and 3 of the Form 40-F, unless otherwise noted. Terms used but not defined
herein have the meanings set forth in the Form 40-F. Fairfax (sometimes herein called “the
Company”) intends to include the revised disclosure contemplated subsequently in this letter with
respect to financial periods covered by its reports on Form 40-F and Form 6-K, as applicable,
beginning with the Company’s Interim Report filed on Form 6-K for the period ending June 30, 2009
and its Annual Report filed on Form 40-F for the fiscal year ending December 31, 2009.

The Company has accounted for all of its credit default swap contracts and total return swap
contracts under Canadian and US GAAP as freestanding derivatives carried at fair value on the
consolidated balance sheets, with changes in fair value recorded in net gains (losses) on
investments in the consolidated statements of net earnings. Accordingly, as the Company has not
applied hedge accounting as contemplated in the Canadian and US GAAP accounting pronouncements to
any of its derivative contracts, all references to hedging activities in the responses which
follow refer solely to economic hedging activities.

Form 40-F for fiscal year ended December 31, 2008

Exhibit 2

Notes to the Consolidated Financial Statements

4.      Securities Sold but not yet Purchased and Derivative Transactions, page 41

    1.

    In 2008, you “closed-out” your short equity and equity index instruments, realizing pre-tax
gains of $2.1 billion. Please revise your disclosure to explain the process and accounting
for these “close-out” transactions. Tell us how each payment made or received was recorded
and the amount of any gain or loss recognized. Link this disclosure to the related amounts
recorded in your financial statements, including derivative liabilities and any amounts of
collateral received. Discuss, as applicable, counterparty netting activity that occurred in
connection with these transactions.

    Response 1:  The short equity and equity index total return swap contracts closed out by the
Company in the fourth quarter of 2008 comprised Company-initiated, contractually-permitted
terminations of multiple industry standard total return swap contracts (as distinct from
contractual reset transactions and contract expiries). The $2,079.6 million of net gains on the
Company’s equity hedges in 2008 arose and were recorded during the year as a result of these
resets, expiries and closing transactions. Typically, each contract contained provisions
permitting the Company to terminate, or close out, the total return swap at any time during the
term of the contract, for a cash settlement amount determined by the fair value of the total
return swap. During the time period that a contract was in force (i.e. prior to expiry or
closing out) the contract required the counterparties to cash-settle the changes in the
unrealized fair value of each total return swap contract, typically on a quarterly basis
(“quarterly reset”). The Company has accounted for all of its total return swaps as derivatives
under Canadian and US GAAP. The Company’s accounting policy for derivatives and related
collateral received or delivered to counterparties is included in note 1 to the consolidated
financial statements (page 27 of the Company’s Form 40-F).

    The process and accounting for contractual reset transactions reflect the total return swap
contract provisions requiring counterparties to cash-settle, typically on a quarterly basis,
any market value movements arising since the prior reset settlement. A total return swap
requires no initial net investment and at its inception, the fair value of the derivative is
zero. Any cash paid to settle unfavorable market value

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    changes and, conversely, any cash received in settlement of favorable market value changes was
recognized by the Company as net gains (losses) on investments in the consolidated statements of
net earnings. The impact of this accounting was to reset the balance sheet derivative asset or
liability associated with each contract to zero value on each quarterly reset date. To the extent
that the quarterly reset date of each contract did not correspond to the balance sheet date, the
Company recorded additional net gains (losses) on investments in the consolidated statements of net
earnings to adjust the carrying value of the derivative asset or liability associated with each
total return swap contract to reflect its fair value at the balance sheet date.

    A closing out transaction resulting in final settlement of a short equity and equity index total
return swap (as well as a contract expiry) resulted in the Company reversing any previously
recorded unrealized market value changes since the last quarterly reset date and recognizing the
actual amount of the final cash settlement as net gains (losses) on investments in the consolidated
statements of net earnings. Derivative assets and liabilities were reported gross on a
contract-by-contract basis without regard to counterparty netting. Cash settlements, whether
occurring at a quarterly reset date, at a contract expiry or at a termination date of a total
return swap, were recorded as cash flows from investing activities arising from net sales of assets
and liabilities classified as held for trading in the consolidated statement of cash flows.

    Accounting for the non-market-value-related cash flows provided by the swaps required that on each
balance sheet date subsequent to the date a contract was entered into, accruals were established to
record any dividend liability owed by the Company to the counterparty and any interest income
receivable from the counterparty. Whereas the accruals are reflected on the balance sheet on a
gross basis (the receivable is reflected as an asset and the payable as a liability), the related
dividend expense and interest income are both reflected in interest and dividend income in the
consolidated statements of net earnings.

    All of the Company’s equity total return swaps were contracted with Citibank and Merrill Lynch as
the counterparties. Typically, when the Company entered into a total return swap contract, the
counterparty required the Company to post an upfront margin amount equal to a varying percentage of
the notional amount of the total return swap, which margin remained in place for the duration of
the total return swap. In addition, the Company was required to post collateral on a regular basis
in favor of the counterparty equal to any decline in the market value of the total return swap. All
margin and collateral amounts were in the form of cash or U.S. government debt securities. The fair
value of such collateral (including the margin amounts) was disclosed in the consolidated balance
sheets as assets pledged for short sale and derivative obligations. The decrease in assets pledged
for short sale and derivative obligations from $1,798.7 million at December 31, 2007 to $8.3
million at December 31, 2008 resulted from the closing out of total return swaps and short equity
positions as disclosed in note 4 to the consolidated financial statements (page 41 of the Company’s
Form 40-F).

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    The counterparties to the total return swap contracts were required to post collateral on a
regular basis in favor of the Company in the form of cash or U.S. government debt securities
in an amount equal to any increase in the market value of the total return swaps. All of the
Company’s total return swap sales, expirations and terminations were settled in cash and all
collateral and margin amounts supporting such settled trades were returned to the party
providing such collateral or margin (i.e. there was no netting of the termination payments
against posted collateral). The return of collateral held by the Company to counterparties
following the closing out of a significant number of total return swap contracts and the
return of collateral held by the Company to counterparties following the sales of credit
default swaps in the fourth quarter of 2008 resulted in a net decrease in collateral pledged
in favor of the Company from $899.4 million at September 30, 2008 to $285.1 million at
December 31, 2008.

    Beginning with the consolidated financial statements to be included in the Company’s Interim
Report filed on Form 6-K for the period ending June 30, 2009 and on Form 40-F for the fiscal
year ending December 31, 2009, the Company will provide additional disclosure in the notes to
those financial statements on the accounting for the settlements of short equity and equity
index total return swaps (including resets, expiries and closing out transactions). See
Appendix 2 for a pro forma example of the Company’s proposed revised disclosure based upon the
results reported for December 31, 2008 (the proposed revisions are shown in bold type).

    2.

    Since 2003, you have been purchasing credit default swaps referenced to various issuers in
the banking, mortgage and insurance sectors of the financial services industry that served as
an economic hedge against fair value declines of your financial assets. In 2008, you realized
a $1.3 billion gain from the sale of these credit default swap contracts with a notional value
of $12.6 billion. Please revise your disclosure to explain the process and accounting for
these credit default swap sales, including how the $1.3 billion gain on these sales related to
previously-recognized changes in fair value for these derivative financial instruments. Tell
us how each payment made or received was recorded and the amount of any gain or loss
recognized. Link this disclosure to the related amounts recorded in your financial statements,
including derivative liabilities and any amounts of collateral received. Discuss, as
applicable, counterparty netting activity that occurred in connection with these transactions.

    Response 2:  The credit default swap contracts sold by the Company in 2008 comprised previously
purchased, industry standard credit default swap contracts which formed part of a diversified
portfolio comprising approximately three dozen reference entities in the global financial
services industry (i.e. at inception of the contracts, the Company was a “purchaser of credit
protection” and not a “seller of credit protection”). At the inception of a purchase of credit
protection in the form of a credit default swap (or in very limited instances, at regular
intervals during the term of the credit default swap contract), the Company paid a cash premium
to the counterparty for the right to recover any decrease in value of the underlying debt
security that resulted from a credit event related to the referenced issuer for a period

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    ranging from five to seven years at inception. This cash outlay constituted the only cash outlay
by the Company and represented the maximum potential loss on the contract (as opposed to the much
higher potential loss exposure to “sellers of protection”). The Company has accounted for all of
its credit default swaps as derivatives under Canadian and US GAAP. The Company’s accounting
policy for derivatives and related collateral received or delivered to counterparties is included
in note 1 to the consolidated financial statements (page 27 of the Company’s Form 40-F).

    The initial premium paid for each credit default swap contract was recorded as a derivative asset
and was subsequently adjusted for changes in the unrealized market value of the contract at each
balance sheet date. Changes in the unrealized market value of the contract were recorded as net
gains (losses) on investments in the Company’s consolidated statements of net earnings at each
balance sheet date with a corresponding adjustment to the carrying value of the balance sheet
derivative asset. As these contracts do not qualify for hedge accounting, all changes in the
unrealized market value of these contracts were recorded as net gains (losses) on investments.

    In general, the unrealized market value of credit default swaps may be monetized in one of three
ways: (1) the credit default swap contracts are terminated prior to maturity by negotiated
agreement between the holder and the counterparty in return for the counterparty paying the market
value of the contract to the holder; (2) the credit default swap contracts are sold by the holder
to a third party at market value; or (3) the credit default swap contracts are exercised pursuant
to a credit event, requiring the counterparty to pay the holder par value on the underlying debt
security of the reference entity. During 2008, the monetization (i.e. the cash proceeds to the
Company) of credit default swap contracts by the Company was achieved through the first two types
of transactions described above. Sales of credit default swap contracts during 2008 caused the
Company to reverse any previously recorded unrealized market value changes since the inception of
the contract and to record the actual amount of the final cash settlement through net gains
(losses) on investments in the consolidated statements of net earnings.

    Substantially all of the Company’s credit default swaps were contracted with Citibank, Deutsche
Bank AG, Barclays Bank PLC or the Bank of Montreal as the counterparties. The counterparties were
required to post cash or US government debt securities as collateral in support of their total
obligations owed to the Company under the credit default swaps once such obligations exceeded a
contracted threshold amount (except for Citibank where there was no threshold). Further to the
disclosure of collateral arrangements related to the Company’s credit default swaps and total
return swaps in note 4 to the consolidated financial statements (page 41 of the Company’s Form
40-F), it was primarily as a result of the return of collateral following sales of credit default
swaps during 2008 that collateral held by the Company securing the credit default swap derivative
asset of $415.0 million (2007 -$1,119.1 million) decreased from $886.0 million at December 31, 2007
to $285.1 million at December 31, 2008. This decrease was partially offset by the impact of
increases in the fair values of the Company’s remaining credit default swap contracts,
which required the counterparties to those contracts to post additional collateral with the
Company’s third party bank custodian.

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    Derivative assets are reported gross, on a contract-by-contract basis. The sale, expiration or
early settlement of a credit default swap will not result in a cash payment owed by the
Company; rather, such an event can only result in a cash payment by a third party purchaser of
the contract, or the counterparty, to the Company. Accordingly, there is no opportunity for
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