suppl
Filed
pursuant to General Instruction II.L. of Form F-10
File No. 333-142069
PROSPECTUS
SUPPLEMENT
(To a base shelf prospectus dated April 10, 2007)
Fairfax Financial Holdings
Limited
Offer to Exchange any and all
of its
73/4%
Notes Due 2012
for Cash and New
73/4%
Senior Notes Due 2022
The
Exchange Offer
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In the exchange offer, we are offering to exchange for each
$1,000 principal amount of our outstanding
73/4%
Notes Due 2012 (the old notes):
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$1,000 principal amount of our new
73/4%
Senior Notes due 2022 (the new notes), and
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accrued and unpaid interest in cash on old notes that we acquire
in the exchange to but not including the settlement date (as
defined below), which we currently expect to be June 12,
2007.
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In addition, for each $1,000 principal amount of old notes
exchanged at or prior to midnight, New York City time, on
May 23, 2007, which date we refer to as the early
participation date, an amount of cash in U.S. dollars
equal to the early participation payment as set out in the table
below. The early participation payment will only be paid to
you if you validly tender and do not validly withdraw your old
notes at or prior to the early participation date.
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The exchange offer will expire at 9:00 a.m., New York City
time, on June 8, 2007, unless we extend the offer.
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Principal
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Old Notes
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Cash Early
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Amount
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to be
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New Note
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Participation
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CUSIP Number
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Outstanding
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Exchanged
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Principal Amount
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Payment
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303901AN2
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$
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464,193,000
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73/4%
Notes due 2012
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$
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1,000
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$
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30.00
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A holder with approximately 24% of the aggregate principal
amount of old notes has indicated its intent to exchange its old
notes in the exchange offer, subject to the terms and conditions
of the exchange offer.
You should consider the risk
factors beginning on
page S-12
of this prospectus supplement and on page 6 of the
accompanying base shelf prospectus before participating in the
exchange offer.
Dealer Managers
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Merrill Lynch &
Co.
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BMO Capital Markets
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Ferris, Baker Watts
Incorporated
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May 10, 2007
(cover page continued on next
page)
(cover page continued)
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As described more fully in this prospectus supplement, the
exchange offer is subject to certain conditions. The exchange
offer is not subject to any condition as to a minimum or maximum
principal amount of old notes that we will accept for tender.
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You may withdraw tenders of old notes at any time prior to
midnight, New York City time, on May 23, 2007.
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The exchange of the old notes for new notes and the payment of
the early participation payment, if applicable, in the exchange
offer will be a taxable event for U.S. federal income tax
purposes. If the exchange qualifies as a recapitalization, U.S.
Holders (as defined in Certain Income Tax
Considerations Certain United States Federal Income
Tax Considerations) will generally recognize gain (but not
loss) equal to the lesser of the amount of the gain realized or
the early participation payment, if applicable. See
Certain Income Tax Considerations Certain
United States Federal Income Tax Considerations.
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The exchange of the old notes for new notes and the payment of
the early participation payment in the exchange offer will be a
taxable event for Canadian federal income tax purposes. Holders
who are resident in Canada will generally recognize a capital
gain equal to the proceeds of disposition, net of reasonable
costs of disposition, less the adjusted cost base of the old
notes. See Certain Income Tax Considerations
Certain Canadian Federal Income Tax Considerations.
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The New
Notes
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The new notes will mature on June 15, 2022 and will bear
interest from and including the settlement date at an annual
rate of
73/4%.
Interest will be payable semi-annually on each June 15 and
December 15, commencing on December 15, 2007.
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The new notes will be our direct, unsecured obligations and will
rank equally and ratably with all of our other unsecured and
unsubordinated indebtedness.
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We may redeem some or all of the new notes at any time on or
after June 15, 2012.
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All other terms of the new notes will be substantially identical
to those of the old notes. The new notes will be issued under
the same indenture and have the same covenants as the old notes.
For a description of the terms of the new notes and the
indenture pursuant to which the new notes will be issued, see
Description of the New Notes.
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We are permitted to prepare this prospectus supplement and
the accompanying base shelf prospectus in accordance with
Canadian disclosure requirements, which are different from those
of the United States. We prepare our financial statements in
accordance with Canadian generally accepted accounting
principles, and are subject to Canadian auditing and auditor
independence standards. Our financial statements may not be
comparable to financial statements of U.S. companies.
Owning the securities may subject you to tax consequences
both in the United States and Canada. This prospectus supplement
and the accompanying base shelf prospectus may not describe
these tax consequences fully. You should read the tax discussion
in this prospectus supplement. You should consult your own
counsel, accountant or other advisors for legal, tax, business,
financial and related advice regarding the exchange offer.
Prospective investors should be aware that, during the period
of the exchange offer, we or our affiliates, directly or
indirectly, may bid for or make purchases of the securities to
be distributed or to be exchanged, or certain related
securities, as permitted by applicable laws or regulations of
Canada, or its provinces or territories.
Your ability to enforce civil liabilities under the U.S.
federal securities laws may be affected adversely because we are
incorporated in Canada, most of our officers and directors and
certain of the experts named in this prospectus supplement and
the accompanying base shelf prospectus are Canadian residents,
and many of our assets are located in Canada.
Neither the U.S. Securities and Exchange Commission nor any
state or provincial securities regulator has approved or
disapproved of these securities, or determined if this
prospectus supplement or accompanying base prospectus is
truthful or complete. Any representation to the contrary is a
criminal offense.
TABLE OF
CONTENTS
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Prospectus Supplement
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S-1
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S-1
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S-1
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S-2
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S-2
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S-4
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S-9
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S-12
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S-15
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S-17
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S-25
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S-32
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S-33
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S-34
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S-40
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S-41
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S-41
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S-41
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S-42
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Base Shelf Prospectus
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Enforceability of Certain Civil
Liabilities
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3
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Presentation of our Financial
Information
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3
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Exchange Rate Data
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3
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Forward-Looking Statements
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3
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The Company
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5
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Risk Factors
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6
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Use of Proceeds
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17
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Insurance Regulatory Matters
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17
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Description of Debt Securities
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25
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Description of Subordinate Voting
Shares and Preferred Shares
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37
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Description of Warrants
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41
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Description of Share Purchase
Contracts
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43
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Description of Units
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44
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Plan of Distribution
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44
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Earnings Coverage Ratios
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45
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Certain Income Tax Considerations
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45
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Documents Incorporated by Reference
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45
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Legal Matters
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47
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Experts
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Auditors, Transfer Agent and
Registrar
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List of Documents filed with the
SEC
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47
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Auditors Consent
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48
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ABOUT
THIS PROSPECTUS SUPPLEMENT
This document is in two parts. The first part is this prospectus
supplement, which describes the terms of the securities that we
are currently offering for exchange. The second part is the
accompanying base shelf prospectus, which gives more general
information, some of which may not apply to the securities that
we are currently offering. Generally, the term
prospectus refers to both parts combined.
You should read this prospectus supplement along with the
accompanying base shelf prospectus. You should rely only on the
information contained in or incorporated by reference in this
prospectus supplement and the accompanying base shelf
prospectus. We have not authorized any other person to provide
you with different information. If anyone provides you with
different or inconsistent information, you should not rely on
it. You should not assume that the information provided by this
prospectus supplement or the accompanying base shelf prospectus
is accurate as of any date other than the date on the front of
these documents. Our business, financial condition, results of
operations and prospects may have changed since those dates. The
new notes are being offered only in jurisdictions in which
offers and sales are permitted.
If the information varies between this prospectus supplement and
the accompanying base shelf prospectus, the information in this
prospectus supplement supercedes the information in the
accompanying base shelf prospectus.
ENFORCEABILITY
OF CERTAIN CIVIL LIABILITIES
We are a corporation organized under the laws of Canada and some
of our assets are located in, and most of our directors and most
of our officers are residents of, Canada. As a result, it may be
difficult for U.S. investors to effect service of process within
the United States upon our directors or officers, or to realize
in the United States upon judgments of courts of the United
States predicated upon civil liability of such directors or
officers under U.S. federal securities laws. We have been
advised by Torys LLP, our Canadian counsel, that a judgment of a
U.S. court predicated solely upon civil liability under such
laws would probably be enforceable in Canada if the U.S. court
in which the judgment was obtained had a basis for jurisdiction
in the matter that was recognized by a Canadian court for such
purposes. We have also been advised by such counsel, however,
that there is substantial doubt whether an action could be
brought in Canada in the first instance on the basis of
liability predicated solely upon such laws.
PRESENTATION
OF FINANCIAL INFORMATION
As the majority of our operations are in the United States or
conducted in U.S. dollars, we report our consolidated financial
statements in U.S. dollars in order to provide more meaningful
information to users of our financial statements. In this
prospectus, except where otherwise indicated, all dollar amounts
are expressed in U.S. dollars, references to $,
US$ and dollars are to U.S. dollars, and
references to Cdn$ are to Canadian dollars.
Our consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in
Canada, or Canadian GAAP, which differ from generally accepted
accounting principles in the United States, or U.S. GAAP. For a
discussion of the material differences between Canadian GAAP and
U.S. GAAP as they relate to our financial statements, see
note 20 to our audited consolidated financial statements
for the year ended December 31, 2006 and note 9 to our
unaudited interim consolidated financial statements for the
three months ended March 31, 2007, incorporated by
reference in this prospectus.
S-1
EXCHANGE
RATE DATA
The following table sets forth, for each period indicated, the
low and high exchange rates for Canadian dollars expressed in
U.S. dollars, the exchange rate at the end of such period and
the average of such exchange rates for each day during such
period, based on the inverse of the noon buying rate in The City
of New York for cable transfers in Canadian dollars as certified
for customs purposes by the Federal Reserve Bank of New York:
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Three Months Ended
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Year Ended December 31,
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March 31,
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2002
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2003
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2004
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2005
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2006
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2006
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2007
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Low
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0.6200
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0.6349
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0.7158
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0.7872
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0.8528
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0.8528
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0.8437
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High
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0.6619
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0.7738
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0.8493
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0.8690
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0.9100
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0.8834
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0.8673
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Period End
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0.6329
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0.7738
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0.8310
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0.8579
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0.8582
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0.8569
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0.8673
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Average
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0.6369
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0.7159
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0.7696
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0.8260
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0.8821
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0.8661
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0.8535
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On May 9, 2007, the inverse of the noon buying rate was
$0.9039 = Cdn$1.00.
FORWARD-LOOKING
STATEMENTS
Any statements made by us or on our behalf may include
forward-looking statements that reflect our current views with
respect to future events and financial performance. The words
believe, anticipate,
project, expect, plan,
intend, predict, estimate,
will likely result, will seek to or
will continue and similar expressions identify
forward-looking statements. These forward-looking statements
relate to, among other things, our plans and objectives for
future operations and underwriting profits. We caution readers
not to place undue reliance on these forward-looking statements,
which speak only as of their dates. We are under no obligation
to update or alter such forward-looking statements as a result
of new information, future events or otherwise. These
forward-looking statements are subject to uncertainties and
other factors that could cause actual results to differ
materially from such statements. These uncertainties and other
factors, which we describe in more detail elsewhere in this
prospectus supplement and the accompanying base shelf
prospectus, or in documents incorporated by reference therein,
include, but are not limited to:
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a reduction in net income if our loss reserves are insufficient;
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underwriting losses on the risks we insure that are higher or
lower than expected;
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insufficient reserves for asbestos, environmental and other
latent claims;
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the lowering or loss of our subsidiaries financial or
claims-paying ability ratings;
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an inability to maintain effective internal control over
financial reporting;
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an inability to realize our investment objectives;
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changes in economic conditions, including interest rates and the
securities markets, which could affect our investment portfolio;
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exposure to credit risk in the event our reinsurers fail to make
payments to us under our reinsurance arrangements;
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exposure to credit risk in the event our insureds fail to pay
premiums that are owed to us or fail to reimburse us for
deductibles that are paid by us on their behalf;
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exposure to credit risk in the event insurance producers or
reinsurance intermediaries fail to remit premiums owed to us;
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the occurrence of catastrophic events with a frequency or
severity exceeding our estimates;
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a decrease in the level of demand for reinsurance or insurance
products, or increased competition in the insurance industry;
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S-2
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the cycle of the insurance market, which can substantially
influence our and our competitors premium rates and
capacity to write new business;
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our inability to obtain reinsurance coverage in sufficient
amounts, at reasonable prices or on terms that adequately
protect us;
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the timing of loss payments being faster or the receipt of
reinsurance recoverables being slower than anticipated by us;
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our dependence on independent brokers over whom we exercise
little control;
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adverse fluctuations in foreign currency exchange rates;
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assessments and shared market mechanisms which can adversely
affect our U.S. insurance subsidiaries;
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our failure to realize future income tax assets;
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loss of key employees;
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the influence exercisable by our controlling shareholder;
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the passage of legislation subjecting our businesses to
additional supervision or regulation, including additional tax
regulation, in the United States, Canada or other jurisdictions
in which we operate;
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our inability to obtain required levels of capital on favorable
terms, if at all;
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our inability to access our subsidiaries cash;
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the failure of any of the loss limitation methods we employ;
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an impairment in the value of our goodwill;
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risks associated with implementing our business strategies;
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risks associated with current government investigations and
requests for information from government authorities; and
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risks associated with pending class action and civil litigation.
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See Risk Factors in this prospectus supplement and
in the accompanying base shelf prospectus for a further
discussion of these risks and uncertainties.
S-3
SUMMARY
This brief summary highlights selected information from this
prospectus supplement and the accompanying base shelf
prospectus. It may not contain all of the information that is
important to you. We urge you to carefully read and review the
entire prospectus supplement and the accompanying base shelf
prospectus and the documents incorporated by reference therein,
including our historical financial statements for the year ended
December 31, 2006 and the three months ended March 31,
2007 and the notes to those financial statements. You should
read Risk Factors beginning on
page S-12
of this prospectus supplement and page 6 of the
accompanying base shelf prospectus for more information about
important factors that you should consider before making a
decision to participate in the exchange offer.
Unless the context otherwise requires, the terms
Fairfax, Company, we,
us and our refer to Fairfax Financial
Holdings Limited and its subsidiaries; the term
OdysseyRe refers to our public reinsurance business,
Odyssey Re Holdings Corp. and its subsidiaries; the term
Crum & Forster refers to our wholly-owned
U.S. property and casualty insurance business, Crum &
Forster Holdings Corp. and its subsidiaries; the term
Northbridge refers to our public Canadian property
and casualty insurance business, Northbridge Financial
Corporation and its subsidiaries; the term Hamblin
Watsa refers to our wholly-owned investment management
subsidiary, Hamblin Watsa Investment Counsel Ltd; and the term
Cunningham Lindsey refers to our claims adjusting
subsidiary, Cunningham Lindsey Group Inc. and its subsidiaries.
All references in this prospectus supplement and the
accompanying base shelf prospectus to $,
US$ or dollars refer to United States
dollars and all references to Cdn$ refer to Canadian
dollars, unless otherwise indicated.
FAIRFAX
FINANCIAL HOLDINGS LIMITED
We are a financial services holding company primarily engaged in
property and casualty insurance and reinsurance. We are
incorporated under the Canada Business Corporations Act.
We operate through a decentralized operating structure, with
autonomous management teams applying a focused underwriting
strategy to our markets. We seek to differentiate ourselves by
combining disciplined underwriting with the investment of our
assets on a total return basis, which we believe provides
above-average returns over the long-term. We provide a full
range of property and casualty products, maintaining a
diversified portfolio of risks across classes of business,
geographic regions, and types of insureds. We have been under
current management since September 1985. Our principal executive
offices are located at 95 Wellington Street West,
Suite 800, Toronto, Ontario, M5J 2N7, Canada. Our telephone
number is
(416) 367-4941.
We conduct our business primarily through the following
segments, with each of our continuing operations maintaining a
strong position in its respective markets.
Our reinsurance business is primarily conducted through
OdysseyRe, a
U.S.-based
underwriter of a full range of property and casualty reinsurance
on a worldwide basis. We have a majority interest in OdysseyRe,
whose common stock is traded on the New York Stock Exchange
under the symbol ORH.
Our U.S. insurance business provides a full range of commercial
property and casualty insurance, principally through
Crum & Forster, a national property and casualty
insurance group which targets specialty classes of business that
emphasize strong technical underwriting expertise. We own all of
the equity of Crum & Forster.
Our Canadian insurance business is conducted principally through
Northbridge, which provides commercial and personal lines
property and casualty insurance in Canada through a wide range
of distribution channels. We have a majority interest in
Northbridge, whose common shares are traded on the Toronto Stock
Exchange under the symbol NB.
Our runoff business primarily includes our discontinued business
that did not meet our underwriting criteria or strategic
objectives and selected business previously written by our other
subsidiaries that was put under dedicated runoff management. In
addition, our runoff segment also includes third-party runoff
operations that we have acquired, which we believe will provide
us with the opportunity to earn attractive returns on our
invested capital.
Our invested assets are managed by our wholly-owned investment
management subsidiary, Hamblin Watsa. Hamblin Watsa has managed
our invested assets since September 1985 and emphasizes a
conservative investment philosophy, seeking to invest our assets
on a total return basis, which includes realized and unrealized
gains over the long-term, using a value-oriented approach.
Debt
Ratings
Our senior unsecured debt is rated BB, with a
negative outlook, by Standard & Poors,
Ba3, with a stable outlook, by Moodys and
bbb, with a stable outlook, by A.M. Best.
A rating is not a recommendation to buy, sell or hold securities
and may be revised or withdrawn at any time by the applicable
rating agency.
S-4
SUMMARY
OF THE EXCHANGE OFFER
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Purpose of the Exchange Offer |
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To refinance a portion of our outstanding debt and extend our
debt maturity profile. |
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Terms of the Exchange Offer |
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We are offering to exchange for each $1,000 principal amount of
our outstanding
73/4%
Notes Due 2012 (the old notes): |
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$1,000 principal amount of our new
73/4%
senior notes due 2022 (the new notes), and
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accrued and unpaid interest in cash on
old notes that we acquire in the exchange to but not including
the settlement date (as defined below), which we currently
expect to be June 12, 2007.
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In addition, for each $1,000 principal amount of old
notes exchanged at or prior to midnight, New York City time, on
May 23, 2007, which date we refer to as the early
participation date, an amount of cash in U.S. dollars
equal to the early participation payment as set out in the table
below.
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Principal
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Old Notes
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New Note
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Cash Early
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Amount
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to be
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Principal
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Participation
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CUSIP Number
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Outstanding
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Exchanged
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Amount
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Payment
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303901AN2
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$
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464,193,000
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73/4%
Notes due 2012
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$
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1,000
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$
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30.00
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The new notes will accrue interest from and including the
settlement date at a rate of
73/4%
per annum on the principal amount. Interest will be payable
semi-annually on each June 15 and December 15,
commencing on December 15, 2007. The new notes will mature
on June 15, 2022. |
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We may redeem some or all of the new notes at any time on or
after June 15, 2012. The redemption prices are described
under Description of the new notes
Redemption Optional redemption. |
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All other terms of the new notes will be substantially identical
to those of the old notes. The new notes will be issued under
the same indenture, and will have the same covenants, as the old
notes. For a description of the terms of the new notes and the
indenture pursuant to which the new notes will be issued, see
Description of the New Notes. |
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Outstanding old notes may be exchanged only in minimum
denominations of $1,000 and integral multiples of $1,000 in
excess thereof. New notes will be issued only in minimum
denominations of $1,000 and integral multiples of $1,000 in
excess thereof. |
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Subject to the satisfaction or waiver of specified conditions,
we will exchange the cash and new notes for all of the old notes
that are validly tendered and not withdrawn prior to the
expiration of the exchange offer. |
|
Early Participation Date |
|
Old notes must be tendered at or prior to midnight, New York
City time, on May 23, 2007 to receive the early
participation payment. |
|
Expiration Date |
|
The exchange offer will expire at 9:00 a.m., New York City
time, on June 8, 2007, unless we extend the offer. |
|
Settlement Date |
|
The early participation payment will be paid, as applicable, and
the new notes will be issued in exchange for the old notes in
the exchange offer, if consummated, on the second business day
following the expiration date of the exchange offer or as soon
as practicable thereafter, which date we refer to as the
settlement date. We currently expect the settlement
date to be June 12, 2007. |
|
Withdrawal of Tenders |
|
Tenders of old notes may be withdrawn at any time prior to
midnight, New York City time, on May 23, 2007, which date
we refer to as the withdrawal deadline. Tenders of
old notes may not be withdrawn after the withdrawal |
S-5
|
|
|
|
|
deadline unless we are required by law to permit withdrawal. See
The Exchange Offer Withdrawal of Tenders. |
|
Taxation |
|
The exchange of the old notes for new notes and the payment of
the early participation payment, if applicable, in the exchange
offer will be a taxable event for U.S. federal income tax
purposes. If the exchange qualifies as a recapitalization, U.S.
Holders (as defined in Certain Income Tax
Considerations Certain United States Federal Income
Tax Considerations) will generally recognize gain (but not
loss) equal to the lesser of the amount of the gain realized or
the early participation payment, if applicable. See
Certain Income Tax Considerations Certain
United States Federal Income Tax Considerations. |
|
|
|
The exchange of the old notes for new notes and the payment of
the early participation payment in the exchange offer will be a
taxable event for Canadian federal income tax purposes. Holders
who are resident in Canada will generally recognize a capital
gain equal to the proceeds of disposition, net of reasonable
costs of disposition, less the adjusted cost base of the old
notes. See Certain Income Tax Considerations
Certain Canadian Federal Income Tax Considerations. |
|
Conditions to the Exchange Offer |
|
The exchange offer is subject to customary conditions, which we
may assert or waive in our absolute discretion. The exchange
offer is not subject to any condition as to a minimum or maximum
principal amount of old notes that we will accept for tender.
See The Exchange Offer Conditions to the
Exchange Offer. |
|
Procedures for Tendering |
|
If you wish to accept the exchange offer and your old notes are
held by a custodial entity such as a bank, broker, dealer, trust
company or other nominee, you must instruct this custodial
entity to tender your old notes on your behalf pursuant to the
procedures of the custodial entity. If your old notes are
registered in your name, you must complete, sign and date the
accompanying letter of transmittal, or a facsimile of the letter
of transmittal, according to the instructions contained in this
prospectus supplement and the letter of transmittal. You must
also mail or otherwise deliver the letter of transmittal, or a
facsimile of the letter of transmittal, together with the old
notes and any other required documents, to the exchange agent at
the address set forth on the cover page of the letter of
transmittal. |
|
|
|
Custodial entities that are participants in The Depository
Trust Company, referred to as DTC, must tender
old notes through the Automated Tender Offer Program, known as
ATOP, maintained by DTC, by which such custodial entity and the
beneficial owner on whose behalf the custodial entity is acting
agree to be bound by the letter of transmittal. A letter of
transmittal need not accompany tenders effected through
ATOP. |
|
Consequences of Failure to Exchange |
|
For a description of the consequences of a failure to exchange
the old notes, see Risk Factors Risks Relating
to Tendering Old Notes for New Notes. |
|
Exchange Agent |
|
D.F. King & Co., Inc. The address and telephone number
of the exchange agent are on the back cover page of this
prospectus. |
|
Information Agent |
|
D.F. King & Co., Inc. The address and telephone number
of the information agent are on the back cover page of this
prospectus. |
|
Dealer Managers |
|
Merrill Lynch, Pierce, Fenner & Smith Incorporated,
BMO Capital Markets Corp. and Ferris, Baker Watts, Incorporated.
Merrill Lynch Canada Inc. and BMO Nesbitt Burns Inc. will act as
dealer managers in Canada. The addresses and telephone numbers
of the dealer managers are on the back cover page of this
prospectus. |
S-6
SUMMARY
OF THE NEW NOTES
|
|
|
Issuer |
|
Fairfax Financial Holdings Limited |
|
Maturity Date |
|
June 15, 2022 |
|
Interest |
|
73/4%.
Interest will be payable semi-annually on each June 15 and
December 15, commencing December 15, 2007. Interest
will accrue from and including the settlement date of the
exchange offer. You will be paid accrued and unpaid interest to
but not including the settlement date on old notes that we
acquire in the exchange. |
|
Ranking |
|
The new notes will be direct, unsecured obligations of Fairfax
Financial Holdings Limited. The new notes will rank equally and
ratably with all of Fairfax Financial Holdings Limiteds
existing unsecured and unsubordinated indebtedness. The new
notes will also be effectively subordinated to all obligations
of Fairfax Financial Holdings Limiteds subsidiaries. At
March 31, 2007, the aggregate indebtedness of our
subsidiaries was approximately $1.0 billion. See Risk
Factors Risks Related to the New Notes. |
|
Optional Redemption |
|
We may redeem some or all of the new notes at any time on or
after June 15, 2012. See Description of the new
notes Redemption Optional
redemption. |
|
Restrictive Covenants |
|
The indenture governing the new notes is the indenture governing
the old notes and contains covenants that, among other things,
limit our ability to: |
|
|
|
create liens on the capital stock of certain of our
subsidiaries; and
|
|
|
|
enter into specific mergers or consolidations or
convey, transfer or lease our properties and assets
substantially as an entirety.
|
|
Events of Default |
|
For a discussion of events that will permit acceleration of the
payment of the principal of, and accrued interest on, the new
notes, see Description of the New Notes Events
of Default. |
|
Form and Denomination |
|
The new notes will be issued only in the form of one or more
global notes. See Description of the New Notes
Book-Entry; Delivery and Form. Each global note will be
deposited with DTC, in each case for credit to the account of a
direct or indirect participant of DTC. Investors in the global
notes who are participants in DTC may hold their interests in
the global notes directly through DTC. Investors in the global
notes who are not participants in DTC may hold their interests
indirectly through organizations that are participants in DTC.
Interests in the global notes will be shown on, and transfers
thereof will be effected only through, records maintained by DTC
and its participants, including Euroclear and Clearstream. |
|
|
|
Except as set forth under Description of the New
Notes Certificated Securities, participants
and indirect participants will not be entitled to receive
physical delivery of definitive new notes or to have new notes
issued and registered in their names and will not be considered
the owners or holders of the new notes under the indenture. |
|
|
|
Interests in the global notes and the definitive new notes, if
any, will be issued in minimum denominations of $1,000 and
integral multiples of $1,000 in excess thereof. |
S-7
|
|
|
PORTAL |
|
The new notes will be designated eligible for trading in the
Private Offerings, Resale and Trading through Automated Linkage
market, known as PORTAL. |
|
Governing Law |
|
The new notes and their governing indenture will be governed by,
and construed in accordance with, the laws of the State of New
York. |
|
Trustees |
|
The Bank of New York, as the successor U.S. trustee, and CIBC
Mellon Trust Company, as the successor Canadian trustee. |
|
Paying Agent |
|
The Bank of New York. |
Risk
Factors
You should carefully consider all of the information set forth
in this prospectus supplement and the accompanying base shelf
prospectus and, in particular, should evaluate the specific risk
factors beginning on
page S-12
of this prospectus supplement and on page 6 of the base
shelf prospectus.
S-8
SELECTED
HISTORICAL FINANCIAL DATA
The following selected historical financial data should be read
in conjunction with the consolidated financial statements and
notes thereto for the year ended December 31, 2006 and the
three months ended March 31, 2007 and the related
managements discussion and analysis thereon that are
incorporated by reference in this prospectus.
The selected historical consolidated financial data for the
years ended and as at December 31, 2004, 2005 and 2006 and
the three months ended March 31, 2007 and 2006 are derived
from our audited consolidated financial statements and our
unaudited interim consolidated financial statements,
respectively. We prepare our consolidated financial statements
in accordance with Canadian GAAP, which differs in certain
respects from U.S. GAAP. For a discussion of the principal
differences between Canadian GAAP and U.S. GAAP as they pertain
to us, see note 20 to our audited consolidated financial
statements for the year ended December 31, 2006 and
note 9 to our unaudited interim consolidated financial
statements for the three months ended March 31, 2007,
incorporated by reference in this prospectus.
We encourage you to read the consolidated financial statements
incorporated by reference in this prospectus because they
contain our complete financial statements for the periods
presented. Our historical results of operations are not
necessarily indicative of future results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
Years Ended December 31,
|
|
|
|
2007(1)
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(dollars in millions, except per share amounts)
|
|
Canadian GAAP Statement of
Earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$
|
1,231.7
|
|
|
$
|
1,341.8
|
|
|
$
|
5,460.6
|
|
|
$
|
5,559.1
|
|
|
$
|
5,603.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
|
1,069.4
|
|
|
|
1,157.6
|
|
|
|
4,763.7
|
|
|
|
4,694.6
|
|
|
|
4,785.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
|
1,137.9
|
|
|
|
1,185.7
|
|
|
|
4,850.6
|
|
|
|
4,692.5
|
|
|
|
4,804.3
|
|
Interest and dividends
|
|
|
198.6
|
|
|
|
149.2
|
|
|
|
746.5
|
|
|
|
466.1
|
|
|
|
375.7
|
|
Net gains on investments
|
|
|
98.8
|
|
|
|
289.6
|
|
|
|
835.3
|
|
|
|
385.7
|
|
|
|
313.6
|
|
Claims fees
|
|
|
99.7
|
|
|
|
90.0
|
|
|
|
371.3
|
|
|
|
356.2
|
|
|
|
336.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,535.0
|
|
|
|
1,714.5
|
|
|
|
6,803.7
|
|
|
|
5,900.5
|
|
|
|
5,829.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses on claims
|
|
|
773.7
|
|
|
|
799.3
|
|
|
|
3,822.4
|
|
|
|
4,370.9
|
|
|
|
3,507.5
|
|
Operating expenses
|
|
|
284.8
|
|
|
|
261.0
|
|
|
|
1,111.6
|
|
|
|
1,059.7
|
|
|
|
1,030.6
|
|
Commissions, net
|
|
|
185.5
|
|
|
|
208.9
|
|
|
|
780.7
|
|
|
|
736.0
|
|
|
|
827.3
|
|
Interest expense
|
|
|
48.9
|
|
|
|
52.2
|
|
|
|
210.4
|
|
|
|
200.4
|
|
|
|
176.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
1,292.9
|
|
|
|
1,321.4
|
|
|
|
5,925.1
|
|
|
|
6,367.0
|
|
|
|
5,542.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from operations
before income taxes
|
|
|
242.1
|
|
|
|
393.1
|
|
|
|
878.6
|
|
|
|
(466.5
|
)
|
|
|
287.6
|
|
Provision for (recovery of) income
taxes
|
|
|
79.3
|
|
|
|
145.0
|
|
|
|
485.6
|
|
|
|
(66.3
|
)
|
|
|
154.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) before
non-controlling interests
|
|
|
162.8
|
|
|
|
248.1
|
|
|
|
393.0
|
|
|
|
(400.2
|
)
|
|
|
132.7
|
|
Non-controlling interests
|
|
|
(51.9
|
)
|
|
|
(49.7
|
)
|
|
|
(165.5
|
)
|
|
|
(46.4
|
)
|
|
|
(79.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
$
|
110.9
|
|
|
$
|
198.4
|
|
|
$
|
227.5
|
|
|
$
|
(446.6
|
)
|
|
$
|
53.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per diluted
share
|
|
$
|
5.88
|
|
|
$
|
10.51
|
|
|
$
|
11.92
|
|
|
$
|
(27.75
|
)
|
|
$
|
3.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian GAAP Selected
Balance Sheet Data (at period end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments and cash(2)
|
|
$
|
17,037.2
|
|
|
$
|
15,334.6
|
|
|
$
|
16,819.7
|
|
|
$
|
14,869.4
|
|
|
$
|
13,460.6
|
|
Total assets
|
|
|
26,426.4
|
|
|
|
27,526.2
|
|
|
|
26,576.5
|
|
|
|
27,542.0
|
|
|
|
26,271.2
|
|
Provision for claims
|
|
|
15,395.0
|
|
|
|
16,106.7
|
|
|
|
15,502.3
|
|
|
|
16,235.1
|
|
|
|
15,166.0
|
|
Total shareholders equity
|
|
|
3,001.4
|
|
|
|
2,818.1
|
|
|
|
2,856.9
|
|
|
|
2,644.2
|
|
|
|
2,801.7
|
|
Common shareholders equity
per share
|
|
|
158.31
|
|
|
|
147.42
|
|
|
|
150.16
|
|
|
|
137.50
|
|
|
|
162.76
|
|
S-9
|
|
|
(1) |
|
On January 1, 2007, the company adopted five new accounting
standards that were issued by the Canadian Institute of
Chartered Accountants (CICA): CICA Handbook Section
1530, Comprehensive Income; Section 3855, Financial
Instruments Recognition and Measurement; Section
3251, Equity; Section 3861, Financial Instruments
Disclosure and Presentation; and Section 3865, Hedges. The
adoption of these new accounting standards resulted in changes
in the accounting for financial instruments as well as the
recognition of certain transition adjustments that have been
recorded in opening retained earnings or opening accumulated
other comprehensive income. The company adopted these standards
prospectively and, accordingly, prior period balances have not
been restated (except for the reclassification of the currency
translation account which was adopted retroactively with prior
period restatement). The adoption of these new accounting
standards had no significant impact on earnings per share during
the first quarter of 2007. |
|
(2) |
|
Includes cash and short-term investments, marketable securities
and total portfolio investments, and is net of short sale and
derivative obligations. See note 4 to our audited
consolidated financial statements for the year ended
December 31, 2006 and note 3 to our unaudited interim
consolidated financial statements for the three months ended
March 31, 2007, incorporated by reference into this
prospectus for a discussion of the components of our portfolio
investments. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
March 31,
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(dollars in millions, except per share data)
|
|
|
Selected Financial
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance Operations (OdysseyRe)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss & loss adjustment
expense ratio(1)
|
|
|
68.2
|
%
|
|
|
65.7
|
%
|
|
|
68.7
|
%
|
|
|
90.5
|
%
|
|
|
69.6
|
%
|
Expense ratio(2)
|
|
|
28.1
|
|
|
|
29.7
|
|
|
|
27.8
|
|
|
|
27.0
|
|
|
|
27.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio(3)
|
|
|
96.3
|
%
|
|
|
95.4
|
%
|
|
|
96.5
|
%
|
|
|
117.5
|
%
|
|
|
97.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Insurance Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss & loss adjustment
expense ratio(1)
|
|
|
67.0
|
%
|
|
|
70.0
|
%
|
|
|
64.1
|
%
|
|
|
71.7
|
%
|
|
|
75.0
|
%
|
Expense ratio(2)
|
|
|
28.9
|
|
|
|
28.4
|
|
|
|
28.2
|
|
|
|
29.2
|
|
|
|
30.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio(3)
|
|
|
95.9
|
%
|
|
|
98.4
|
%
|
|
|
92.3
|
%
|
|
|
100.9
|
%
|
|
|
105.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian Insurance Operations
(Northbridge)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss & loss adjustment
expense ratio(1)
|
|
|
65.0
|
%
|
|
|
65.8
|
%
|
|
|
71.8
|
%
|
|
|
67.9
|
%
|
|
|
62.2
|
%
|
Expense ratio(2)
|
|
|
28.5
|
|
|
|
25.5
|
|
|
|
26.2
|
|
|
|
25.0
|
|
|
|
25.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio(3)
|
|
|
93.5
|
%
|
|
|
91.3
|
%
|
|
|
98.0
|
%
|
|
|
92.9
|
%
|
|
|
87.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated combined ratio
(excluding runoff)
|
|
|
95.7
|
%
|
|
|
95.1
|
%
|
|
|
95.5
|
%
|
|
|
107.7
|
%
|
|
|
96.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. GAAP Reconciliation
of Earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss), Canadian GAAP
|
|
$
|
110.9
|
|
|
$
|
198.4
|
|
|
$
|
227.5
|
|
|
$
|
(446.6
|
)
|
|
$
|
53.1
|
|
Recoveries (deferred gains) on
retroactive reinsurance
|
|
|
3.4
|
|
|
|
13.2
|
|
|
|
465.8
|
|
|
|
169.8
|
|
|
|
(15.1
|
)
|
Other than temporary declines in
investments
|
|
|
|
|
|
|
7.9
|
|
|
|
7.9
|
|
|
|
21.7
|
|
|
|
28.1
|
|
Embedded bond investment
derivatives
|
|
|
|
|
|
|
7.8
|
|
|
|
(3.1
|
)
|
|
|
4.9
|
|
|
|
12.6
|
|
Other differences
|
|
|
0.4
|
|
|
|
|
|
|
|
(6.5
|
)
|
|
|
(2.0
|
)
|
|
|
(14.5
|
)
|
Tax effect
|
|
|
(1.2
|
)
|
|
|
(8.1
|
)
|
|
|
(37.2
|
)
|
|
|
(61.2
|
)
|
|
|
12.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss), U.S. GAAP
|
|
|
113.5
|
|
|
|
219.2
|
|
|
|
654.4
|
|
|
|
(313.4
|
)
|
|
|
76.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
8.5
|
|
|
|
(150.4
|
)
|
|
|
(195.2
|
)
|
|
|
(2.1
|
)
|
|
|
147.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
122.0
|
|
|
$
|
68.8
|
|
|
$
|
459.2
|
|
|
$
|
(315.5
|
)
|
|
$
|
224.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss), per diluted
share, U.S. GAAP
|
|
$
|
6.01
|
|
|
$
|
11.61
|
|
|
$
|
34.73
|
|
|
$
|
(19.65
|
)
|
|
$
|
4.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S-10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
March 31,
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(dollars in millions, except per share data)
|
|
|
U.S. GAAP Reconciliation
of Shareholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity,
Canadian GAAP
|
|
$
|
3,001.4
|
|
|
$
|
2,818.1
|
|
|
$
|
2,856.9
|
|
|
$
|
2,644.2
|
|
|
$
|
2,801.7
|
|
Accumulated other comprehensive
income (excluding currency translation account)
|
|
|
(67.3
|
)
|
|
|
119.1
|
|
|
|
(1.7
|
)
|
|
|
275.3
|
|
|
|
283.8
|
|
Reduction of other paid in capital
|
|
|
(57.9
|
)
|
|
|
(59.4
|
)
|
|
|
(57.9
|
)
|
|
|
(59.4
|
)
|
|
|
(59.4
|
)
|
Adjustment to initially apply
FIN 48
|
|
|
(4.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative reduction in net
earnings, U.S. GAAP
|
|
|
(61.4
|
)
|
|
|
(458.8
|
)
|
|
|
(52.7
|
)
|
|
|
(479.6
|
)
|
|
|
(612.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity,
U.S. GAAP
|
|
$
|
2,810.4
|
|
|
$
|
2,419.0
|
|
|
$
|
2,744.6
|
|
|
$
|
2,380.5
|
|
|
$
|
2,413.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shareholders equity
per share, U.S. GAAP
|
|
$
|
150.81
|
|
|
$
|
128.32
|
|
|
$
|
147.09
|
|
|
$
|
126.02
|
|
|
$
|
142.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Loss and loss adjustment expense ratio is calculated as claims
losses and loss adjustment expenses expressed as a percentage of
net premiums earned. For further information on these ratios,
please read the managements discussion and analysis
incorporated by reference in this prospectus. |
|
(2) |
|
Expense ratio is calculated as commissions, premium acquisition
costs and other underwriting expenses as a percentage of net
premiums earned. For further information on these ratios, please
read the managements discussion and analysis incorporated
by reference in this prospectus. |
|
(3) |
|
The combined ratio, which may be calculated differently by
different companies, is the traditional measure of underwriting
results of property and casualty insurance companies and is
regarded as a non-GAAP measure. |
S-11
RISK
FACTORS
An investment in our securities involves risk. You should
carefully consider the following risk factors and the risk
factors beginning on page 6 of the accompanying base shelf
prospectus, as well as the other information contained in and
incorporated by reference into this prospectus, before deciding
whether to participate in the exchange offer. Any of the
following risks could materially adversely affect our business,
financial condition or results of operations and could
materially adversely affect your investment in the new notes.
Additional risks and uncertainties not currently known to us or
that we currently deem to be immaterial may also materially and
adversely affect our business, financial condition or results of
operations.
Risks
Related to the New Notes
The
new notes are effectively subordinated to the indebtedness of
our subsidiaries.
The new notes are effectively subordinated to any existing and
future indebtedness and other liabilities of our subsidiaries.
You will not have any claim as a creditor against our
subsidiaries or the assets of our subsidiaries. Therefore, in
the event of the insolvency or liquidation of a subsidiary,
following payment by such subsidiary of its liabilities, the
subsidiary may not have sufficient remaining assets to make
payments to us as a shareholder or otherwise. In the event of a
default by a subsidiary under any credit agreement or other
indebtedness, its creditors could accelerate the debt, prior to
such subsidiary distributing amounts to us that we could use to
make payments on the new notes. In addition, if we caused a
subsidiary to pay a dividend to us to make payments on the new
notes, and the dividend were determined to be improperly paid,
holders of the new notes would be required to return the payment
to the subsidiarys creditors.
As of March 31, 2007, our subsidiaries had approximately
$1.0 billion of indebtedness. Our subsidiary debt may
increase in the future. The terms of the new notes do not limit
the ability of our subsidiaries to incur additional indebtedness
that is senior to the new notes.
We are
a holding company, and we may not have access to the cash that
is needed to make payments on the new notes.
We are a holding company and we conduct substantially all of our
business through our subsidiaries and receive substantially all
of our earnings from them. None of our subsidiaries is obligated
to make funds available to us for payment on the new notes.
Accordingly, our ability to make payments on the new notes is
dependent on the distribution of earnings from our subsidiaries.
The ability of our subsidiaries to pay dividends to us in the
future will depend on their statutory surplus, on earnings and
on regulatory restrictions. The ability of our subsidiaries to
pay dividends or make distributions or returns of capital to us
is subject to restrictions set forth in the insurance laws and
regulations of Canada, the United States, Ireland and the United
Kingdom and is affected by our subsidiaries credit
agreements, indentures, rating agencies, the discretion of
insurance regulatory authorities and capital support agreements
with our subsidiaries. No assurance can be given that some or
all of our operating subsidiaries jurisdictions will not
adopt statutory provisions more restrictive than those currently
in effect. Our subsidiaries may incur additional indebtedness
that may severely restrict or prohibit the making of
distributions, the payment of dividends or the making of loans
by our subsidiaries to us. We cannot assure you that the
agreements governing the current and future indebtedness of our
subsidiaries will permit our subsidiaries to provide us with
sufficient dividends, distributions or loans to fund payments on
the new notes when due.
We may
incur additional indebtedness that may adversely affect our
ability to meet our financial obligations under the new
notes.
Our obligations under the new notes rank equally with all of our
other unsecured senior indebtedness. We may incur additional
indebtedness in the future, which could have important
consequences to holders of the new notes, including the
following:
|
|
|
|
|
we could have insufficient cash to meet our financial
obligations, including our obligations under the new notes;
|
S-12
|
|
|
|
|
our ability to obtain additional financing for working capital,
capital expenditures or general corporate purposes may be
impaired; and
|
|
|
|
a significant degree of debt could make us more vulnerable to
changes in general economic conditions and also could affect the
financial strength ratings of our insurance subsidiaries.
|
Your decision to tender your old notes should be made with the
understanding that the lengthened maturity of the new notes
exposes you to the risks of non-payment for a longer period of
time.
Holders
of the new notes may not be protected in the event we are
involved in a highly leveraged transaction, reorganization,
restructuring, merger or similar transaction in the
future.
The indenture under which the new notes will be issued may not
sufficiently protect holders of new notes if we are involved in
a highly leveraged transaction, reorganization, restructuring,
merger or similar transaction. The indenture does not contain:
|
|
|
|
|
any provision restricting any of our subsidiaries from
incurring, assuming or being liable with respect to any
indebtedness or other obligations;
|
|
|
|
any provision restricting us or our subsidiaries from incurring,
assuming or being liable with respect to any unsecured
indebtedness or other unsecured obligations;
|
|
|
|
any provision restricting us or any of our subsidiaries from
paying dividends or making other distributions on capital stock
or from purchasing or redeeming capital stock;
|
|
|
|
any restrictions on the ability of our subsidiaries to issue
securities that would be senior to the common shares of the
subsidiary held by us;
|
|
|
|
any financial ratios or specified level of net worth to which we
or our subsidiaries must adhere; or
|
|
|
|
any restrictions on our ability to contribute our assets to our
insurance subsidiaries.
|
The
price at which you may be able to resell your new notes may be
adversely affected by factors that are beyond our
control.
If you are able to resell your new notes, the price you receive
will depend on many factors that may vary over time, including:
|
|
|
|
|
the number of potential buyers;
|
|
|
|
the level of liquidity of the new notes;
|
|
|
|
our financial performance;
|
|
|
|
the amount of indebtedness we have outstanding;
|
|
|
|
the level, direction and volatility of market interest rates
generally; and
|
|
|
|
the market for similar securities.
|
As a result of these factors, you may only be able to sell your
new notes at prices below those you believe to be appropriate,
including prices below the price at which you acquired them in
the offer.
There
may be no active market for the new notes.
We cannot be sure that any active market for the new notes will
develop, or if one does develop, that it will be maintained. If
an active market for the new notes fails to develop or be
sustained, the trading price of the new notes could decline. We
do not intend to apply for listing of the new notes on any
securities exchange or any automated quotation system.
S-13
Risks
Related to Tendering Old Notes for New Notes
The
exchange offer will result in reduced liquidity of unexchanged
old notes
The trading market for unexchanged old notes could become more
limited than the existing limited trading market for the old
notes and could cease to exist altogether due to the reduction
in the amount of the old notes outstanding upon consummation of
the exchange offer. A more limited trading market might
adversely affect the liquidity, market price and price
volatility of the old notes. If a market for unexchanged old
notes exists or develops, the old notes may trade at a discount
to the price at which they would trade if the amount outstanding
were not reduced. There can, however, be no assurance that an
active market in the unexchanged old notes will exist, develop
or be maintained or as to the prices at which the unexchanged
old notes may be traded.
S-14
CAPITALIZATION
Canadian
GAAP
The table below sets forth our capitalization as of
March 31, 2007 under Canadian GAAP. The As
Adjusted column reflects our capitalization after giving
effect to: (a) the issuance on May 7, 2007 by
Crum & Forster of $330.0 million aggregate
principal amount of 7.75% notes due 2017 and the application of
the net proceeds from that offering to the repurchase of
$295.7 million of Crum & Forsters 10.375%
unsecured senior notes due 2013 (issue costs on this exchange
were $36.2 million); (b) the repurchases on
April 27, 2007 and May 4, 2007 of $27.0 million
aggregate principal amount of our 7.375% senior notes due 2018;
(c) the repurchases on April 27, 2007 and
April 30, 2007 of $9.1 million aggregate principal
amount of our 8.25% senior notes due 2015; (d) the
conversion on May 1, 2007, by the senior debenture holders,
of $22.5 million aggregate principal amount of
OdysseyRes 4.375% senior debentures due 2022; and
(e) this exchange offer (assuming that holders of 50% of
the aggregate principal amount of outstanding old notes
participate in the exchange offer and that all of such holders
tender their old notes prior to the early participation date).
The cash to be paid in the exchange offer will be paid out of
our existing cash. You should read this table in conjunction
with our audited consolidated financial statements for the year
ended December 31, 2006 and our unaudited interim
consolidated financial statements for the three months ended
March 31, 2007, incorporated by reference into this
prospectus.
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2007
|
|
|
|
Actual
|
|
|
As Adjusted
|
|
|
|
(dollars in millions)
|
|
|
Cash, short-term investments
and marketable securities
|
|
$
|
774.3
|
|
|
$
|
728.2
|
|
|
|
|
|
|
|
|
|
|
Debt(1)
|
|
|
|
|
|
|
|
|
Long-term debt holding
company borrowings
|
|
$
|
973.9
|
|
|
$
|
705.7
|
|
Long-term debt
subsidiary company borrowings
|
|
|
906.3
|
|
|
|
881.9
|
|
Purchase consideration payable
|
|
|
178.1
|
|
|
|
178.1
|
|
Trust preferred securities of
subsidiaries
|
|
|
17.9
|
|
|
|
17.9
|
|
Convertible senior debentures(2)
|
|
|
135.7
|
|
|
|
135.7
|
|
Indebtedness of Cunningham Lindsey
|
|
|
68.9
|
|
|
|
68.9
|
|
New notes
|
|
|
|
|
|
|
222.9
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
2,280.8
|
|
|
|
2,211.1
|
|
|
|
|
|
|
|
|
|
|
Non-controlling
interests(3)
|
|
|
1,357.8
|
|
|
|
1,384.6
|
|
|
|
|
|
|
|
|
|
|
Shareholders
equity
|
|
|
|
|
|
|
|
|
Common shareholders equity
|
|
|
2,071.9
|
|
|
|
2,071.9
|
|
Other paid in capital(2)
|
|
|
57.9
|
|
|
|
57.9
|
|
Treasury stock
|
|
|
(18.3
|
)
|
|
|
(18.3
|
)
|
Preferred shares
|
|
|
136.6
|
|
|
|
136.6
|
|
Retained earnings(4)
|
|
|
685.5
|
|
|
|
681.9
|
|
Accumulated other comprehensive
income
|
|
|
67.8
|
|
|
|
67.8
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
3,001.4
|
|
|
|
2,997.8
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
6,640.0
|
|
|
$
|
6,593.5
|
|
|
|
|
|
|
|
|
|
|
Total debt as a percentage of
total capitalization
|
|
|
34.3
|
%
|
|
|
33.5
|
%
|
Net debt as a percentage of net
total capitalization(5)
|
|
|
25.7
|
%
|
|
|
25.3
|
%
|
|
|
|
(1) |
|
See notes 8 and 9 of our audited consolidated financial
statements for the year ended December 31, 2006 and
note 5 to our unaudited consolidated financial statements
for the three months ended March 31, 2007, incorporated by
reference in this prospectus, for more details on our long-term
debt and trust preferred securities. |
|
(2) |
|
In accordance with Canadian GAAP, the convertible senior
debentures issued July 14, 2003 are recorded as components
of debt and equity. The present value of the interest cost and
principal amount associated with such debentures, discounted at
8% per annum, is presented as debt and the balance is shown as
paid in capital. |
|
(3) |
|
Includes minority interest in OdysseyRe, Northbridge and
Cunningham Lindsey. |
S-15
|
|
|
(4) |
|
This exchange offer is accounted for as a modification of debt
and does not have any impact on retained earnings. Retained
earnings have been adjusted to reflect the accounting impact of
debt repurchases in the post March 31, 2007 period. |
|
(5) |
|
Net debt equals total debt minus cash, short-term investments
and marketable securities. |
U.S.
GAAP
The table below sets forth our capitalization as of
March 31, 2007 under U.S. GAAP. The As Adjusted
column reflects our capitalization after giving effect to:
(a) the issuance on May 7, 2007 by Crum &
Forster of $330.0 million aggregate principal amount of
7.75% notes due 2017 and the application of the net proceeds
from that offering to the repurchase of $295.7 million of
Crum & Forsters 10.375% unsecured senior notes
due 2013 (issue costs on this exchange were $36.2 million);
(b) the repurchases on April 27, 2007 and May 4,
2007 of $27.0 million aggregate principal amount of our
7.375% senior notes due 2018; (c) the repurchases on
April 27, 2007 and April 30, 2007 of $9.1 million
aggregate principal amount of our 8.25% senior notes due 2015;
(d) the conversion on May 1, 2007, by the senior
debenture holders, of $22.5 million aggregate principal
amount of OdysseyRes 4.375% senior debentures due 2022;
and (e) this exchange offer (assuming that holders of 50%
of the aggregate principal amount of outstanding old notes
participate in the exchange offer and that all of such holders
tender their old notes prior to the early participation date).
The cash to be paid in the exchange offer will be paid out of
our existing cash. You should read this table in conjunction
with our audited consolidated financial statements for the year
ended December 31, 2006 and our unaudited interim
consolidated financial statements for the three months ended
March 31, 2007, incorporated by reference into this
prospectus. For a discussion of the material differences between
Canadian GAAP and U.S. GAAP as they relate to our financial
statements, see note 20 to our audited consolidated
financial statements for the year ended December 31, 2006
and note 9 to our unaudited interim consolidated financial
statements for the three months ended March 31, 2007,
incorporated by reference into this prospectus.
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2007
|
|
|
|
Actual
|
|
|
As Adjusted
|
|
|
|
(dollars in millions)
|
|
|
Cash, short-term investments
and marketable securities
|
|
$
|
774.3
|
|
|
$
|
728.2
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
|
|
|
|
|
|
Long-term debt holding
company borrowings
|
|
$
|
973.9
|
|
|
$
|
705.7
|
|
Long-term debt
subsidiary company borrowings
|
|
|
906.3
|
|
|
|
881.9
|
|
Purchase consideration payable
|
|
|
178.1
|
|
|
|
178.1
|
|
Trust preferred securities of
subsidiaries
|
|
|
17.9
|
|
|
|
17.9
|
|
Convertible senior debentures
|
|
|
188.4
|
|
|
|
188.4
|
|
Indebtedness of Cunningham Lindsey
|
|
|
68.9
|
|
|
|
68.9
|
|
New notes
|
|
|
|
|
|
|
222.9
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
2,333.5
|
|
|
|
2,263.8
|
|
|
|
|
|
|
|
|
|
|
Non-controlling
interests(1)
|
|
|
1,354.8
|
|
|
|
1,381.6
|
|
|
|
|
|
|
|
|
|
|
Shareholders
equity
|
|
|
|
|
|
|
|
|
Common shareholders equity
|
|
|
2,071.9
|
|
|
|
2,071.9
|
|
Treasury stock
|
|
|
(18.3
|
)
|
|
|
(18.3
|
)
|
Preferred shares
|
|
|
136.6
|
|
|
|
136.6
|
|
Retained earnings(2)
|
|
|
619.7
|
|
|
|
616.1
|
|
Accumulated other comprehensive
income
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
2,810.4
|
|
|
|
2,806.8
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
6,498.7
|
|
|
$
|
6,452.2
|
|
|
|
|
|
|
|
|
|
|
Total debt as a percentage of
total capitalization
|
|
|
35.9
|
%
|
|
|
35.1
|
%
|
Net debt as a percentage of net
total capitalization(3)
|
|
|
27.2
|
%
|
|
|
26.8
|
%
|
|
|
|
(1) |
|
Includes minority interest in OdysseyRe, Northbridge and
Cunningham Lindsey. |
|
(2) |
|
This exchange offer is accounted for as a modification of debt
and does not have any impact on retained earnings. Retained
earnings have been adjusted to reflect the accounting impact of
debt repurchases in the post March 31, 2007 period. |
|
(3) |
|
Net debt equals total debt minus cash, short-term investments
and marketable securities. |
S-16
THE
EXCHANGE OFFER
Purpose
of the Exchange Offer
To refinance a portion of our outstanding debt and extend our
debt maturity profile.
Terms of
the Exchange Offer
We are offering to exchange for each $1,000 principal amount of
our outstanding
73/4%
Notes Due 2012 (the old notes):
|
|
|
|
|
$1,000 principal amount of our new
73/4%
senior notes due 2022 (the new notes), and
|
|
|
|
accrued and unpaid interest in cash on old notes that we acquire
in the exchange to but not including the settlement date (as
defined below), which we currently expect to be June 12,
2007.
|
|
|
|
|
|
In addition, for each $1,000 principal amount of old notes
exchanged at or prior to midnight, New York City time, on
May 23, 2007, which date we refer to as the early
participation date, an amount of cash in U.S. dollars
equal to the early participation payment as set out in the table
below.
|
The early participation payment will only be paid to you if you
validly tender and do not validly withdraw your old notes at or
prior to the early participation date.
The exchange offer will expire at 9:00 a.m., New York City
time, on June 8, 2007, unless we extend the offer.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
Old Notes
|
|
|
|
|
|
Cash Early
|
|
|
|
Amount
|
|
|
to be
|
|
|
New Note
|
|
|
Participation
|
|
CUSIP Number
|
|
Outstanding
|
|
|
Exchanged
|
|
|
Principal Amount
|
|
|
Payment
|
|
|
303901AN2
|
|
$
|
464,193,000
|
|
|
|
73/4%
Notes due 2012
|
|
|
$
|
1,000
|
|
|
$
|
30.00
|
|
A holder with approximately 24% of the aggregate principal
amount of old notes has indicated its intent to exchange its old
notes in the exchange offer, subject to the terms and conditions
of the exchange offer.
The early participation payment will be paid, as applicable, and
the new notes will be issued in exchange for the old notes in
the exchange offer, if consummated, on the second business day
following the expiration date of the exchange offer or as soon
as practicable thereafter, which date we refer to as the
settlement date. We currently expect the settlement
date to be June 12, 2007.
Outstanding old notes may be exchanged only in minimum
denominations of $1,000 and integral multiples of $1,000 in
excess thereof. New notes will be issued only in minimum
denominations of $1,000 and integral multiples of $1,000 in
excess thereof.
Conditions
to the Exchange Offer
Notwithstanding any other provisions of the exchange offer, or
any extension of the exchange offer, we will not be required to
distribute the early participation payments or issue new notes,
and we may terminate the exchange offer or, at our option,
modify, extend or otherwise amend the exchange offer, if any of
the following conditions has not been satisfied or waived, prior
to or concurrently with the expiration of the exchange offer, as
extended:
(1) no action or proceeding has been instituted or
threatened in any court or before any governmental agency and no
law, rule, regulation, judgment, order or injunction has been
proposed (including a proposal which is in existence as of the
date of this document), enacted, entered or enforced by any
court or governmental agency that in our judgment would
reasonably be expected to (1) prohibit, prevent or
materially impair our ability to proceed with this exchange
offer, (2) materially adversely affect the business,
condition (financial or otherwise), income, operations, assets,
liabilities or prospects of our subsidiaries or us taken as a
whole, (3) limit the deductibility of interest on or
indebtedness on any debt connected to this exchange offer or
that would materially increase the after-tax cost to us of this
exchange offer, or (4) materially impair the contemplated
benefits to us from this exchange offer;
S-17
(2) nothing has occurred or is reasonably likely to occur
affecting the business, condition (financial or otherwise),
income, operations, assets, liabilities or prospects of the
Company and our subsidiaries, taken as a whole, that in our
judgment would reasonably be expected to (1) prohibit,
prevent or delay consummation of this exchange offer, or
(2) materially impair the contemplated benefits to us from
this exchange offer;
(3) there shall not have occurred (a) any general
suspension of or limitation on trading in securities on the New
York Stock Exchange, the Toronto Stock Exchange or in the
over-the-counter
market (whether or not mandatory), (b) any material adverse
change in the prices of the old notes, (c) a material
impairment in the general trading market for debt securities,
(d) a declaration of a banking moratorium or any suspension
of payments in respect of banks by federal or state authorities
in the United States or Canada (whether or not mandatory),
(e) a commencement or escalation of a war, armed
hostilities or other national or international crisis directly
or indirectly relating to the United States or Canada,
(f) any limitation (whether or not mandatory) by any
governmental authority on, or other event having a reasonable
likelihood of affecting, the extension of credit by banks or
other lending institutions in the United States or Canada,
(g) any material adverse change in securities or financial
markets in the United States or Canada generally, or (h) in
the case of any of the foregoing existing at the time of the
commencement of the exchange offer, a material acceleration or
worsening thereof; and
(4) neither of the trustees with respect to the indenture
for the old notes shall have objected in any respect to, or
taken any action that could, in our reasonable judgment,
adversely affect the consummation of, the exchange offer, the
exchange of new notes for old notes or the payment of the early
consent payment under the exchange offer nor shall a trustee
have taken any action that challenges the validity or
effectiveness of the procedures used by us in making the
exchange offer or the exchange of the old notes under the
exchange offer.
The foregoing conditions are for our sole benefit and may be
waived by us in whole or in part at our absolute discretion. Any
determination made by us concerning an event, development or
circumstance described or referred to above shall be conclusive
and binding.
If any of the foregoing conditions are not satisfied with
respect to the old notes, we may, at any time before or
concurrently with the expiration date for the exchange offer:
(1) terminate the exchange offer and return all tendered
old notes to the holders thereof;
(2) modify, extend or otherwise amend the exchange offer
and retain all tendered old notes until the expiration date, as
extended, of the exchange offer, subject, however, to the
withdrawal rights of holders (see Withdrawal
of Tenders and Expiration Date;
Extensions; Amendments; Termination); or
(3) waive the unsatisfied conditions with respect to the
exchange offer and accept all old notes tendered and not
previously withdrawn.
We reserve the right, in our absolute discretion, to purchase or
make offers to purchase any old notes that remain outstanding
subsequent to the expiration date of the exchange offer and, to
the extent permitted by applicable law, purchase old notes in
the open market, in privately negotiated transactions or
otherwise. The terms of any such purchases or offers could
differ from the terms of the exchange offer. Any purchase or
offer to purchase will not be made except in accordance with
applicable law.
Expiration
Date; Extensions; Amendments; Termination
For purposes of the exchange offer, the term expiration
date means 9:00 a.m., New York City time, on
June 8, 2007, subject to our right to extend such date and
time for the exchange offer in our absolute discretion, in which
case the expiration date means, with respect to any extended
exchange offer, the latest date and time to which the exchange
offer is extended.
We reserve the right, in our absolute discretion, to
(i) extend the exchange offer, (ii) terminate the
exchange offer, or (iii) amend the exchange offer, by giving
oral or written notice of such delay, extension, termination or
amendment to the exchange agent. If the exchange offer is
amended, we will extend the exchange offer for the period of
time required by law, if any.
S-18
We will promptly announce any extension, amendment or
termination of the exchange offer by issuing a press release to
the Dow Jones News Service. We will announce any extension of
the expiration date no later than 9:00 a.m., New York City
time, on the first business day after the previously scheduled
expiration date. We have no other obligation to publish,
advertise or otherwise communicate any information about any
extension, amendment or termination.
Effect of
Tender
Any tender by a holder (and our subsequent acceptance of such
tender) of old notes will constitute a binding agreement between
that holder and us upon the terms and subject to the conditions
of the exchange offer described herein and in the letter of
transmittal. The acceptance of the exchange offer by a tendering
holder of old notes will constitute the agreement by that holder
to deliver good and marketable title to the tendered old notes,
free and clear of any and all liens, restrictions, charges,
pledges, security interests, encumbrances or rights of any kind
of third parties.
Letter of
Transmittal; Representations, Warranties and Covenants of
Holders of Old Notes
Upon the submission of the letter of transmittal, or agreement
to the terms of the letter of transmittal pursuant to an
agents message, a holder, or the beneficial holder on
behalf of which the holder has tendered, will, subject to the
terms and conditions of the exchange offer, be deemed, among
other things, to:
(1) irrevocably sell, assign and transfer to or upon our
order or the order of our nominee, all right, title and interest
in and to, and any and all claims in respect of or arising or
having arisen as a result of such holders status as a
holder of, all old notes tendered thereby, such that thereafter
it shall have no contractual or other rights or claims in law or
equity against us or any fiduciary, trustee, fiscal agent or
other person connected with the old notes arising under, from or
in connection with such old notes;
(2) waive any and all rights with respect to the old notes
tendered thereby (including, without limitation, any existing or
past defaults and their consequences in respect of such old
notes); and
(3) release and discharge us and the trustees from any and
all claims such holder may have, now or in the future, arising
out of or related to the old notes tendered thereby, including,
without limitation, any claims that such holder is entitled to
receive additional principal or interest payments with respect
to the old notes tendered thereby (other than as expressly
provided in this prospectus supplement and in the letter of
transmittal) or to participate in any redemption or defeasance
of the old notes tendered thereby.
In addition, such holder of old notes will be deemed to
represent, warrant and agree that:
(1) it has received and reviewed this prospectus;
(2) it is the beneficial owner (as defined below) of, or a
duly authorized representative of one or more such beneficial
owners of, the old notes tendered thereby and it has full power
and authority to execute the letter of transmittal;
(3) the old notes being tendered thereby were owned as of
the date of tender, free and clear of any liens, charges,
claims, encumbrances, interests and restrictions of any kind,
and acknowledges that we will acquire good, indefeasible and
unencumbered title to such old notes, free and clear of all
liens, charges, claims, encumbrances, interests and restrictions
of any kind, when we accept the same;
(4) it (and any beneficial owner(s) on whose behalf it is
acting) will not sell, pledge, hypothecate or otherwise encumber
or transfer any old notes tendered thereby from the date of the
letter of transmittal and agrees that any purported sale,
pledge, hypothecation or other encumbrance or transfer will be
void and of no effect;
(5) in evaluating the exchange offer and in making its
decision whether to participate therein by submitting a letter
of transmittal and tendering its old notes, such holder (and any
beneficial owner(s) on whose behalf it is acting) has made its
own independent appraisal of the matters referred to herein and
in any related communications and is not relying on any
statement, representation or warranty, express or implied, made
to
S-19
such holder by us, the information agent, the exchange agent or
the dealer managers or any other party other than those
contained in this prospectus (as supplemented to the expiration
date);
(6) the execution and delivery of the letter of transmittal
shall constitute an undertaking to execute any further documents
and give any further assurances that may be required in
connection with any of the foregoing, in each case on and
subject to the terms and conditions set out or referred to in
this prospectus supplement;
(7) the submission of the letter of transmittal to the
exchange agent shall, subject to the terms and conditions of the
exchange offer, constitute the irrevocable appointment of the
exchange agent as the holders attorney and agent, and an
irrevocable instruction to such attorney and agent to complete
and execute all or any form(s) of transfer and other document(s)
at the discretion of such attorney and agent in relation to the
old notes tendered thereby in favor of us or such other person
or persons as we may direct and to deliver such form(s) of
transfer and other document(s) in the attorneys and
agents discretion and/or the certificate(s) and other
document(s) of title relating to such old notes
registration and to execute all such other documents and to do
all such other acts and things as may be in the opinion of such
attorney or agent necessary or expedient for the purpose of, or
in connection with, the acceptance of the exchange offer, and to
vest in us or our nominees such old notes; and
(8) that the terms and conditions of the exchange offer
shall be deemed to be incorporated in, and form a part of, the
letter of transmittal which shall be read and construed
accordingly.
The representations, warranties and agreements of a holder
tendering old notes shall be deemed to be repeated and
reconfirmed on and as of the expiration date and the settlement
date. For purposes of this prospectus, the beneficial
owner of any old notes shall mean any holder that
exercises sole investment discretion with respect to such old
notes.
Absence
of Dissenters Rights
Holders of the old notes do not have any appraisal or
dissenters rights in connection with the exchange offer
under the laws of the State of New York, which govern the
indenture and the old notes.
Acceptance
of Old Notes for Exchange; Delivery New Notes and Early
Participation Payment
On the settlement date, new notes to be issued in partial
exchange for old notes in the exchange offer, if consummated,
will be delivered in book-entry form and payment of the early
participation payment, as applicable, and accrued and unpaid
interest in U.S. dollars will be made by deposit of funds with
DTC, which will transmit such payments to tendering holders.
We will be deemed to have accepted validly tendered old notes
that have not been validly withdrawn as provided in this
prospectus when, and if, we have given oral or written notice
thereof to the exchange agent. Subject to the terms and
conditions of the exchange offer, delivery of the early
participation payment, as applicable, and new notes through the
settlement date will be made by the exchange agent on the
settlement date upon receipt of such notice. The exchange agent
will act as agent for tendering holders of the old notes for the
purpose of receiving old notes and transmitting cash and new
notes as of the settlement date. If any tendered old notes are
not accepted for any reason set forth in the terms and
conditions of the exchange offer, such unaccepted old notes will
be returned without expense to the tendering holder as promptly
as practicable after the expiration or termination of the
exchange offer.
Procedures
for Tendering
A holder of old notes who wishes to accept the exchange offer,
and whose old notes are held by a custodial entity such as a
bank, broker, dealer, trust company or other nominee, must
instruct this custodial entity to tender with respect to such
holders old notes on the holders behalf pursuant to
the procedures of the custodial entity.
To tender in the exchange offer, a holder of old notes must
either (i) complete, sign and date the letter of
transmittal (or a facsimile thereof) in accordance with its
instructions (including guaranteeing the signature(s) to the
S-20
letter of transmittal, if required), and mail or otherwise
deliver such letter of transmittal or such facsimile, together
with the certificates representing the old notes specified
therein, to the exchange agent at the address set forth in the
letter of transmittal for receipt on or prior to the expiration
date, or (ii) comply with the ATOP procedures for
book-entry transfer described below on or prior to the
expiration date.
The exchange agent and DTC have confirmed that the exchange
offer is eligible for ATOP. The letter of transmittal (or
facsimile thereof), with any required signature guarantees, or
(in the case of book-entry transfer) an agents message in
lieu of the letter of transmittal, and any other required
documents, must be transmitted to and received by the exchange
agent on or prior to the expiration date of the exchange offer
at one of its addresses set forth on the back cover page of this
prospectus. Old notes will not be deemed surrendered until the
letter of transmittal and signature guarantees, if any, or
agents message, are received by the exchange agent.
The method of delivery of old notes, the letter of transmittal,
and all other required documents to the exchange agent is at the
election and risk of the holder. Instead of delivery by mail,
holders should use an overnight or hand delivery service,
properly insured. In all cases, sufficient time should be
allowed to assure delivery to and receipt by the exchange agent
on or before the expiration date. Do not send the letter of
transmittal or any old notes to anyone other than the exchange
agent.
All new notes will be delivered only in book-entry form through
DTC. Accordingly, if you anticipate tendering other than through
DTC, you are urged to contact promptly a bank, broker or other
intermediary (that has the capability to hold securities
custodially through DTC) to arrange for receipt of any new notes
to be delivered to you pursuant to the exchange offer and to
obtain the information necessary to provide the required DTC
participant with account information for the letter of
transmittal.
Book-Entry
Delivery Procedures for Tendering Old Notes Held with
DTC
If you wish to tender old notes held on your behalf by a nominee
with DTC, you must (i) inform your nominee of your interest
in tendering your old notes pursuant to the exchange offer, and
(ii) instruct your nominee to tender all old notes you wish
to be tendered in the exchange offer into the exchange
agents account at DTC on or prior to the expiration date.
Any financial institution that is a nominee in DTC, including
Euroclear and Clearstream, must tender old notes by effecting a
book-entry transfer of the old notes to be tendered in the
exchange offer into the account of the exchange agent at DTC by
electronically transmitting its acceptance of the exchange offer
through the ATOP procedures for transfer. DTC will then verify
the acceptance, execute a book-entry delivery to the exchange
agents account at DTC, and send an agents message to
the exchange agent. An agents message is a
message, transmitted by DTC to and received by the exchange
agent and forming part of a book-entry confirmation, which
states that DTC has received an express acknowledgement from an
organization that participates in DTC (a
participant) tendering old notes that the
participant has received and agrees to be bound by the terms of
the letter of transmittal and that we may enforce the agreement
against the participant. A letter of transmittal need not
accompany tenders effected through ATOP.
Proper
Execution and Delivery of Letter of Transmittal
Signatures on a letter of transmittal or notice of withdrawal
described below (see Withdrawal of
Tenders), as the case may be, must be guaranteed by an
eligible institution unless the old notes tendered pursuant to
the letter of transmittal are tendered (i) by a holder who
has not completed the box entitled Special Return
Instructions or Special Issuance/Delivery
Instructions on the letter of transmittal or (ii) for
the account of an eligible institution. If signatures on a
letter of transmittal, or notice of withdrawal are required to
be guaranteed, such guarantee must be made by an eligible
institution.
If the letter of transmittal is signed by the holder(s) of old
notes tendered thereby, the signature(s) must correspond with
the name(s) as written on the face of the old notes without
alteration, enlargement or any change whatsoever. If any of the
old notes tendered thereby are held by two or more holders, all
such holders must sign the letter of transmittal. If any of the
old notes tendered thereby are registered in different names on
different old notes, it will be necessary to complete, sign and
submit as many separate letters of transmittal, and any
accompanying documents, as there are different registrations of
certificates.
S-21
If old notes that are not tendered for exchange pursuant to the
exchange offer are to be returned to a person other than the
holder thereof, certificates for such old notes must be endorsed
or accompanied by an appropriate instrument of transfer, signed
exactly as the name of the registered owner appears on the
certificates, with the signatures on the certificates or
instruments of transfer guaranteed by an eligible institution.
If the letter of transmittal is signed by a person other than
the holder of any old notes listed therein, such old notes must
be properly endorsed or accompanied by a properly completed bond
power, signed by such holder exactly as such holders name
appears on such old notes. If the letter of transmittal or any
old notes, bond powers or other instruments of transfer are
signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in
a fiduciary or representative capacity, such persons should so
indicate when signing, and, unless waived by us, evidence
satisfactory to us of their authority to so act must be
submitted with the letter of transmittal.
No alternative, conditional, irregular or contingent tenders
will be accepted. By executing the letter of transmittal (or
facsimile thereof), the tendering holders of old notes waive any
right to receive any notice of the acceptance for exchange of
their old notes. Tendering holders should indicate in the
applicable box in the letter of transmittal the name and address
to which payments and/or substitute certificates evidencing old
notes for amounts not tendered or not exchanged are to be issued
or sent, if different from the name and address of the person
signing the letter of transmittal. If no such instructions are
given, old notes not tendered or exchanged will be returned to
such tendering holder.
All questions as to the validity, form, eligibility (including
time of receipt), and acceptance and withdrawal of tendered old
notes will be determined by us in our absolute discretion, which
determination will be final and binding. We reserve the absolute
right to reject any and all tendered old notes determined by us
not to be in proper form or not to be properly tendered or any
tendered old notes our acceptance of which would, in the opinion
of our counsel, be unlawful. We also reserve the right to waive,
in our absolute discretion, any defects, irregularities or
conditions of tender as to particular old notes, whether or not
waived in the case of other old notes. Our interpretation of the
terms and conditions of the exchange offer (including the
instructions in the letter of transmittal) will be final and
binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of old notes must be
cured within such time as we shall determine. Although we intend
to notify the holders of old notes of defects or irregularities
with respect to tenders of their old notes, neither we, the
exchange agent, the information agent, the dealer managers nor
any other person will be under any duty to give such
notification or shall incur any liability for failure to give
any such notification. Tenders of old notes will not be deemed
to have been made until such defects or irregularities have been
cured or waived.
Mutilated,
Lost, Stolen or Destroyed Notes
Any holder whose old notes have been mutilated, lost, stolen or
destroyed will be responsible for obtaining replacement
securities or for arranging for indemnification with the trustee
of the old notes. Holders may contact the information agent for
assistance with such matters.
Withdrawal
of Tenders
Tenders of old notes may be withdrawn in writing at any time
prior to midnight, New York City time, on May 23, 2007. We
refer to this time limit as the withdrawal deadline. Tenders of
old notes may not be withdrawn after the withdrawal deadline
unless we are required by law to permit withdrawal.
For withdrawal of a tender to be effective, a written or
facsimile transmission notice of withdrawal must be received by
the exchange agent prior to the withdrawal deadline at one of
its addresses set forth on the back cover page of this
prospectus. The withdrawal notice must specify the name of the
person who tendered the old notes to be withdrawn; must contain
a description of the old notes to be withdrawn, the certificate
numbers shown on the particular certificates evidencing such old
notes and the aggregate principal amount of old notes subject to
such withdrawal; and must be signed by the holder of such old
notes in the same manner as the original signature of the letter
of transmittal (including any required signature guarantees) or
be accompanied by evidence satisfactory to us that the person
withdrawing the tender has succeeded to the beneficial ownership
of the old notes. In addition, the notice of withdrawal must
specify, in the case of old notes tendered by book-entry
transfer, the name and number of the
S-22
account at DTC to be credited with the withdrawn notes. The
signature on the notice of withdrawal must be guaranteed by an
eligible institution unless the old notes have been tendered for
the account of an eligible institution.
Withdrawal of tenders of old notes may not be rescinded, and any
old notes properly withdrawn will thereafter be deemed not
validly tendered for purposes of the exchange offer. Properly
withdrawn old notes may, however, be re-tendered by repeating
one of the procedures described in Procedures
for Tendering prior to the expiration date.
Exchange
Agent
D.F. King & Co., Inc. has been appointed the exchange
agent for the exchange offer. Letters of transmittal and all
correspondence in connection with the exchange offer should be
sent or delivered by each holder of old notes, or a beneficial
owners commercial bank, broker, dealer, trust company or
other nominee, to the exchange agent at the addresses and
telephone numbers set forth on the back cover page of this
prospectus. We will pay the exchange agent reasonable and
customary fees for its services and will reimburse it for its
reasonable
out-of-pocket
expenses in connection therewith.
Information
Agent
D.F. King & Co., Inc. has been appointed as the
information agent for the exchange offer and will receive
customary compensation for its services. Questions concerning
tender procedures and requests for additional copies of this
prospectus or the letter of transmittal should be directed to
the information agent at the address and telephone numbers set
forth on the back cover page of this prospectus. Holders of old
notes may also contact their commercial bank, broker, dealer,
trust company or other nominee for assistance concerning the
exchange offer.
Dealer
Managers
We have retained Merrill Lynch, Pierce, Fenner & Smith
Incorporated, BMO Capital Markets Corp. and Ferris, Baker Watts,
Incorporated to act as dealer managers in connection with the
exchange offer. Any solicitation to be made to a resident of
Canada will be made through Merrill Lynch Canada Inc. and BMO
Nesbitt Burns Inc., Canadian affiliates of the dealer managers.
We will pay a fee to the dealer managers for soliciting
acceptances of the exchange offer. Such fee is based on the
aggregate principal amount of the old notes exchanged in the
exchange offer and will be payable on the date the new notes are
issued in the exchange offer. We will also reimburse the dealer
managers for their reasonable
out-of-pocket
expenses. The obligations of the dealer managers to perform such
function are subject to certain conditions. We have agreed to
indemnify the dealer managers against certain liabilities,
including certain liabilities under the federal securities laws
of the United States and the provincial securities laws of
Canada. Questions regarding the terms of the exchange offer may
be directed to the dealer managers at the addresses and
telephone numbers set forth on the back cover page of this
prospectus.
At any given time, each dealer manager may trade the new notes
and other of our securities for its own accounts, or for the
accounts of its customers, and accordingly, may hold a long or
short position in the new notes or those securities. The dealer
managers are not obligated to make a market in the new notes.
The dealer managers, and their affiliates, have provided, from
time to time, and may continue to provide, commercial banking,
investment banking, financial and other services to us for which
we have paid, and intend to pay, customary fees.
Other
Fees and Expenses
We will bear the expenses of soliciting tenders of the old
notes. The principal solicitation is being made by mail;
additional solicitations may, however, be made by telegraph,
facsimile transmission, telephone or in person by the dealer
managers and the information agent, as well as by our officers
and other employees and those of our affiliates.
Tendering holders of old notes will not be required to pay any
fee or commission to the dealer managers. If, however, a
tendering holder handles the transaction through its broker,
dealer, commercial bank, trust company or other institution,
such holder may be required to pay brokerage fees or commissions.
S-23
Retail
Processing Fee
We will pay to retail brokers a retail processing fee of $2.50
per $1,000 of old notes tendered and accepted for exchange in
the exchange offer. As used herein, a retail broker
is an entity covered by a letter of transmittal which names the
broker as having processed the tender from a holder, and is:
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any broker or dealer in securities, which is a member of any
national securities exchange or of the National Association of
Securities Dealers, Inc., referred to as NASD;
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any foreign broker or dealer not eligible for membership in the
NASD which agrees to conform to the NASDs Rules of Fair
Practice in soliciting tenders outside the United States to the
same extent as though it were an NASD member; or
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any bank or trust company.
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No fee shall be payable to a retail broker:
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unless a properly completed Processing Fee Payment Request Form
has been received by the Exchange Agent no later than two
business days after the Expiration Date;
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to the extent old notes tendered due to processing by that
broker are not validly tendered or otherwise are not accepted in
the exchange offer;
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with respect to the tender of old notes by a holder as to which
a retail broker fee has already been paid;
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with respect to the tender of old notes by a beneficial holder
of more than $500,000 in principal amount of old notes;
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in respect of old notes registered in the name of that retail
broker unless the old notes are held by that retail broker as
nominee and the old notes are being tendered for the benefit of
one or more beneficial owners identified on the letter of
transmittal;
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if the retail broker is required for any reason to transfer the
amount of the fee to a tendering holder other than itself; or
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with respect to old notes tendered for that retail brokers
own account.
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Retail brokers should take care to ensure proper record-keeping
to document their entitlement to any processing fee. We and the
exchange agent reserve the right to require additional
information, as deemed warranted in our sole discretion.
No broker, dealer, bank, trust company or fiduciary shall be
deemed to be the agent of us, DTC, any of the dealer managers or
the information agent for purposes of the exchange offer.
We will also, upon request, reimburse retail brokers for
reasonable and customary handling and mailing expenses incurred
by them in forwarding materials relating to the exchange offer
to their customers.
S-24
DESCRIPTION
OF THE NEW NOTES
As used under this heading Description of the New
Notes, the terms Fairfax, Company,
we, us and our refer only to
Fairfax Financial Holdings Limited, and not its subsidiaries.
The new notes will bear interest from the date of issuance at
the rate of
73/4%
per annum, and will mature on June 15, 2022. Interest will
be payable semi-annually on June 15 and December 15,
commencing December 15, 2007 to the persons in whose names
the new notes are registered at the close of business on the
preceding June 1 and December 1, respectively. The new
notes will be governed by the same indenture, and will have the
same covenants, as the old notes.
Interest will be calculated on the basis of a
360-day year
consisting of twelve
30-day
months. Principal of and interest on the new notes will be
payable in such coin or currency of the United States of America
as at the time of payment is legal tender for the payment of
public and private debts. The new notes will not be redeemable
at the option of the holder prior to maturity and will not be
subject to any sinking fund.
The new notes will be issued under an indenture, dated as of
December 1, 1993, among us, The Bank of New York, as the
successor U.S. trustee and the CIBC Mellon Trust Company,
as the successor Canadian trustee. The U.S. trustee and the
Canadian trustee are referred to together in this prospectus
supplement as the trustees. The following summary of certain
provisions of the indenture does not purport to be complete and
is subject to, and qualified in its entirety by reference to,
all of the provisions of the indenture. Whenever reference is
made to particular sections of the indenture or terms that are
defined therein, such sections or defined terms are incorporated
herein by reference as a part of such summaries, which are
qualified in their entirety by such reference. The indenture is
subject to the provisions of the Canada Business Corporations
Act and, consequently, is exempt from certain provisions of
the Trust Indenture Act of 1939, as amended, by virtue of
Rule 4d-9
thereunder. References to accounting terms in the indenture and
in this summary, unless otherwise defined, have the meanings
assigned to them in accordance with Canadian GAAP.
The indenture provides that, in addition to the new notes
offered hereby, securities of other series may be issued under
the indenture without limitation as to aggregate principal
amount. The securities of other series may have such terms and
provisions not inconsistent with the indenture as we may
determine from time to time. The securities of any series issued
under the indenture, including the new notes, are referred to as
securities.
General
The new notes will be direct, unsecured obligations of us and
will rank equally and ratably with all of our other unsecured
and unsubordinated indebtedness. The new notes will rank among
themselves equally and ratably without preference or priority.
The indenture permits us from time to time, without notice to or
the consent of the holders of any series of securities issued
under the indenture, to create and issue further notes of a
series ranking pari passu with the new notes in all respects (or
in all respects except for the payment of interest accruing
prior to the issue date of such further notes or except for the
first payment of interest following the issue date of such
further notes) and so that such further notes shall be
consolidated and form a single series with, and shall have the
same terms as to status, redemption or otherwise as, the new
notes offered under this prospectus.
The new notes will be issued in denominations of $1,000 and
integral multiples thereof.
The provisions of the indenture do not contain any provisions
that would limit our ability to incur indebtedness or that would
afford holders of new notes protection in the event of a highly
leveraged or similar transaction involving us.
S-25
Redemption
Optional
Redemption
After June 15, 2012, we may redeem the new notes at our
option, in whole or in part, upon not less than 30 nor more than
60 days notice, at the following redemption prices
(expressed as percentages of the principal amount thereof) if
redeemed during the twelve-month period commencing on
June 15 of the year set forth below:
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Year
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Percentage
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2012
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103.875
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%
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2013
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102.583
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%
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2014
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101.292
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%
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2015 and thereafter
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100.000
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In addition, the Company must pay accrued and unpaid interest to
the date of redemption on the new notes redeemed.
Selection
and Notice of Redemption
In the event that we choose to redeem less than all of the new
notes, selection of the new notes for redemption will be made by
the Trustee in compliance with the requirements of the principal
national securities exchange, if any, on which the new notes are
listed; or, if the new notes are not so listed, on a pro rata
basis, by lot or by such method as the Trustee shall deem
fair and appropriate.
No new notes of a principal amount of $1,000 or less shall be
redeemed in part. Notice of redemption will be mailed by
first-class mail at least 30 but not more than 60 days
before the redemption date to each holder of new notes to be
redeemed at its registered address. If any new note is to be
redeemed in part only, the notice of redemption that relates to
such new note shall state the portion of the principal amount
thereof to be redeemed. A new note in principal amount equal to
the unredeemed portion thereof will be issued in the name of the
holder thereof upon cancellation of the original new note. On
and after the redemption date, interest will cease to accrue on
new notes or portions thereof called for redemption as long as
we have deposited with the paying agent funds in satisfaction of
the applicable redemption price.
Certain
Covenants
Limitation on Liens on Capital Stock of Restricted
Subsidiaries. The indenture provides that we may
not, and may not permit any subsidiary to, create, assume, incur
or suffer to exist any lien, other than a purchase money lien,
upon any capital stock, whether owned on the date of the
indenture or thereafter acquired, of any restricted subsidiary,
to secure any obligation (other than the securities) of us, any
subsidiary or any other person, without in any such case making
effective provision whereby all of the outstanding securities
shall be directly secured equally and ratably with such
obligation; provided, however, that this restriction will
not apply to (i) liens on the capital stock of any
restricted subsidiary securing obligations outstanding from time
to time under any bank credit facility, provided that the
principal amount of all such obligations secured by liens on the
capital stock of any restricted subsidiary, at the time of each
incurrence of any portion of any such obligation, does not
exceed 15% of the sum of (A) our consolidated
shareholders equity at the end of our most recently
completed fiscal quarter immediately preceding such incurrence
for which financial statements are or are required to be
available and (B) the aggregate principal amount of all
obligations which are outstanding under any bank credit facility
immediately after giving effect to such incurrence and which are
secured by liens on the capital stock of a restricted
subsidiary, and (ii) liens securing obligations from us to
any wholly-owned restricted subsidiary or from any wholly-owned
restricted subsidiary to us or any other wholly-owned restricted
subsidiary. This provision will not restrict any of our other
property or that of our subsidiaries.
The indenture defines lien as any mortgage, pledge,
hypothecation, lien, encumbrance, charge or security interest of
any kind; obligation as indebtedness for money
borrowed or indebtedness evidenced by a bond, note, debenture or
other evidence of indebtedness; purchase money lien
as (i) any mortgage, pledge, hypothecation, lien,
encumbrance, charge or security interest of any kind upon any
capital stock of any restricted subsidiary
S-26
acquired after the date of the indenture if such purchase money
lien is for the purpose of financing, and does not exceed, the
cost to us or any subsidiary of acquiring the capital stock of
such restricted subsidiary and such financing is effected
concurrently with, or within six months after, the date of such
acquisition, and (ii) any extension, renewal or refinancing
of any purchase money lien so long as the principal amount of
obligations secured thereby shall not exceed the original
principal amount of obligations so secured at the time of such
extension, renewal or refinancing; restricted
subsidiary as any subsidiary that is a licensed insurance
company, other than any licensed insurance company that our
board of directors, in good faith, determines is not,
individually or together with any other licensed insurance
company as to which a similar determination has been made,
material to the business of the Company and its subsidiaries,
considered as a whole; and subsidiary as a
corporation or business trust, a majority of the outstanding
voting stock of which is owned, directly or indirectly, by us or
one or more other subsidiaries, or by us and one or more other
subsidiaries. As of the date hereof, each of our licensed
insurance company subsidiaries is a restricted subsidiary.
Waiver of Certain Covenants. We may omit in
any particular instance to comply with any term, provision or
condition of the covenants described above if the holders of at
least a majority of all securities issued under the indenture
and then outstanding waive compliance in such instance with such
term, provision or condition.
Amalgamation, Consolidation, Merger, Conveyance, Transfer or
Lease. The indenture provides that we may not
amalgamate or consolidate with or merge into any other
corporation or convey, transfer or lease our properties and
assets substantially as an entirety to any other person, unless,
(i) the corporation formed by such consolidation or
amalgamation or into which we are merged or the person which
shall have acquired or leased such properties or assets shall be
a corporation, partnership or trust organized and validly
existing under the laws of Canada or any province thereof or the
United States, any state thereof or the District of Columbia and
shall expressly assume our obligation for the due and punctual
payment of the principal of (and premium, if any, on) and
interest on all the outstanding securities issued under the
indenture and the performance and observance of every covenant
of the indenture on our part to be performed or observed,
(ii) immediately after giving effect to such transaction,
no event of default or event that after notice or passage of
time or both would be an event of default shall have occurred
and be continuing and (iii) certain other conditions are
met.
Events of
Default
The following constitute events of default with respect to the
new notes under the indenture: (a) a default for
30 days in the payment of any interest on any new note;
(b) a default in the payment of the principal of any new
note when due; (c) a default in the performance, or breach,
of any other covenant or warranty in the indenture (other than a
covenant or warranty included in the indenture solely for the
benefit of one or more series of securities other than the new
notes) which default or breach continues for a period of
60 days after notice; (d) a default in the payment, at
the stated maturity, of any indebtedness for money borrowed by
us in excess of $10,000,000, or the acceleration of indebtedness
for money borrowed by us in excess of $10,000,000, if such
indebtedness has not been discharged, or such acceleration has
not been rescinded or annulled, within 10 days after
written notice has been given by either trustee, or the holders
of at least 25% in principal amount of the outstanding
securities, as provided in the indenture; and (e) certain
events of bankruptcy, insolvency or reorganization.
If an event of default relating to a default in payment of
principal of (or premium, if any, on) or interest on any series
of securities issued under the indenture, or to a default in the
performance, or breach, of any other covenant or warranty of us
applicable to the securities of such series but not applicable
to all outstanding securities issued under the indenture, or to
a default in the payment, at stated maturity, of, or to the
acceleration of, any indebtedness for money borrowed shall have
occurred and be continuing, either trustee or the holders of not
less than 25% in principal amount of securities of that series
then outstanding may then declare the principal of all
securities of that series to be due and payable immediately. If
an event of default relating to a default in the performance, or
breach, of any other covenant or warranty in the indenture
applicable to all securities issued thereunder and then
outstanding shall have occurred and be continuing, either
trustee or the holders of not less than 25% in principal amount
of all securities issued under the indenture and then
outstanding (treated as one class) may declare the principal
amount of all the securities then outstanding to be due and
payable immediately. If an event of default described in clause
(e) above shall occur, other than with respect to one of
our subsidiaries, the principal amount of all the securities
will automatically, and without any action by either trustee or
any holder, become immediately due and payable. In each
S-27
case, the holders of a majority in principal amount of the
outstanding securities of that series or all series, as the case
may be, may under certain circumstances rescind and annul such
declaration by written notice to us and the trustees. In the
event of a declaration of acceleration because an event of
default specified in clause (d) above has occurred and is
continuing, such declaration of acceleration shall be
automatically annulled if the indebtedness which is the subject
of such event of default has been discharged or the holders
thereof have rescinded their declaration of acceleration in
respect of such indebtedness, and written notice of such
discharge or rescission is given to either trustee by us and
countersigned by the holders of such indebtedness or their
representative, within 30 days after such declaration of
acceleration in respect of the new notes, and no other event of
default has occurred during such
30-day
period which has not been cured or waived during such period.
The holders of not less than a majority in principal amount of
the outstanding securities of the applicable series, in the case
of an event of default applicable to such series but not to all
outstanding securities, or a majority in principal amount of the
outstanding securities of all series, in the case of an event of
default applicable to all outstanding securities, may waive any
past default and its consequences, except a default in respect
of the payment of the principal of (or premium, if any, on) or
interest on any security or in respect of a covenant or
provision of the indenture which cannot be modified or amended
without the consent of the holder of each outstanding security
affected thereby.
The indenture provides that the trustees shall be under no
obligation to exercise any of the rights or powers vested in
them by the indenture at the request or direction of holders of
securities unless such holders shall have offered to the
trustees reasonable funding, security and indemnity against the
costs, expenses and liabilities which might be incurred by it in
compliance with such request or direction. Subject to such
provisions for the indemnification of the trustees, the holders
of not less than a majority in principal amount of the
securities of any series (with respect to any remedy, trust or
power relating to any default in payment of principal (or
premium, if any, on) or interest on the securities of such
series or any default in the performance or breach of any other
covenant or warranty of us applicable to the securities of such
series but not applicable to all outstanding securities issued
under the indenture) or the holders of not less than a majority
in principal amount of all securities issued under the indenture
and then outstanding (treated as one class) (with respect to any
other remedy, trust or power) shall have the right to direct the
time, method and place of conducting any proceeding for any
remedy available to the trustees, or exercising any trust or
power conferred on the trustees, with respect to such securities.
Discharge,
Defeasance and Covenant Defeasance
We may discharge certain obligations to holders of new notes
which have not already been delivered to the trustees for
cancellation and which have either become due and payable or are
by their terms due and payable within one year by irrevocably
depositing with one of the trustees trust funds in an amount
sufficient to pay at maturity the principal of and interest on
the new notes.
We may, at our option, and at any time, elect to have our
obligations discharged with respect to all outstanding notes.
This is referred to as defeasance. Such defeasance
means that we shall be deemed to have paid and discharged the
entire indebtedness represented by the outstanding notes and to
have satisfied our other obligations with respect to the new
notes under the indenture, except for (i) the rights of the
holders of outstanding new notes to receive, solely from the
trust fund described below, payments in respect of the principal
of and interest on such new notes when such payments are due,
(ii) our obligations with respect to the new notes relating
to the issuance of temporary new notes, the registration,
transfer and exchange of new notes, the replacement of
mutilated, destroyed, lost or stolen new notes, the maintenance
of an office or agency in The City of New York, the holding of
money for security payments in trust and statements as to
compliance with the indenture, (iii) our obligations in
connection with the rights, powers, trusts, duties and
immunities of the trustees and (iv) the defeasance
provisions of the indenture. In addition, we may, at our option
and at any time, elect to be released from our obligations with
respect to certain of our covenants under the indenture
(including those described under Limitation on
Liens on Capital Stock of Restricted Subsidiaries),
referred to as covenant defeasance, and any omission
to comply with such obligations shall not constitute a default
or an event of default with respect to the new notes.
In order to exercise either defeasance or covenant defeasance
with respect to the new notes, (i) we must irrevocably
deposit with one of the trustees, in trust, for the benefit of
the holders of the new notes, cash in U.S.
S-28
dollars, certain United States government obligations, or a
combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent
public accountants, to pay the principal of and interest on the
outstanding new notes on the stated maturity of such principal
or installment of interest; (ii) in the case of defeasance,
we shall have delivered to the trustees an opinion of counsel in
the United States stating that (x) we have received from,
or there has been published by, the Internal Revenue Service a
ruling or (y) since the date of this prospectus supplement,
there has been a change in the applicable United States federal
income tax law, in either case to the effect that, and based
thereon such opinion of counsel shall confirm that, the holders
of the outstanding new notes will not recognize income, gain or
loss for United States federal income tax purposes as a result
of such defeasance and will be subject to United States federal
income tax on the same amounts, in the same manner and at the
same times as would have been the case if such defeasance had
not occurred; (iii) in the case of covenant defeasance, we
shall have delivered to the trustees an opinion of counsel in
the United States to the effect that the holders of the
outstanding new notes will not recognize income, gain or loss
for United States federal income tax purposes as a result of
such covenant defeasance and will be subject to United States
federal income tax on the same amounts, in the same manner and
at the same times as would have been the case if such covenant
defeasance had not occurred; (iv) in the case of defeasance
or covenant defeasance, we shall have delivered to the trustees
an opinion of counsel in Canada to the effect that holders of
the outstanding new notes will not recognize income, gain or
loss for Canadian federal or provincial income tax or other tax
purposes as a result of such defeasance or covenant defeasance,
as applicable, and will be subject to Canadian federal or
provincial income tax and other tax on the same amounts, in the
same manner and at the same times as would have been the case if
such defeasance or covenant defeasance, as applicable, had not
occurred (which condition may not be waived by any holder of new
notes or the trustees); and (v) we must comply with certain
other conditions.
Modification
The indenture provides that we and the trustees may enter into
supplemental indentures without the consent of the holders of
the new notes or the holders of the securities of any other
series to: (a) evidence the succession of another person to
us and the obligations assumed by such successor under the
indenture; (b) add to our covenants for the benefit of the
holders of the securities of any series or surrender any right
or power conferred upon us by the indenture; (c) add events
of default for the benefit of the holders of the securities of
any series; (d) add to or change any provisions of the
indenture to facilitate the issuance of securities of any series
in bearer form; (e) change or eliminate any provisions of
the indenture, provided that any such change or elimination
shall become effective only when there is no security issued
under the indenture then outstanding of any series created prior
thereto which is entitled to the benefit of such provision;
(f) secure any series of securities; (g) establish the
form and terms of any series of securities; (h) evidence
the acceptance of appointment by a successor trustee under the
indenture and provide for or facilitate the administration of
one or more trusts under the indenture by one or more trustees;
(i) close the indenture with respect to the authentication
and delivery of additional series of securities or cure any
ambiguity, correct or supplement any inconsistency or make any
other provision with respect to matters or questions arising
under the indenture, provided that such action does not
adversely affect the interests of the holders of securities of
any series in any material respect and (j) supplement any
of the provisions of the indenture to the extent necessary to
permit or facilitate the defeasance or discharge of any series
of securities, provided such action does not adversely affect
the interests of the holders of securities of any series in any
material respect.
The indenture also contains provisions permitting us and the
trustees, with the consent of the holders of not less than a
majority in principal amount of all securities issued under the
indenture then outstanding and affected (treated as one class),
to add any provisions to, change in any manner or eliminate any
of the provisions of, the indenture or modify in any manner the
rights of the holders of securities under the indenture;
provided that we and the trustees may not, without the consent
of the holder of each outstanding security affected thereby,
among other things: (a) change the stated maturity of the
principal of or any installment of interest on any security,
(b) reduce the principal amount of or the rate of interest
on, or premium payable upon the redemption of, any such
security, (c) reduce the amount of the principal of an
original issue discount security that would be due and payable
upon a declaration of acceleration of the maturity thereof,
(d) adversely affect any right of repayment at the option
of the holder of any security, (e) change the place or
currency of payment of principal of, or any premium or interest
on, any such security, (f) impair the right to institute
suit for the enforcement of any such payment on any security
when due, (g) reduce the percentage in principal amount of
securities of any series whose consent is necessary to modify
S-29
or amend the indenture or to waive compliance with certain
provisions of the indenture or certain defaults and their
consequences or (h) modify the foregoing requirements.
Book-Entry;
Delivery and Form
The following description of the operations of DTC is provided
solely as a matter of convenience. These operations and
procedures are solely within the control of DTC and are subject
to changes by it. We take no responsibility for these operations
and procedures and urge you to contact DTC or its participants
directly to discuss these matters.
The new notes will be issued in fully registered form without
interest coupons. The new notes will be represented by one or
more global notes and will be deposited with the trustee as
custodian for DTC and registered in the name of Cede &
Co., as a nominee of DTC. Unless and until it is exchanged in
whole for new notes in definitive registered form, a global note
may not be transferred, in whole or in part, except to a nominee
of DTC or by a nominee of DTC to DTC or another nominee of DTC
or by DTC or by such nominee to a successor depositary or
nominee of such depositary.
Upon the issuance of the global notes, DTC will credit, on its
internal system, the respective principal amount of the
individual beneficial interests represented by such global notes
to the accounts of persons who have accounts with such
depositary. Ownership of beneficial interests in a global note
will be limited to persons who have accounts with DTC, referred
to as participants, or persons who hold interests
through participants. Ownership of beneficial interests in the
global notes will be shown on, and the transfer of that
ownership will be effected only through, records maintained by
DTC or its nominee (with respect to interests of participants)
and the records of participants (with respect to interests of
persons other than participants).
So long as DTC, or its nominee, is the registered owner or
holder of a global note, DTC or such nominee, as the case may
be, will be considered the sole owner or holder of the new notes
represented by such global note for all purposes under the
indenture and the new notes. Except as provided below, owners of
beneficial interests in the global notes:
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will not be entitled to have certificates registered in their
names;
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will not receive or be entitled to physical delivery of
certificates in definitive form; and
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will not be considered holders of the global notes.
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Payments of the principal of, and interest on, the global notes
will be made to DTC or its nominee, as the case may be, as the
registered owner thereof. Neither we, the trustee nor any paying
agent will have any responsibility or liability for the payment
of amounts to owners of beneficial interests in a global note or
for any aspect of the records relating to or payments made on
account of beneficial ownership interests in the global notes or
for maintaining, supervising or reviewing any records relating
to such beneficial ownership interests.
Because DTC can only act on behalf of participants, who in turn
act on behalf of indirect participants and other banks, your
ability to pledge your interest in the new notes represented by
global notes to persons or entities that do not participate in
the DTC system, or otherwise take actions in respect of such
interest, may be affected by the lack of a physical certificate.
It is DTCs current practice that DTC or its nominee, upon
receipt of any payment of principal or interest in respect of a
global note, will credit participants accounts with
payments in amounts proportionate to their respective beneficial
interests in the principal amount of such global note as shown
on the records of DTC or its nominee. Payments by participants
and indirect participants to the owners of beneficial interests
in such global note held through such participants will be
governed by standing instructions and customary practices and
will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the
ordinary way in accordance with DTC rules and will be settled in
same-day
funds. Transfers between participants in Euroclear will be
effected in the ordinary way in accordance with its rules and
operating procedures. DTC has advised us that it will take any
action permitted to be taken by a holder of new notes (including
the presentation of new notes for exchange as described below)
only at the
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direction of one or more participants to whose account the DTC
interests in the global notes is credited and only in respect of
such portion of the aggregate principal amount of new notes as
to which such participant or participants has or have given such
direction. However, if there is an event of default under the
new notes, DTC will exchange the global notes for new notes in
definitive registered form, referred to as certificated
notes, which it will distribute to its participants.
DTC has advised us as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a
member of the Federal Reserve System, and a clearing
agency registered pursuant to Section 17A of the
Exchange Act, as amended. DTC was created to hold securities for
its participants and facilitate the clearance and settlement of
securities transactions between participants through electronic
book-entry changes in accounts of its participants, thereby
eliminating the need for physical movement of certificates.
Participants include securities brokers and dealers, banks,
trust companies and clearing corporations and certain other
organizations. Certain participants or their representatives,
together with other entities, own DTC. Indirect access to the
DTC system is available to others such as banks, brokers,
dealers and trust companies that clear through, or maintain a
custodial relationship with, a participant, either directly or
indirectly, referred to as indirect participants.
Although DTC and Euroclear are expected to follow the foregoing
procedures in order to facilitate transfers of interest in the
global note among participants of DTC and Euroclear, they are
under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time.
None of us, the trustees nor any of their respective agents will
have any responsibility for the performance by DTC, Euroclear or
the participants or indirect participants of their respective
obligations under the rules and procedures governing their
respective operations, including maintaining, supervising or
reviewing the records relating to, or payments made on account
of, beneficial ownership interests in global notes.
Certificated
Securities
Subject to certain conditions, any person having a beneficial
interest in a global note may, upon request to us or the
trustee, exchange such beneficial interest for new notes in the
form of certificated notes. Upon any such issuance, the trustee
is required to register such new notes in the name of, and cause
the same to be delivered to, such person or persons (or the
nominee of any thereof).
In addition if:
(1) DTC or any depositary notifies us in writing that it is
no longer willing or able to act as a depositary and we are
unable to locate a qualified successor within 90 days; or
(2) we, at our option, notify the trustee in writing that
we elect to cause the issuance of new notes in the form of
certificated notes under the indenture, then, upon surrender by
the registered owner or holder of a global note of its global
note, replacement notes in such form will be issued to each
person that such global note holder and the depositary identify
as the beneficial owner of the related new notes.
Neither we nor the trustee will be liable for any delay by the
related global note holder or the depositary in identifying the
beneficial owners of the related new notes, and we and the
trustee may conclusively rely on, and will be protected in
relying on, instructions from such global note holder or of the
depositary for all purposes (including with respect to the
registration and delivery, and the respective principal amounts,
of the new issuance of notes).
Enforceability
of Judgments
Since some of our assets are outside the United States, any
judgment obtained in the United States against us, including any
judgment with respect to the payment of principal or interest on
the new notes may not be collectible within the United States.
We have been informed by our Canadian counsel, Torys LLP, that
the laws of the Province of Ontario and the federal laws of
Canada applicable therein permit an action to be brought in a
court of competent jurisdiction in that province on any final
and conclusive judgment in personam of any federal or state
court located in the Borough of Manhattan, The City of New York,
State of New York (a New York Court) that is not
impeachable as void or voidable under the internal laws of the
State of New York for a sum certain if: (i) the court
rendering such judgment
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had jurisdiction over the judgment debtor, as recognized by the
courts of Ontario (and submission by us in the indenture to the
jurisdiction of the New York Court will be sufficient for this
purpose); (ii) such judgment was not obtained by fraud or
in a manner contrary to natural justice or other rule of law,
whether equitable, legal or statutory, and the enforcement
thereof would not be inconsistent with public policy, as such
term is understood under the laws of Ontario and the federal
laws of Canada applicable therein or contrary to any order made
by the Attorney General of Canada under the Foreign
Extraterritorial Measures Act (Canada) or by the Competition
Tribunal under the Competition Act (Canada);
(iii) the enforcement of such judgment does not constitute,
directly or indirectly, the enforcement of foreign revenue,
expropriatory or penal laws; (iv) no new admissible
evidence relevant to the action is discovered prior to the
rendering of judgment by a Canadian court; and (v) the
action to enforce such judgment is commenced within the
applicable limitation period; except that a court in the
Province of Ontario may only give judgment in Canadian dollars.
In the opinion of such counsel, there are currently no reasons
under the law of Ontario for avoiding recognition of said
judgments of New York Courts under the indenture or on the new
notes based upon public policy. We have been advised by such
counsel that there is doubt as to the enforceability in Canada
by a court in original actions, or in actions to enforce
judgments of United States courts, of liabilities predicated
solely upon United States federal securities laws.
Consent
to Jurisdiction
The indenture provides that we will irrevocably appoint CT
Corporation System, 111 Eighth Avenue, New York, New York 10011
as our authorized agent for service of process in any legal
action or proceeding arising out of or relating to the indenture
or the new notes for actions brought under federal or state
securities laws or for actions brought by either trustee in any
New York Court, and will irrevocably submit to the jurisdiction
of the New York Courts for such purposes.
Governing
Law
The indenture and the new notes will be governed by and
construed in accordance with the laws of the State of New York.
DESCRIPTION
OF CERTAIN OTHER INDEBTEDNESS
Notes
As of March 31, 2007, we had outstanding six series of
senior notes, including the old notes. Our holding company notes
totalled approximately $1.0 billion aggregate principal
amount as of March 31, 2007 and had the following aggregate
principal amounts and maturities:
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Principal Amount
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Series
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Outstanding
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(dollars in millions)
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Senior notes at 6.875% due
April 15, 2008
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$
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62.2
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Old notes
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464.2
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Senior notes at 8.25% due
October 1, 2015
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100.0
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Senior notes at 7.375% due
April 15, 2018
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171.2
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Senior notes at 8.30% due
April 15, 2026
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91.8
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Senior notes at 7.75% due
July 15, 2037
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91.3
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$
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980.7
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Convertible
Debentures
On July 14, 2003 and July 23, 2003, we issued
$200.0 million aggregate principal amount of 5% convertible
senior debentures, due July 15, 2023. Each $1,000 principal
amount of debentures is convertible under certain circumstances
into 4.7057 subordinate voting shares ($212.51 per share) of the
Company. Prior to July 15, 2008, we may redeem the
convertible debentures, effectively forcing conversion, if the
share price exceeds $293.12 for
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20 trading days in any
30-day
trading period. We may redeem the convertible debentures at any
time commencing July 15, 2008, and the convertible
debenture holders can put their convertible debentures to us for
repayment on July 15, 2008, 2013 and 2018. We have the
option to repay the debentures in cash, subordinate voting
shares or a combination thereof.
EARNINGS
COVERAGE RATIOS
The following consolidated financial ratios are calculated for
the twelve-month periods ended March 31, 2007 and
December 31, 2006. The As Adjusted ratio for
the twelve months ended March 31, 2007 gives effect as of
April 1, 2006 to:
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the issuance on May 7, 2007 by Crum & Forster of
$330.0 million aggregate principal amount of 7.75% notes
due 2017 and the application of the net proceeds from that
offering to the repurchase of $295.7 million of
Crum & Forsters 10.375% unsecured senior notes
due 2013;
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the repurchases on April 27, 2007 and May 4, 2007 of
$27.0 million aggregate principal amount of our 7.375%
senior notes due 2018;
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the repurchases on April 27, 2007 and April 30, 2007
of $9.1 million aggregate principal amount of our 8.25%
senior notes due 2015;
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the conversion on May 1, 2007, by the senior debenture
holders, of $22.5 million aggregate principal amount of
OdysseyRes 4.375% senior debentures due 2022; and
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this exchange offer assuming that holders of 50% of the
aggregate principal amount of outstanding old notes participate
in the exchange offer and that all of such holders tender their
old notes prior to the early participation date.
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The As Adjusted ratio for the twelve months ended
December 31, 2006 gives effect as of January 1, 2006
to:
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the issuance on May 7, 2007 by Crum & Forster of
$330.0 million aggregate principal amount of 7.75% notes
due 2017 and the application of the net proceeds from that
offering to the repurchase of $295.7 million of
Crum & Forsters 10.375% unsecured senior notes
due 2013;
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the repurchases on April 27, 2007 and May 4, 2007 of
$27.0 million aggregate principal amount of our 7.375%
senior notes due 2018;
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the repurchases on April 27, 2007 and April 30, 2007
of $9.1 million aggregate principal amount of our 8.25%
senior notes due 2015;
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the conversion on May 1, 2007, by the senior debenture
holders, of $22.5 million aggregate principal amount of
OdysseyRes 4.375% senior debentures due 2022;
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the repayment on February 7, 2007, of
45.7 million aggregate principal amount of our 2.5%
secured debt due 2007;
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the repurchase, on March 15, 2007 and March 16, 2007,
of $13.0 million aggregate principal amount of our 7.375%
senior notes due 2018; and
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this exchange offer assuming that holders of 50% of the
aggregate principal amount of outstanding old notes participate
in the exchange offer and that all of such holders tender their
old notes prior to the early participation date.
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Except as described above, the following table does not reflect
the interest cost of our debt and the debt of our subsidiaries
issued during the periods as if it was issued at the beginning
of the periods.
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Twelve Months Ended
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March 31, 2007
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December 31, 2006
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Actual
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As Adjusted
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Actual
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As Adjusted
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Earnings coverage(1)
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4.5x
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4.6x
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5.2x
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5.5x
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Earnings coverage is equal to net income before interest
expense, non-controlling interests and income taxes divided by
interest expense. |
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Our interest expense amounted to approximately
$207.1 million and $210.4 million for the twelve-month
periods ended March 31, 2007 and December 31, 2006,
respectively. Our earnings before interest expense and income
taxes for the twelve-month periods ended March 31, 2007 and
December 31, 2006 were approximately $934.7 million
and $1,089.0 million, respectively, which is 4.5 times and
5.2 times our interest expense for those periods. The actual
ratios have been calculated excluding the carrying charges for
the convertible senior debentures due 2023 reflected in equity.
The earnings coverage ratios would not have changed materially
had these securities been accounted for as debt
After giving effect to the adjustments as described above as of
the beginning of the period, our interest expense would have
amounted to approximately $202.3 million and
$199.4 million for the twelve-month periods ended
March 31, 2007 and December 31, 2006, respectively.
After giving effect to the adjustments as described above as of
the beginning of the periods, our earnings before interest
expense and income taxes for the twelve-month periods ended
March 31, 2007 and December 31, 2006 would have been
approximately $935.0 million and $1,089.3 million,
respectively, which would have been 4.6 times and
5.5 times our interest expense for those periods.
CERTAIN
INCOME TAX CONSIDERATIONS
Certain
United States Federal Income Tax Considerations
The following discussion summarizes the material U.S. federal
income tax consequences of the exchange offer and the ownership
of the new notes acquired in the exchange offer that may be
relevant to you if you are a U.S. Holder (as defined below).
This summary is based upon the provisions of the Internal
Revenue Code of 1986, as amended, or the Code, Treasury
regulations promulgated under the Code, and administrative
rulings and judicial decisions as of the date hereof. These
authorities may be changed, perhaps retroactively, resulting in
U.S. federal income tax consequences different from those
discussed below.
We have not sought any ruling from the Internal Revenue Service,
or the IRS, or an opinion of counsel with respect to the
statements made and the conclusions reached in the following
summary, and there can be no assurance that the IRS will agree
with such statements and conclusions. Accordingly, we urge you
to consult with your tax advisor regarding any comments or
conclusions contained herein.
This summary assumes that the old notes and the new notes are or
will be held as capital assets within the meaning of
Section 1221 of the Code. This summary also does not
address the tax considerations arising under the laws of any
foreign, state or local jurisdiction. In addition, this summary
does not address all tax considerations that may be applicable
to your particular circumstances or to you if you are a U.S.
Holder that may be subject to special tax rules, including,
without limitation:
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U.S. Holders subject to the alternative minimum tax;
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banks, insurance companies, or other financial institutions;
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tax exempt organizations;
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dealers in securities or commodities;
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traders in securities that elect to use a mark to market method
of accounting for their securities holdings;
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U.S. Holders whose functional currency is not the
U.S. dollar;
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persons holding the old notes or the new notes as a position in
a hedging transaction, straddle, conversion
transaction or other risk reduction transaction; or
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persons deemed to sell the old notes or the new notes under the
constructive sale provisions of the Code.
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For purposes of this discussion, you are a U.S.
Holder if you are a holder of the old notes that is:
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an individual citizen or resident of the United States for U.S.
federal income tax purposes;
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a corporation, including any entity treated as a corporation for
U.S. federal income tax purposes, created or organized in the
United States or under the laws of the United States or of any
political subdivision of the United States;
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an estate the income of which is subject to U.S. federal income
taxation regardless of its source; or
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a trust, if its administration is subject to the primary
supervision of a U.S. court and one or more U.S. persons have
the authority to control all substantial decisions of the trust,
or if it has made a valid election under applicable Treasury
regulations to be treated as a U.S. person.
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If a partnership holds the old notes or the new notes, the tax
treatment of a partner in the partnership generally will depend
upon the status of the partner and the activities of the
partnership. If you are a partner of a partnership holding the
old notes or the new notes, you should consult your tax advisor
regarding the tax consequences of the exchange offer and the
ownership of new notes.
THIS SUMMARY OF CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES IS
FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. YOU ARE
URGED TO CONSULT YOUR TAX ADVISOR WITH RESPECT TO THE
APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO YOUR
PARTICULAR SITUATION AS WELL AS ANY TAX CONSEQUENCES ARISING
UNDER THE U.S. FEDERAL ESTATE OR GIFT TAX RULES OR UNDER
THE LAWS OF ANY STATE, LOCAL, FOREIGN OR OTHER TAXING
JURISDICTION OR UNDER ANY APPLICABLE TAX TREATY.
The
Exchange Offer
Under U.S. federal income tax law, the exchange of old debt
instruments for new debt instruments results in an exchange on
which taxable gain or loss is realized if the exchange
constitutes a significant modification of the terms of the old
debt instruments. The modification of a debt instrument is a
significant modification if, based on all the facts and
circumstances and taking into account all modifications of the
debt instrument, the legal rights and obligations under the debt
instrument are altered in a manner that is economically
significant. Under applicable Treasury regulations, the exchange
of the old notes for the new notes pursuant to the exchange
offer will constitute a significant modification of the terms of
the old notes. The precise tax treatment will depend on whether
the exchange qualifies as a recapitalization under the Code.
Even if the exchange qualifies as a recapitalization, you
generally will recognize any gain on the exchange to the extent
of cash received, although you will not recognize a loss. If the
exchange does not qualify as a recapitalization, you generally
will recognize gain or loss.
Recapitalization
Generally, an exchange of old debt instruments for new debt
instruments will qualify as a recapitalization only if both the
old debt instruments and the new debt instruments constitute
securities for U.S. federal income tax purposes. The term
security is not defined in the Code or the Treasury regulations
and has not been clearly defined by judicial decisions. The test
as to whether a debt instrument is a security involves an
overall evaluation of the nature of the debt instrument, the
extent of the investors proprietary interest in the issuer
compared with the similarity of the debt instrument to a right
to receive a cash payment and certain other considerations. One
of the most significant factors considered in determining
whether a particular debt instrument is a security is its
original term. In general, debt instruments with an initial term
of less than five years are not likely to (but may in certain
circumstances) be considered securities. The old notes and the
new notes may qualify as securities, and thus the exchange of
the old notes for the new notes may qualify as a
recapitalization. You should consult your tax advisor as to
whether your old notes and new notes received in the exchange
offer constitute securities and whether the exchange of old
notes for new notes qualifies as a recapitalization.
If the exchange of old notes for new notes pursuant to the
exchange offer qualifies as a recapitalization, generally you
will recognize gain (but not loss) in an amount equal to the
lesser of (i) the amount of gain realized, which is the
excess of the issue price of the new notes (discussed below) and
the early participation payment, if applicable (but excluding
accrued and unpaid interest, discussed below) over your adjusted
tax basis in the old notes exchanged or (ii) the early
participation payment, if applicable (but excluding accrued and
unpaid interest, discussed below). Subject to the discussion
under Market Discount, below, such gain
generally will be capital gain, and will be long-term capital
gain if your holding period for the old notes is more than one
year at the time of the exchange. If you are a non-corporate
U.S. Holder, including an individual, your long-term capital
gain is generally subject to a maximum tax rate of 15%. Such
gain generally will be treated as U.S. source gain for U.S.
foreign tax credit limitation purposes.
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Your holding period for the new notes received will include your
holding period for the old notes exchanged. Your initial tax
basis in the new notes will equal the adjusted tax basis of the
old notes immediately prior to the exchange, decreased by the
early participation payment, if applicable (but excluding
accrued and unpaid interest, discussed below) and increased by
the amount of gain, if any, that you recognize in respect of the
exchange.
Non-Recapitalization
If the exchange of old notes for new notes pursuant to the
exchange offer is not treated as a recapitalization, you will
recognize gain or loss equal to the difference, if any, between
the amount realized on the exchange and your adjusted tax basis
in the old notes. The amount realized will be the early
participation payment, if applicable (but excluding accrued and
unpaid interest, discussed below) and the issue price of the new
notes (discussed below). Subject to the discussion under
Market Discount, below, any gain or loss
will be capital gain or loss, and will be long-term capital gain
or loss if your holding period for the old notes is more than
one year at the time of the exchange. If you are a non-corporate
U.S. Holder, including an individual, your long-term capital
gain is generally subject to a maximum tax rate of 15%. The
deductibility of capital losses is subject to limitations. Any
gain or loss recognized on the exchange generally will be
treated as U.S. source gain or loss for U.S. foreign tax credit
limitation purposes.
Your holding period for the new notes will not include your
holding period for the old notes exchanged and will begin on the
day after the exchange. Your initial tax basis in the new notes
will be the issue price of the new notes on the date of the
exchange.
Accrued
and Unpaid Interest
Any amounts that you receive that are attributable to accrued
and unpaid interest on the old notes will be treated as ordinary
income for U.S. federal income tax purposes to the extent not
previously included in income. Such interest will be treated as
foreign source income for U.S. foreign tax credit limitation
purposes, and as passive category income.
Market
Discount
If you hold old notes acquired at a market discount, you
generally will be required to treat a portion of any gain that
you recognize on the exchange of such old notes for new notes
and cash as ordinary income to the extent attributable to any
accrued market discount that has not previously been included in
income. If the exchange of old notes for new notes qualifies as
a recapitalization, any remaining market discount will carry
over to the new notes. Such market discount should be treated as
foreign source income for U.S. foreign tax credit limitation
purposes, and as passive category income.
Issue
Price of the New Notes
Debt instruments are considered to be publicly traded if they
are traded on an established market during the
60-day
period ending 30 days after the date they are issued, which
in the case of an exchange is the date of the exchange. A debt
instrument generally is considered to be traded on an
established market if it is listed on a major securities
exchange, appears on a quotation medium of general circulation
or otherwise is readily quotable by dealers, brokers or traders
(and certain safe harbors do not apply). If the new notes are
publicly traded, the issue price of the new notes will equal the
fair market value of the new notes at the time of the exchange.
If the new notes are not publicly traded but the old notes are
publicly traded, the issue price of the new notes generally will
equal the fair market value of the old notes at the time of the
exchange. If neither the old notes nor the new notes are
publicly traded, the issue price of the new notes will equal the
stated principal amount of the new notes.
We expect that the new notes will be considered to be publicly
traded under the rules described above. These rules are complex,
however, and you should consult your tax advisor regarding the
determination of the issue price of the new notes.
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Ownership
of the New Notes
For purposes of this discussion, it is assumed that the new
notes will not be issued with more than de minimis
original issue discount.
Stated Interest. Stated interest on the new
notes generally will be taxable to you as ordinary income at the
time that it is paid or accrued in accordance with your method
of accounting for U.S. federal income tax purposes. Such
interest will be treated as foreign source income for U.S.
foreign tax credit limitation purposes, and as passive category
income.
Bond Premium. If immediately after the
exchange you have an adjusted tax basis in the new notes in
excess of the stated principal amount of the new notes, the new
notes will be treated as issued with bond premium. Generally,
you may elect to amortize such bond premium as an offset to
stated interest income in respect of the new note, using a
constant yield method prescribed under applicable Treasury
regulations, over the remaining term of the note. If you elect
to amortize bond premium you must reduce your basis in the new
note by the amount of the premium used to offset stated
interest. Your election to amortize bond premium as an offset to
stated interest accordingly should offset your foreign source
interest income. You should consult your tax advisor regarding
the availability of an election to amortize bond premium for
U.S. federal income tax purposes.
Sale, Exchange, or Other Disposition of the New
Notes. Upon the sale, exchange, or other
disposition of a new note, you will recognize gain or loss equal
to the difference, if any, between the amount realized on the
sale, exchange or other disposition (excluding accrued but
unpaid stated interest, which generally will be taxable as
interest to the extent not previously included in income) and
your adjusted tax basis in the new notes. Your adjusted tax
basis in a new note will equal your initial tax basis in the new
notes, decreased (but not below zero) by all payments received
in respect of the new note other than payments of stated
interest and decreased by any amortized bond premium. Subject to
the discussion under Market Discount,
below, such gain or loss will be capital gain or loss, and will
be long-term capital gain or loss if your holding period for the
old notes is more than one year at the time of the exchange. If
you are a non-corporate U.S. Holder, including an individual,
your long-term capital gain is generally subject to a maximum
tax rate of 15%. The deductibility of capital losses is subject
to limitations. Any gain or loss recognized on the sale,
exchange, or other disposition generally will be treated as U.S.
source gain or loss for U.S. foreign tax credit limitation
purposes.
Market Discount. If your initial basis in a
new note is less than its principal amount, the amount of such
difference is treated as market discount for
U.S. federal income tax purposes, unless such difference is
no more than a de minimis amount. Additionally, as
described above in The Exchange Offer Market
Discount, if the exchange of old notes for new notes
qualifies as a recapitalization, any market discount that a
U.S. Holder had in the old notes that has not previously
been included in income or was not included in income to the
extent of the cash received in the exchange will carry over to
the new notes. Principal payments and gain received on the
disposition of a new note will be treated as ordinary income to
the extent accrued market discount, if any, has not been
previously included in income. Alternatively, a U.S. Holder
may elect to include market discount in income currently.
In general, the amount of market discount that has accrued is
determined on a ratable basis. A U.S. Holder may, however,
elect to determine the amount of accrued market discount on a
constant yield-to-maturity basis. This election is made on a
note-by-note basis and is irrevocable.
Information Reporting and Backup
Withholding. If you are a non-corporate U.S.
Holder, information reporting requirements on IRS Form 1099
generally will apply to payments of principal and interest on
your new notes within the United States and the payment of
proceeds from the sale of your new notes at a U.S. office of a
broker. Additionally, backup withholding, currently at a rate of
28%, may apply to such payments if you are a non-corporate U.S.
Holder that fails to provide an accurate taxpayer identification
number, is notified by the IRS that you have failed to report
all interest and dividends required to be shown on your U.S.
federal income tax returns, or fails to comply with certain
certification requirements.
Backup withholding is not an additional tax. Any amounts
withheld under the backup withholding rules will be allowed as a
refund or credit against your U.S. federal income tax provided
the required information is furnished to the IRS in a timely
manner.
S-37
Certain
Canadian Federal Income Tax Considerations
In the opinion of Torys LLP, the following summary accurately
describes the principal Canadian federal income tax
considerations under the Income Tax Act (Canada) (the
Canadian Tax Act) generally applicable to a holder
of old notes who disposes of old notes in exchange for new notes
pursuant to the exchange offer (old and new notes collectively
referred to as notes) and who, at all relevant times
for purposes of the Canadian Tax Act, holds the notes as capital
property, deals with the Company at arms length and is not
affiliated with the Company. A note will generally be considered
to be capital property of a holder provided that holder does not
use or hold and is not deemed to use or hold the notes in
carrying on business or an adventure in the nature of trade
(a Holder).
The summary is based on the current provisions of the Canadian
Tax Act, the regulations thereunder and an understanding of the
current administrative practices and policies published by the
Canada Revenue Agency and takes into account all specific
proposals to amend the Canadian Tax Act and regulations publicly
announced by the Minister of Finance (Canada) prior to the date
hereof. This summary does not take into account or anticipate
any other changes in law or administrative practices, whether by
judicial, governmental or legislative action or decisions, nor
does it take into account provincial, territorial or foreign
income tax legislation or considerations.
This summary is of a general nature only and is not intended
to be, and should not be construed to be, legal or tax advice to
any particular Holder. Holders should consult their own tax
advisors as to the tax consequences in their particular
circumstances.
Residents
of Canada
The following portion of the summary applies only to a Holder
who, at all relevant times, is resident or deemed to be resident
in Canada for purposes of the Canadian Tax Act (a Resident
Holder).
Foreign
Currency
For purposes of the Canadian Tax Act, all amounts relevant in
computing a Resident Holders liability under the Canadian
Tax Act must be computed in Canadian currency. Any amount
denominated in U.S. dollars (including adjusted cost base,
proceeds of disposition and payments of interest) must be
converted into Canadian dollars based on the Canada/U.S.
currency exchange rate prevailing at the time the particular
amount arises.
Disposition
of Old Notes Pursuant to Exchange Offer
A Resident Holder who disposes of old notes pursuant to the
exchange offer will be considered to have disposed of such old
notes for proceeds of disposition equal to the consideration
received on the disposition. The Resident Holder will realize a
capital gain (capital loss) on the disposition of the old notes
equal to the amount by which the Resident Holders proceeds
of disposition, net of any reasonable costs of disposition, are
greater than (less than) the adjusted cost base to the Resident
Holder of the old notes sold pursuant to the exchange offer.
Upon the disposition, any interest paid to a Resident Holder,
interest which has accrued on the old notes to the date of
disposition and which would otherwise be payable after that date
or amounts deemed under the Canadian Tax Act to be interest,
will be excluded from the Resident Holders proceeds of
disposition of the old notes and must be included in computing
the income of the Resident Holder except to the extent it was
included in the income of the Resident Holder for a previous
year. The early participation payment payable for the old notes
pursuant to the exchange offer will be deemed to be interest
only if it can reasonably be considered to relate to amounts
that would have been paid on the old notes as interest had the
old notes not been exchanged by the Company. The Company is of
the view that the early participation payment does not relate to
such amounts.
Under the Canadian Tax Act, one-half of any capital gain
(capital loss) realized by a Resident Holder is a taxable
capital gain (an allowable capital loss). Taxable capital gains
must be included in computing the income of a Resident Holder.
Allowable capital losses may be deducted only against taxable
capital gains subject to and in accordance with the provisions
of the Canadian Tax Act. In certain circumstances, such as where
a Resident Holder acquires other notes (the Substituted
Notes) during the period that begins 30 days before
and ends 30 days after the disposition and at the end of
that period owns such Substituted Notes, the Resident
Holders loss from the
S-38
disposition is deemed to be nil. In certain circumstances, such
a loss may be recognized at the time the Substituted Notes are
disposed of, or may be added to the adjusted cost base of the
Substituted Notes.
Capital gains realized by an individual or by most trusts may
give rise to alternative minimum tax under the Canadian Tax Act.
Canadian-controlled private corporations may be subject to an
additional refundable tax of
62/3%
on taxable capital gains realized on the disposition of notes.
Taxation
of New Notes
Interest. A Resident Holder that is a
corporation, partnership, unit trust or trust of which a
corporation or partnership is a beneficiary will be required to
include in computing its income for a taxation year any interest
on a new note that accrues or is deemed to accrue to the
Resident Holder to the end of that taxation year or becomes
receivable or is received by the Resident Holder before the end
of that taxation year, except to the extent that such interest
was otherwise included in the Resident Holders income for
a preceding taxation year.
Any other Resident Holder, including an individual or a trust of
which neither a corporation or a partnership is a beneficiary,
will be required to include in income for a taxation year any
interest on a new note received or receivable by such Resident
Holder in that year (depending upon the method regularly
followed by the Resident Holder in computing income), except to
the extent that the interest was included in the Resident
Holders income for a preceding taxation year.
Any premium paid by the Company to a Resident Holder because of
the redemption by it of a new note before maturity thereof will
generally be deemed to be interest received at that time by the
Resident Holder to the extent that such premium can reasonably
be considered to relate to, and does not exceed the value at the
time of the redemption of, the interest that would have been
paid or payable by the Company on the new note for a taxation
year ending after the redemption.
Disposition. The tax consequences of a
disposition of the new notes will generally be similar to those
described under Certain Canadian Federal Income Tax
Considerations Residents of Canada
Disposition of Old Notes Pursuant to Exchange Offer.
Non-Residents
of Canada
The following portion of the summary is generally applicable to
a Holder who, at all relevant times, for the purposes of the
Canadian Tax Act and any applicable income tax treaty or
convention, is neither resident nor deemed to be resident in
Canada and who does not use or hold, and is not deemed by the
Canadian Tax Act to use or hold, such Holders Notes in
connection with carrying on a business in Canada (a
Non-Resident Holder). This summary does not apply to
a Holder that is an insurer that carries on an insurance
business in Canada and elsewhere.
Disposition
of Old Notes Pursuant to Exchange Offer
Amounts paid to a Non-Resident Holder of old notes pursuant to
the exchange offer, including amounts in respect of accrued
interest, will be exempt from Canadian withholding tax. No taxes
on income (including taxable capital gains) will be payable by a
Non-Resident Holder in respect of the disposition of old notes
pursuant to the exchange offer.
Taxation
of New Notes
Interest or principal paid to a Non-Resident Holder of new notes
will be exempt from Canadian withholding tax. No other tax on
income (including taxable capital gains) will be payable by a
Non-Resident Holder of new notes in respect of the acquisition,
ownership, redemption or disposition of new notes.
S-39
DOCUMENTS
INCORPORATED BY REFERENCE
The following documents filed by us with the securities
commission or similar authority in each of the provinces of
Canada and filed with or furnished to the U.S. Securities and
Exchange Commission under the Securities Exchange Act of 1934,
as amended, are specifically incorporated by reference in this
prospectus:
(1) our annual information form for the year ended
December 31, 2006, dated March 9, 2007;
(2) our audited consolidated financial statements and the
notes thereto, including balance sheets as at December 31,
2006 and 2005 and earnings, shareholders equity and cash
flow statements for each of the years in the three year period
ended December 31, 2006, together with the report of the
auditors thereon;
(3) managements discussion and analysis for the
annual consolidated financial statements as at and for the
periods referred to in paragraph 2;
(4) our management information circular dated March 9,
2007 in connection with the annual meeting of shareholders held
on April 18, 2007;
(5) our unaudited consolidated financial statements and the
notes thereto, including balance sheet as at March 31, 2007
and earnings, comprehensive income, shareholders equity
and cash flow statements for the three months ended
March 31, 2007 and March 31, 2006; and
(6) managements discussion and analysis for the
unaudited consolidated financial statements as at and for the
periods referred to in paragraph 5.
Any documents of the types referred to in paragraphs 1
through 6 above and any business acquisition reports or material
change reports (excluding confidential material change reports)
filed by us with the securities regulatory authorities in Canada
or filed with the SEC after the date of this prospectus
supplement and prior to the termination of the exchange offer
hereunder shall be deemed to be incorporated by reference into
this prospectus. In addition, any report furnished to the SEC by
us pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended, or submitted by us to the SEC
pursuant to
Rule 12g3-2(b)
under the Securities Exchange Act of 1934, as amended, after the
date of this prospectus supplement and prior to the termination
of the exchange offer shall be deemed to be incorporated by
reference into this prospectus supplement and the registration
statement of which this prospectus supplement forms a part, if
and to the extent expressly provided in such report.
Any statement contained in a document incorporated or deemed
to be incorporated by reference herein shall be deemed to be
modified or superseded for the purposes of this prospectus to
the extent that a statement contained herein, or in any other
subsequently filed document which also is or is deemed to be
incorporated by reference herein, modifies or supersedes that
statement. The modifying or superseding statement need not state
that it has modified or superseded a prior statement or include
any other information set forth in the document that it modifies
or supersedes. The making of a modifying or superseding
statement shall not be deemed an admission for any purposes that
the modified or superseded statement, when made, constituted a
misrepresentation, an untrue statement of a material fact or an
omission to state a material fact that is required to be stated
or that is necessary to make a statement not misleading in light
of the circumstances in which it was made. Any statement so
modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this
prospectus.
Information has been incorporated by reference in this
prospectus from documents filed with securities commissions or
similar authorities in Canada. Copies of the documents
incorporated herein by reference may be obtained on request
without charge from Bradley P. Martin, Vice President, Chief
Operating Officer and Corporate Secretary, at Suite 800, 95
Wellington Street West, Toronto, Ontario M5J 2N7. For the
purpose of the Province of Quebec, this simplified prospectus
contains information to be completed by consulting the permanent
information record. A copy of the permanent information record
may be obtained from our Vice President and Corporate Secretary
at the above-mentioned address. Copies of documents that we have
filed with the securities regulatory authorities in Canada may
be obtained over the Internet at the Canadian Securities
Administrators website at www.sedar.com.
S-40
We are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and in accordance
therewith file or furnish reports and other information with or
to the SEC. Our recent SEC filings may be obtained over the
Internet at the SECs website at www.sec.gov. You may also
read and copy any document we file or furnish with or to the SEC
at the public reference facilities maintained by the SEC at
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549. Please call
1-800-SEC-0330
for further information on the operations of the public
reference facilities and copying charges.
LEGAL
MATTERS
Certain legal matters relating to the new notes offered by this
prospectus will be passed upon on our behalf by Torys LLP, our
Canadian counsel, and Shearman & Sterling LLP, our
U.S. counsel. As of the date hereof, the lawyers of Torys LLP,
directly or indirectly, in aggregate, own less than one percent
of our outstanding subordinate voting shares.
EXPERTS
The consolidated financial statements as of December 31,
2006 and 2005 and for each of the years in the three year period
ended December 31, 2006 incorporated by reference into this
prospectus have been so incorporated in reliance on the report
of PricewaterhouseCoopers LLP, independent auditors, given on
the authority of said firm as experts in accounting and auditing.
AUDITORS
Our auditors are PricewaterhouseCoopers LLP, Chartered
Accountants, Royal Trust Tower, Suite 3000, P.O. Box
82, 77 King Street West, Toronto, Ontario, Canada M5K 1G8.
S-41
AUDITORS
CONSENT
We have read the prospectus supplement of Fairfax Financial
Holdings Limited (the Company) dated May 10,
2007 relating to the Companys offer to exchange any and
all of its
73/4%
notes due 2012 for cash and new
73/4%
notes due 2022, together with the accompanying short form base
shelf prospectus of the Company dated April 10, 2007. We
have complied with Canadian generally accepted standards for an
auditors involvement with offering documents.
We consent to the incorporation by reference in the
above-mentioned prospectus supplement of our report to the
shareholders of the Company relating to the consolidated balance
sheets of the Company as at December 31, 2006 and 2005, the
consolidated statements of earnings, shareholders equity
and cash flows for each of the years in the three year period
ended December 31, 2006, and managements assessment
of the effectiveness of internal control over financial
reporting and the effectiveness of internal control over
financial reporting as of December 31, 2006. Our report is
dated March 9, 2007.
(Signed)
PricewaterhouseCoopers LLP
Chartered Accountants, Licensed Public Accountants
Toronto, Ontario
May 10, 2007
S-42
PROSPECTUS
April 10,
2007
FAIRFAX
FINANCIAL HOLDINGS LIMITED
US$750,000,000
Subordinate
Voting Shares
Preferred Shares
Debt Securities
Warrants
Share Purchase Contracts
Units
We may offer from time to time, during the 25 month period
that this prospectus, including any amendments hereto, remains
effective, up to US$750,000,000 of the securities listed above
in one or more series or issuances and their total offering
price, in the aggregate, will not exceed US$750,000,000. Our
securities may be offered separately or together, in amounts, at
prices and on terms to be determined based on market conditions
and set forth in an accompanying shelf prospectus supplement.
We will provide the specific terms of any securities we actually
offer in supplements to this prospectus. You should read this
prospectus and any applicable prospectus supplement carefully
before you invest. This prospectus may not be used to offer
securities unless accompanied by a prospectus supplement. Any
net proceeds we expect to receive from the issue of our
securities will be set forth in a prospectus supplement.
This prospectus does not qualify for issuance debt securities in
respect of which the payment of principal
and/or
interest may be determined, in whole or in part, by reference to
one or more underlying interests including, for example, an
equity or debt security, a statistical measure of economic or
financial performance including, but not limited to, any
currency, consumer price or mortgage index, or the price or
value of one or more commodities, indices or other items, or any
other item or formula, or any combination or basket of the
foregoing items.
Our outstanding Subordinate Voting Shares are listed for trading
on the Toronto Stock Exchange and the New York Stock Exchange
under the symbol FFH.
Investing in our securities involves risks. See Risk
Factors.
Our head and registered office is at Suite 800, 95
Wellington Street West, Toronto, Ontario, M5J 2N7.
We are permitted to prepare this prospectus in accordance
with Canadian disclosure requirements, which are different from
those of the United States. We prepare our financial statements
in accordance with Canadian generally accepted accounting
principles, and are subject to Canadian auditing and auditor
independence standards. Our financial statements may not be
comparable to financial statements of U.S. companies.
Owning the securities may subject you to tax consequences
both in the United States and Canada. This prospectus or any
applicable prospectus supplement may not describe these tax
consequences fully. You should read the tax discussion in any
applicable prospectus supplement.
Your ability to enforce civil liabilities under the
U.S. federal securities laws may be affected adversely
because we are incorporated in Canada, most of our officers and
directors and certain of the experts named in this prospectus
are Canadian residents, and many of our assets are located in
Canada.
Neither the U.S. Securities and Exchange Commission nor
any state or provincial securities regulator has approved or
disapproved of these securities or determined if this prospectus
is truthful or complete. Any representation to the contrary is a
criminal offense.
TABLE OF
CONTENTS
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You should rely only on the information contained in or
incorporated by reference into this prospectus or any prospectus
supplement. References to this prospectus include
documents incorporated by reference therein. See Documents
Incorporated by Reference. The information in or
incorporated by reference into this prospectus is current only
as of its date. We have not authorized anyone to provide you
with information that is different. This document may only be
used where it is legal to offer these securities.
2
ENFORCEABILITY
OF CERTAIN CIVIL LIABILITIES
We are a corporation organized under the laws of Canada and some
of our assets are located in, and most of our directors and most
of our officers are residents of, Canada. As a result, it may be
difficult for U.S. investors to effect service of process
within the United States upon our directors or officers, or to
realize in the United States upon judgments of courts of the
United States predicated upon civil liability of such directors
or officers under U.S. federal securities laws. We have
been advised by Torys LLP, our Canadian counsel, that a judgment
of a U.S. court predicated solely upon civil liability
under such laws would probably be enforceable in Canada if the
U.S. court in which the judgment was obtained had a basis
for jurisdiction in the matter that was recognized by a Canadian
court for such purposes. We have also been advised by such
counsel, however, that there is substantial doubt whether an
action could be brought in Canada in the first instance on the
basis of liability predicated solely upon such laws.
PRESENTATION
OF OUR FINANCIAL INFORMATION
As the majority of our operations are in the United States or
conducted in U.S. dollars, we report our consolidated
financial statements in U.S. dollars in order to provide
more meaningful information to users of our financial
statements. In this prospectus, except where otherwise
indicated, all dollar amounts are expressed in
U.S. dollars, references to $, US$
and dollars are to U.S. dollars, and references
to Cdn$ are to Canadian dollars.
Our consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in
Canada, or Canadian GAAP, which differ from generally accepted
accounting principles in the United States, or U.S. GAAP.
For a discussion of the material differences between Canadian
GAAP and U.S. GAAP as they relate to our financial
statements, see note 20 to our audited consolidated
financial statements for the year ended December 31, 2006,
incorporated by reference in this prospectus.
EXCHANGE
RATE DATA
The following table sets forth, for each period indicated, the
low and high exchange rates for Canadian dollars expressed in
United States dollars, the exchange rate at the end of such
period and the average of such exchange rates for each day
during such period, based on the inverse of the noon buying rate
in The City of New York for cable transfers in Canadian dollars
as certified for customs purposes by the Federal Reserve Bank of
New York:
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Year Ended December 31,
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2002
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2003
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2004
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2005
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2006
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Low
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0.6200
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0.6349
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0.7158
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0.7872
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0.8528
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High
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0.6619
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0.7738
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0.8493
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0.8690
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0.9100
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Period End
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0.6329
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0.7738
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0.8310
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0.8579
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0.8582
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Average
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0.6369
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0.7159
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0.7696
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0.8260
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0.8821
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On April 10, 2007, the inverse of the noon buying rate was
$0.8712 = Cdn$1.00.
FORWARD-LOOKING
STATEMENTS
Any statements made by us or on our behalf may include
forward-looking statements that reflect our current views with
respect to future events and financial performance. The words
believe, anticipate,
project, expect, plan,
intend, predict, estimate,
will likely result, will seek to or
will continue and similar expressions identify
forward-looking statements. These forward-looking statements
relate to, among other things, our plans and objectives for
future operations and underwriting profits. We caution readers
not to place undue reliance on these forward-looking statements,
which speak only as of their dates. We are under no obligation
to update or alter such forward-looking statements as a result
of new information, future events or otherwise. These
forward-looking statements are subject to uncertainties and
other factors that could cause actual results to differ
3
materially from such statements. These uncertainties and other
factors, which we describe in more detail elsewhere in this
prospectus, or in documents incorporated by reference herein,
include, but are not limited to:
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a reduction in net income if our loss reserves are insufficient;
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underwriting losses on the risks we insure that are higher or
lower than expected;
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insufficient reserves for asbestos, environmental and other
latent claims;
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the lowering or loss of one of our subsidiaries financial
or claims-paying ability ratings;
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an inability to maintain effective internal control over
financial reporting;
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an inability to realize our investment objectives;
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changes in economic conditions, including interest rates and the
securities markets, which could affect our investment portfolio;
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exposure to credit risk in the event our reinsurers fail to make
payments to us under our reinsurance arrangements;
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exposure to credit risk in the event our insureds fail to pay
premiums that are owed to us or fail to reimburse us for
deductibles that are paid by us on their behalf;
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exposure to credit risk in the event insurance producers or
reinsurance intermediaries fail to remit premiums owed to us;
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the occurrence of catastrophic events with a frequency or
severity exceeding our estimates;
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a decrease in the level of demand for our subsidiaries
reinsurance or insurance products, or increased competition in
the insurance industry;
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the cycle of the insurance market, which can substantially
influence our and our competitors premium rates and
capacity to write new business;
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our inability to obtain reinsurance coverage in sufficient
amounts, at reasonable prices or on terms that adequately
protect us;
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the timing of loss payments being faster or the receipt of
reinsurance recoverables being slower than anticipated by us;
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our dependence on independent brokers over whom we exercise
little control;
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adverse fluctuations in foreign currency exchange rates;
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assessments and shared market mechanisms which can adversely
affect our U.S. insurance subsidiaries;
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our failure to realize future income tax assets;
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loss of key employees;
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the influence exercisable by our controlling shareholder;
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the passage of legislation subjecting our businesses to
additional supervision or regulation, including additional tax
regulation, in the United States, Canada or other jurisdictions
in which we operate;
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our inability to obtain required levels of capital on favorable
terms, if at all;
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our inability to access our subsidiaries cash;
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risks associated with current government investigations of, and
class action litigation related to, insurance industry practices;
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the failure of any of the loss limitation methods we employ;
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an impairment in the value of our goodwill;
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risks associated with implementing our business strategies;
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risks associated with requests for information from government
authorities; and
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risks associated with our pending civil litigation.
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See Risk Factors for a further discussion of these
risks and uncertainties.
THE
COMPANY
Unless the context otherwise requires, the terms
Fairfax, Company, we,
us and our refer to Fairfax Financial
Holdings Limited and its subsidiaries; the term
OdysseyRe refers to our public reinsurance business,
Odyssey Re Holdings Corp. and its subsidiaries; the term
Crum & Forster refers to our wholly-owned
U.S. property and casualty insurance business,
Crum & Forster Holdings Corp. and its subsidiaries;
the term Northbridge refers to our public Canadian
property and casualty insurance business, Northbridge Financial
Corporation and its subsidiaries; the term Hamblin
Watsa refers to our wholly-owned investment management
subsidiary, Hamblin Watsa Investment Counsel Ltd.; and the term
Cunningham Lindsey refers to our claims adjusting
subsidiary, Cunningham Lindsey Group Inc. and its subsidiaries.
All references in this prospectus to $,
US$ or dollars refer to United States
dollars and all references to Cdn$ refer to Canadian
dollars, unless otherwise indicated.
We are a financial services holding company primarily engaged in
property and casualty insurance and reinsurance. We are
incorporated under the Canada Business Corporations Act.
We operate through a decentralized operating structure, with
autonomous management teams applying a focused underwriting
strategy to our markets. We seek to differentiate ourselves by
combining disciplined underwriting with the investment of our
assets on a total return basis, which we believe provides
above-average returns over the long-term. We provide a full
range of property and casualty products, maintaining a
diversified portfolio of risks across classes of business,
geographic regions, and types of insureds. We have been under
current management since September 1985. Our principal executive
offices are located at 95 Wellington Street West,
Suite 800, Toronto, Ontario, M5J 2N7, Canada. Our telephone
number is
(416) 367-4941.
We conduct our business through the following segments, with
each of our continuing operations maintaining a strong position
in its respective markets.
Our reinsurance business is conducted through OdysseyRe,
a U.S.-based
underwriter of a full range of property and casualty reinsurance
on a worldwide basis. We have a majority interest in OdysseyRe,
whose common stock is traded on the New York Stock Exchange
under the symbol ORH.
Our U.S. insurance business provides a full range of
commercial property and casualty insurance, principally through
Crum & Forster, a national property and casualty
insurance group which targets specialty classes of business that
emphasize strong technical underwriting expertise. We own all of
the equity of Crum & Forster.
Our Canadian insurance business is conducted principally
through Northbridge, which provides commercial and personal
lines property and casualty insurance in Canada through a wide
range of distribution channels. We have a majority interest in
Northbridge, whose common shares are traded on the Toronto Stock
Exchange under the symbol NB.
Our runoff business primarily includes our discontinued
business that did not meet our underwriting criteria or
strategic objectives and selected business previously written by
our other subsidiaries that was put under dedicated runoff
management. In addition, our runoff segment also includes
third-party runoff operations that we have acquired, which we
believe will provide us with the opportunity to earn attractive
returns on our invested capital.
Our invested assets are managed by our wholly-owned investment
management subsidiary, Hamblin Watsa. Hamblin Watsa has managed
our invested assets since September 1985 and emphasizes a
conservative investment philosophy, seeking to invest our assets
on a total return basis, which includes realized and unrealized
gains over the long-term, using a value-oriented approach.
5
RISK
FACTORS
An investment in our securities involves risk. You
should carefully consider the following risk factors, as well as
the other information contained in and incorporated by reference
into this prospectus, before deciding whether to invest in our
securities. Any of the following risks could materially
adversely affect our business, financial condition or results of
operations. Additional risks and uncertainties not currently
known to us or that we currently deem to be immaterial may also
materially and adversely affect our business, financial
condition or results of operations.
Overview
We operate with a holding company structure. The holding company
controls our operating insurance and reinsurance companies, each
of which must comply with applicable insurance regulations of
the jurisdictions in which it operates. Each company must
maintain reserves for losses and loss adjustment expenses to
cover the risks it has underwritten. The reserves of one of our
insurance or reinsurance companies are not available to be
applied against the risks underwritten by other of our
companies. The financial condition and results of operations of
each of the insurance and reinsurance companies we control are
included in our consolidated financial statements and,
generally, losses incurred by any of our companies directly
impact our consolidated results. Although a severe loss incurred
by one company should not have any adverse effect on any of our
other companies, such loss, even though not material to us when
our financial condition is viewed as a whole, could have an
adverse effect on us because it could affect adversely how our
other companies are treated by others, including rating agencies
and insurance regulators.
If our
actual claims exceed our claim reserves, our financial condition
and results of operations could be adversely
affected.
We maintain reserves to cover our estimated ultimate unpaid
liability for losses and loss adjustment expenses with respect
to reported and unreported claims incurred as of the end of each
accounting period. Our success is dependent upon our ability to
accurately assess the risks associated with the businesses that
we reinsure or insure. If we fail to accurately assess the risks
we assume, we may fail to establish appropriate premium rates
and our reserves may be inadequate to cover our losses, which
could have a material adverse effect on our financial condition
and reduce our net income.
At December 31, 2006, we had net unpaid loss and loss
adjustment expense reserves of approximately $10.7 billion.
Reserves do not represent an exact calculation of liability, but
instead represent estimates involving actuarial and statistical
projections at a given point in time of our expectations of the
ultimate settlement and administration costs of claims incurred.
Establishing an appropriate level of claim reserves is an
inherently uncertain process. We utilize both proprietary and
commercially available actuarial models, as well as historical
insurance industry loss development patterns, to assist in the
establishment of appropriate claim reserves.
In contrast to casualty losses, which frequently can be
determined only through lengthy and unpredictable litigation,
non-casualty property losses tend to be reported promptly and
usually are settled within a shorter period of time.
Nevertheless, for both casualty and property losses, actual
claims and claim expenses ultimately paid may deviate, perhaps
substantially, from the reserve estimates reflected in our
financial statements. Variables in the reserve estimation
process can be affected by both internal and external events,
such as changes in claims handling procedures, economic
inflation, legal trends and legislative changes. Many of these
items are not directly quantifiable, particularly on a
prospective basis.
If our claim reserves are determined to be inadequate, we will
be required to increase claim reserves with a corresponding
reduction in our net income in the period in which the
deficiency is rectified. It is possible that claims in respect
of events that have occurred could exceed our claim reserves and
have a material adverse effect on our results of operations in a
particular period
and/or our
financial condition. For the year ended December 31, 2006,
we increased our loss and loss adjustment expense reserves
relating to prior periods by $285.1 million, primarily
relating to the U.S. casualty business written by the
Americas division of OdysseyRe in 2001 and prior, development on
hurricane losses at Northbridge and runoff.
6
Even though most insurance contracts have policy limits, the
nature of property and casualty insurance and reinsurance is
such that losses can exceed policy limits for a variety of
reasons and could very significantly exceed the premiums
received on the underlying policies. When this occurs, our
financial results are adversely affected.
Our
business could be harmed because of our potential exposure for
asbestos, environmental and other latent claims.
We have established loss reserves for asbestos and environmental
and other latent claims. There is a high degree of uncertainty
with respect to future exposure from such claims because of:
significant issues surrounding the liabilities of the insurers,
including us; risks inherent in major litigation, including more
aggressive environmental and asbestos-related litigation against
insurers, including us; and diverging legal interpretations and
judgments in different jurisdictions. These uncertainties
include, among other things:
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the extent of coverage under insurance policies;
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whether or not particular claims are subject to an aggregate
limit;
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whether multiple policies issued to the same insured will be
triggered by a particular claim;
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the number of occurrences involved in particular claims; and
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new theories of insured and insurer liability.
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Insurers generally, including us, experienced an increase in the
number of asbestos-related claims from 2001 through 2003 likely
due to, among other things, the introduction by several states
of tort reform statutes that impact asbestos litigation and
resulted in plaintiffs rushing to file claims before the
effective date of new legislation. The increase in such claims
also led to an increase in the number of entities seeking
bankruptcy protection as a result of asbestos-related
liabilities.
Increasingly, policyholders have been asserting that their
claims for asbestos-related insurance are not subject to
aggregate limits on coverage and that each individual bodily
injury claim should be treated as a separate occurrence under
the policy. We expect this trend to continue. Although it is
difficult to predict whether these policyholders will be
successful on either of these issues, to the extent either issue
is resolved in their favor, our coverage obligations under the
policies at issue would be materially increased and bounded only
by the applicable per occurrence limits and the number of
asbestos bodily injury claims made by the policyholders.
Accordingly, it is difficult to predict the ultimate size of the
claims for coverage not subject to aggregate limits.
In addition, proceedings have recently been launched directly
against insurers, including us, challenging insurers
conduct in respect of asbestos claims, including in some cases
with respect to previous settlements. Some plaintiffs have also
advanced claims against us as defendants in asbestos personal
injury cases that are close to trial. We anticipate the filing
of other direct actions against insurers, including us, in the
future. Particularly in light of jurisdictional issues, it is
difficult to predict the outcome of these proceedings, including
whether the plaintiffs will be able to sustain these actions
against insurers based on novel legal theories of liability.
Similarly, as a result of various regulatory efforts aimed at
environmental remediation, companies in the insurance industry,
including us, continue to be involved in litigation involving
policy coverage and liability issues with respect to
environmental claims. In addition to regulatory pressures, the
results of court decisions affecting the industrys
coverage positions continue to be inconsistent and have expanded
coverage beyond its original intent. Accordingly, the ultimate
responsibility and liability for environmental remediation costs
remains uncertain.
In addition to asbestos and environmental pollution, we face
exposure to other types of mass tort claims, including claims
related to exposure to potentially harmful products or
substances, such as lead paint and silica. Establishing claim
and claim adjustment expense reserves for mass tort claims is
subject to uncertainties because of many factors, including
expanded theories of liability and disputes concerning medical
causation with respect to certain diseases.
Given the factors described above, it is not presently possible
to quantify with a high degree of certainty the ultimate
exposure or range of exposure represented by asbestos,
environmental and other latent claims and related litigation. We
have established reserves that represent our best estimate of
ultimate claims and claim adjustment
7
expenses based upon known facts and current law. Our gross
asbestos reserves were $1.4 billion at December 31,
2006 and our gross reserves for environmental and other latent
claims were $564.1 million. Our asbestos reserves, net of
reinsurance but excluding vendor indemnities, were
$756.2 million at December 31, 2006 and our reserves
for environmental and other latent claims, net of reinsurance
but excluding vendor indemnities, were $236.2 million.
However, these claims and related litigation, particularly if
current trends continue, could result in liability exceeding
these reserves by an amount that could be material to our
operating results and financial condition in future periods.
If our
insurance and reinsurance subsidiaries are unable to maintain
favorable financial strength ratings, it may be more difficult
for them to maintain or write new business.
Third-party rating agencies assess and rate the claims-paying
ability of reinsurers and insurers based upon the criteria of
such rating agencies. Periodically the rating agencies evaluate
our insurance companies to confirm that they continue to meet
the criteria of the ratings previously assigned to them. The
claims-paying ability ratings assigned by rating agencies to
reinsurance or insurance companies represent independent
opinions of financial strength and ability to meet policyholder
obligations, and are not directed toward the protection of
investors. Ratings by rating agencies are not ratings of
securities or recommendations to buy, hold or sell any security
and are not applicable to the securities offered by this
prospectus.
A.M. Best has assigned an A rating (the third
highest of fifteen ratings) to OdysseyRe, and an
A− rating (the fourth highest of fifteen
ratings) to each of Crum & Forster and Northbridge.
Financial strength ratings are used by insurers and reinsurance
and insurance intermediaries as an important means of assessing
the financial strength and quality of insurers and reinsurers. A
downgrade in these ratings could lead to a significant reduction
in the number of insurance policies our insurance subsidiaries
write.
The ratings by these agencies of our insurance subsidiaries may
be based on a variety of factors, some of which are outside of
our control, including, but not limited to, the financial
condition of us and our subsidiaries and affiliates, the
financial condition or actions of parties from which our
insurance subsidiaries have obtained reinsurance, and factors
relating to the sectors in which such persons conduct business,
and the statutory surplus of our insurance subsidiaries, which
is adversely affected by underwriting losses and dividends paid
by them. A downgrade of any of the debt or other ratings of
Fairfax, or of any of Fairfaxs subsidiaries or affiliates,
or a deterioration in the financial markets view of any of
these entities, could have a negative impact on the ratings of
our insurance subsidiaries.
Management
has identified material weaknesses in our internal control over
financial reporting. If we fail to maintain effective internal
control over financial reporting, we may not be able to
accurately report our financial results.
During 2006 we restated our consolidated financial statements as
at and for the years ended December 31, 2001 through 2005
and all related disclosures including interim periods therein.
In connection with the restatement, our management identified
four material weaknesses in our internal control over financial
reporting relating to financial reporting organizational
structure and personnel, head office consolidation controls,
investment accounting in accordance with U.S. GAAP and
accounting for income taxes. A material weakness is a control
deficiency, or combination of control deficiencies, that results
in more than a remote likelihood that a material misstatement of
the annual or interim financial statements will not be prevented
or detected. As of December 31, 2006, the two material
weaknesses relating to investment accounting in accordance with
US GAAP and accounting for income taxes had been remediated,
however material weaknesses existed relating to a sufficient
complement of personnel and lines of communication within the
organization and certain head office consolidation controls. See
Managements Report on Internal Control over
Financial Reporting and Remediation of Material
Weaknesses in Internal Control Over Financial Reporting in
our managements discussion and analysis for the fiscal
year ended December 31, 2006 incorporated herein by
reference.
If actions to remediate these material weaknesses are not
successfully implemented, if other material weaknesses are
identified in the future, or if we otherwise fail to maintain
effective internal control over financial
8
reporting, we may not be able to accurately report our financial
results, which could have a material adverse effect on our
business and prospects.
If we
are unable to realize our investment objectives, our business,
financial condition or results of operations may be adversely
affected.
Investment returns are an important part of our overall
profitability and our operating results depend in part on the
performance of our investment portfolio. Accordingly,
fluctuations in the fixed income or equity markets could impair
our profitability, financial condition or cash flows. We derive
our investment income from interest and dividends, together with
realized gains on the sale of investment assets. The portion
derived from realized gains generally fluctuates from year to
year. For the years ended December 31, 2006, 2005 and 2004,
net realized gains accounted for approximately 51.4%, 45.3% and
44.4%, respectively, of our total investment income (including
realized gains and losses). Realized gains are typically a less
predictable source of investment income than interest and
dividends, particularly in the short term.
The return on our portfolio and the risks associated with our
investments are also affected by our asset mix, which can change
materially depending on market conditions. Investments in cash
or short term investments generally produce a lower return than
other investments. At December 31, 2006, 32%, or
$5.4 billion, of our invested assets were held in cash and
short term investments pending our identifying suitable
opportunities for reinvestment in line with our long-term
value-oriented investment philosophy.
The volatility of our claims submissions may force us to
liquidate securities, which may cause us to incur capital
losses. If we structure our investments improperly relative to
our liabilities, we may be forced to liquidate investments prior
to maturity at a significant loss to cover such liabilities.
Realized and unrealized investment losses resulting from an
other than temporary decline in value could significantly
decrease our assets, thereby affecting our ability to conduct
business.
The ability to achieve our investment objectives is affected by
general economic conditions that are beyond our control. General
economic conditions can adversely affect the markets for
interest-rate-sensitive securities, including the extent and
timing of investor participation in such markets, the level and
volatility of interest rates and, consequently, the value of
fixed income securities. Interest rates are highly sensitive to
many factors, including governmental monetary policies, domestic
and international economic and political conditions and other
factors beyond our control. General economic conditions, stock
market conditions and many other factors can also adversely
affect the equities markets and, consequently, the value of the
equity securities we own. In addition, defaults by third parties
who fail to pay or perform on their obligations could reduce our
investment income and realized investment gains or result in
investment losses. We may not be able to realize our investment
objectives, which could reduce our net income significantly and
adversely affect our business, financial condition or results of
operations.
We
cannot assure you that our reinsurers and certain insureds will
pay us on a timely basis or at all.
Reinsurance is an arrangement in which an insurance company,
called the ceding company, transfers insurance risk to another
insurer, called the reinsurer, which accepts the risk in return
for a premium payment. Although reinsurance makes the assuming
reinsurer liable to us to the extent of the risk ceded, we are
not relieved of our primary liability to our insureds. As of
December 31, 2006, we had a total of $5.5 billion
recoverable from reinsurers. We cannot assure you that our
reinsurers will pay our reinsurance claims on a timely basis or
at all. As well, we bear credit risk with respect to our
reinsurers (including retrocessionaires), both with respect to
receivables reflected on our balance sheet as well as to
contingent liabilities with respect to reinsurance protection on
future claims. If reinsurers are unwilling or unable to pay us
amounts due under reinsurance contracts, we will incur
unexpected losses and our cash flow will be adversely affected.
We write certain insurance policies, such as large deductible
policies (policies where the insured retains a specific amount
of any potential loss), in which the insured must reimburse us
for certain losses. Accordingly, we bear credit risk on these
policies and cannot assure you that our insureds will pay us on
a timely basis or at all. In the ordinary course of business we
are sometimes unable to collect all amounts billed to insureds,
generally due to disputes on audit of retrospectively rated
policies and, in some cases, due to insureds having filed for
bankruptcy
9
protection. In addition, if an insured files for bankruptcy, we
may be unable to recover on assets such insured may have pledged
to us as collateral. We reserve for uncollectible amounts in the
period the collection issues become known. The inability to
collect amounts due to us reduces our net income and cash flow,
and the ability of our insurance and reinsurance subsidiaries to
pay dividends or make other distributions to us.
Unpredictable
catastrophic events could reduce our net income.
Our insurance and reinsurance operations expose us to claims
arising out of catastrophes. We have experienced, and will in
the future experience, catastrophe losses which may materially
reduce our profitability or harm our financial condition.
Catastrophes can be caused by various events, including natural
events such as hurricanes, windstorms, earthquakes, hailstorms,
severe winter weather and fires, and unnatural events such as
terrorist attacks and riots. The incidence and severity of
catastrophes are inherently unpredictable.
The extent of losses from a catastrophe is a function of both
the total amount of insured exposure in the area affected by the
event and the severity of the event. Most catastrophes are
restricted to small geographic areas; however, hurricanes,
windstorms and earthquakes may produce significant damage in
large, heavily populated areas, and most of our past natural
catastrophe-related claims have resulted from severe storms.
Catastrophes can cause losses in a variety of property and
casualty lines. It is possible that a catastrophic event or
multiple catastrophic events could have a material adverse
effect upon our net income and financial condition.
Claims resulting from natural or man-made catastrophic events
could cause substantial volatility in our financial results for
any fiscal quarter or year and could materially reduce our
profitability or harm our financial condition. Our ability to
write new business could also be affected. We believe that
increases in the value and geographic concentration of insured
property, climate change and the effects of inflation could
increase the severity of claims from catastrophic events in the
future. In addition, states have from time to time passed
legislation that has the effect of limiting the ability of
insurers to manage catastrophe risk, such as legislation
prohibiting insurers from withdrawing from catastrophe-prone
areas. In addition, following catastrophes, there are sometimes
legislative initiatives and court decisions which seek to expand
insurance coverage for catastrophe claims beyond the original
intent of the policies.
The
cycles of the insurance and reinsurance industries may cause
fluctuations in our results.
Historically, we have experienced fluctuations in operating
results due to competition, frequency of occurrence or severity
of catastrophic events, levels of capacity, general economic
conditions and other factors. Demand for insurance and
reinsurance is influenced significantly by underwriting results
of primary insurers and prevailing general economic conditions.
The property and casualty insurance business historically has
been characterized by periods of intense price competition due
to excess underwriting capacity, as well as periods when
shortages of underwriting capacity have permitted attractive
premium levels. We expect to continue to experience the effects
of this cyclicality, which, during down periods, could harm our
financial condition, profitability or cash flows.
In the reinsurance industry, the supply of reinsurance is
related to prevailing prices and levels of surplus capacity
that, in turn, may fluctuate in response to changes in rates of
return being realized. It is possible that premium rates or
other terms and conditions of trade could vary in the future,
that the present level of demand will not continue because the
larger insurers created by the consolidation discussed below may
require less reinsurance or that the present level of supply of
reinsurance could increase as a result of capital provided by
recent or future market entrants or by existing reinsurers. If
any of these events transpire, our results of operations in our
reinsurance business could be adversely affected.
We
operate in a highly competitive environment which could make it
more difficult for us to attract and retain
business.
The property and casualty insurance industry and the reinsurance
industry are both highly competitive, and we believe that they
will remain highly competitive in the foreseeable future.
Competition in our industry is based on many factors, including
premiums charged and other terms and conditions offered,
products and services provided,
10
financial ratings assigned by independent rating agencies, speed
of claims payment, reputation, selling effort, perceived
financial strength and the experience of the insurer or
reinsurer in the line of insurance or reinsurance to be written.
We compete, and will continue to compete, with major U.S. and
non-U.S. insurers
and reinsurers, as well as certain underwriting syndicates, some
of which have greater financial, marketing and management
resources than we do, and there is no assurance that we will be
able to successfully retain or attract business.
New insurers and reinsurers have been formed to compete in our
industry, and a number of existing market participants have
raised new capital which may enhance their ability to compete.
In addition, we may not be aware of other companies that may be
planning to enter our industry or existing participants that may
be planning to raise additional capital. In addition, we have
recently seen the creation of alternative products from capital
market participants that are intended to compete with insurance
and reinsurance products. We are unable to predict the extent to
which these initiatives may affect the demand for our products,
our premium volume or the risks that may be available for us to
consider underwriting. Such increased competition could cause us
and certain of our competitors to charge lower premium rates and
obtain less favorable policy terms, which could adversely affect
our ability to generate revenue and grow our business. Further,
our plans for our business units could be adversely impacted by
the loss of business to competitors offering competitive
insurance products at lower prices, which would have an adverse
effect on our results of operations.
Many insurance industry participants are consolidating to
enhance their market power. These entities may try to use their
market power to negotiate price reductions for our products and
services. If competitive pressures compel us to reduce our
prices, our operating margins would decrease. As the insurance
industry consolidates, competition for customers will become
more intense and the importance of acquiring and properly
servicing each customer will become greater. We could incur
greater expenses relating to customer acquisition and retention,
further reducing our operating margins. In addition, insurance
companies that merge may be able to spread their risks across a
larger capital base so that they require less reinsurance.
We may
be unable to obtain reinsurance coverage at reasonable prices or
on terms that adequately protect us.
We use reinsurance arrangements, including reinsurance of our
own reinsurance business purchased from other reinsurers,
referred to as retrocessionaires, to help manage our exposure to
property and casualty risks. The availability and cost of
reinsurance are subject to prevailing market conditions, both in
terms of price and available capacity, which can affect our
business volume and profitability. Many reinsurance companies
have begun to exclude certain coverages from, or alter terms in,
the policies that we purchase from them. Some exclusions are
with respect to risks which we cannot exclude in policies we
write due to business or regulatory constraints, such as
coverage with respect to acts of terrorism, mold and cyber risk.
In addition, reinsurers are imposing terms, such as lower per
occurrence and aggregate limits, on primary insurers that are
inconsistent with corresponding terms in the policies written by
these primary insurers. As a result, our insurance subsidiaries,
like other primary insurance companies, increasingly are writing
insurance policies which to some extent do not have the benefit
of reinsurance protection. These gaps in reinsurance protection
expose us to greater risk and greater potential losses. If we
cannot obtain adequate reinsurance protection for the risks we
underwrite, we may be exposed to greater losses from those risks
or we may be forced to reduce the amount of business we
underwrite, which will reduce our revenues. As a result, our
inability to obtain adequate reinsurance protection could have a
material adverse effect on our financial condition and
operations.
In addition, although our current reinsurance program is
primarily maintained with reinsurers rated A
(Excellent) or better by A.M. Best, a reinsurers
insolvency or inability or unwillingness to make timely payments
under the terms of its reinsurance agreements with us could have
a material adverse effect on us.
We
rely on independent brokers over whom we exercise little
control, which exposes us to certain risks.
We do business with a large number of independent brokers on a
non-exclusive basis and we cannot rely on their commitment to
our insurance products. Moreover, in some markets we operate
pursuant to open market arrangements in which we
have no formal relationships with brokers who place our risk in
these markets. Our continued profitability depends, in part, on
the marketing efforts of independent brokers and our ability to
offer
11
insurance products and maintain financial ratings that meet the
requirements and preferences of such brokers and their
policyholders.
Because the majority of our brokers are independent, we have
only limited ability to exercise control over them. In the event
that an independent broker to which we have granted binding
authority exceeds its authority by binding us on a risk which
does not comply with our underwriting guidelines, we may be at
risk for that policy until we receive the application and effect
a cancellation. Although to date we have not experienced a
material loss from improper use of binding authority of our
brokers, any improper use of such authority may result in losses
that could have a material adverse effect on our business,
results of operations and financial condition.
In accordance with industry practice, our customers often pay
the premiums for their policies to brokers for payment over to
us. These premiums are considered paid when received by the
broker and, thereafter, the customer is no longer liable to us
for those amounts, whether or not we have actually received the
premiums from the broker. Consequently, we assume a degree of
credit risk associated with our reliance on brokers in
connection with the settlement of insurance balances.
Further, as is customary in the reinsurance industry, OdysseyRe
frequently pays amounts owing in respect of claims under its
policies to reinsurance brokers, for payment over to the ceding
insurers. In the event that a broker fails to make such a
payment, depending on the jurisdiction, OdysseyRe might remain
liable to the ceding insurer for the deficiency. Conversely, in
certain jurisdictions, when the ceding insurer pays premiums for
such policies to reinsurance brokers for payment over to
OdysseyRe, such premiums will be deemed to have been paid and
the ceding insurer will no longer be liable for those amounts,
whether or not OdysseyRe has actually received such premiums.
Consequently, in connection with the settlement of reinsurance
balances, we assume a degree of credit risk associated with
brokers around the world.
Assessments
and other surcharges for guaranty funds and second-injury funds
and other mandatory pooling arrangements may reduce the
profitability of our U.S. insurance
subsidiaries.
Virtually all states require insurers licensed to do business in
their state to bear a portion of the loss suffered by some
insureds as the result of impaired or insolvent insurance
companies. Many states also have laws that establish
second-injury funds to provide compensation to injured employees
for aggravation of a prior condition or injury, which are funded
by either assessments based on paid losses or premium surcharge
mechanisms. In addition, as a condition to the ability to
conduct business in various jurisdictions, our insurance
subsidiaries are required to participate in mandatory property
and casualty shared market mechanisms or pooling arrangements,
which provide various types of insurance coverage to individuals
or other entities that otherwise are unable to purchase that
coverage from private insurers. The effect of these assessments
and mandatory shared-market mechanisms or changes in them could
reduce the profitability of our U.S. insurance subsidiaries
in any given period or limit their ability to grow their
business.
We may
be adversely affected by foreign currency
fluctuations.
Our functional currency is the U.S. dollar. A portion of
our premiums are written in currencies other than the
U.S. dollar and a portion of our assets (including
investments) and loss reserves are also in foreign currencies.
We may, from time to time, experience losses resulting from
fluctuations in the values of foreign currencies (including when
our foreign currency assets and liabilities are hedged) which
could adversely affect our operating results.
Our
failure to realize future income tax assets could lead to a
writedown, which could adversely affect our results of
operations.
Realization of the future income tax asset is dependent upon the
generation of taxable income in those jurisdictions where the
relevant tax losses and other timing differences exist. The
major component of our future income tax asset of
$771.3 million at December 31, 2006 is
$600.6 million relating to our U.S. consolidated tax
group. Failure to achieve projected levels of profitability for
our U.S. operations could lead to a writedown in this
future tax asset if the recovery period becomes longer than
expected.
12
Our
business could be adversely affected by the loss of one or more
key employees.
We are substantially dependent on a small number of key
employees, including our Chairman and controlling shareholder,
Mr. Prem Watsa, and the senior managers of our operating
subsidiaries. We believe that the experiences and reputations in
our industry of these individuals are important factors in our
ability to attract new business. At the subsidiary level, we
have entered into employment agreements with our key employees.
Our success has been, and will continue to be, dependent on our
ability to retain the services of our existing key employees and
to attract and retain additional qualified personnel in the
future. The loss of the services of any of these key employees,
or the inability to identify, hire and retain other highly
qualified personnel in the future, could adversely affect the
quality and profitability of our business operations. We do not
currently maintain key employee insurance with respect to any of
our employees.
Our
controlling shareholder may substantially influence our
direction and operations.
Mr. Prem Watsa, our Chairman and Chief Executive Officer,
owns, directly or indirectly, or exercises control or direction
over shares representing 48.6% of the voting power of our
outstanding shares. Mr. Watsa has the ability to
substantially influence certain actions requiring shareholder
approval, including approving a merger or consolidation,
liquidation or sale of our assets, electing members of our board
of directors and adopting amendments to our articles of
incorporation and by-laws. As a shareholder, Mr. Watsa may
have different interests than you have and therefore may make
decisions that are adverse to your interests.
Our
operations could be adversely affected as a result of
regulatory, political, economic or other influences in the
insurance and reinsurance industries.
The insurance and reinsurance industries are highly regulated
and are subject to changing political, economic and regulatory
influences. These factors affect the practices and operation of
insurance and reinsurance organizations. Federal, state and
provincial legislatures in the United States and Canada, as well
as governments in foreign jurisdictions in which we do business,
have periodically considered programs to reform or amend the
insurance systems at both the federal and local levels.
Changes in current insurance regulations may include increased
governmental involvement in the insurance industry or may
otherwise change the business and economic environment in which
insurance industry participants operate. In the United States,
for example, the states of Hawaii and Florida have implemented
arrangements whereby property insurance in catastrophe prone
areas is provided through state-sponsored entities. The
California Earthquake Authority, the first privately financed,
publicly operated residential earthquake insurance pool,
provides earthquake insurance to California homeowners.
Such changes could adversely affect our subsidiaries
financial results, including their ability to pay dividends,
cause us to make unplanned modifications of products or
services, or result in delays or cancellations of sales of
products and services by insurers or reinsurers. Insurance
industry participants may respond to changes by reducing their
investments or postponing investment decisions, including
investments in our products and services. We cannot predict the
future impact of changing law or regulation on our operations;
any changes could have a material adverse effect on us or the
insurance industry in general.
As industry practices and legal, judicial, social and other
environmental conditions change, unexpected and unintended
issues related to claims and coverage may emerge. These issues
can have a negative effect on our business by either extending
coverage beyond our underwriting intent or by increasing the
number or size of claims. Recent examples of emerging claims and
coverage issues include:
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increases in the number and size of water damage claims related
to expenses for testing and remediation of mold conditions;
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increases in the number and size of claims relating to
construction defects, which often present complex coverage and
damage valuation questions;
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changes in interpretation of the named insured provision with
respect to the uninsured/underinsured motorist coverage in
commercial automobile policies; and
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a growing trend in the United States of plaintiffs targeting
property and casualty insurers in purported class action
litigation relating to claim-handling, premium calculation and
billing, and other practices, particularly with respect to the
handling of personal lines automobile and homeowners claims.
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The effects of these and other unforeseen emerging claims and
coverage issues are extremely hard to predict and could harm our
business.
Our
inability to obtain additional capital in the future as required
could have a material adverse effect on our financial
condition.
Our future capital requirements depend on many factors,
including our ability to write new business successfully and to
establish premium rates and reserves at levels sufficient to
cover losses. To the extent that the funds generated by our
business are insufficient to fund future operations, we may need
to raise additional funds through equity or debt financings. Any
equity or debt financing, if available at all, may be on terms
that are not favorable to us. The cost and availability of debt
financing is affected by credit ratings. Our senior unsecured
debt at the holding company level is rated BB by
Standard & Poors (the
5th highest
of 10 rating categories) with a negative outlook and is rated
Ba3 with a stable outlook by Moodys (the
5th highest
of 9 rating categories). Our ability to raise additional capital
may be adversely affected by our credit ratings. If we cannot
obtain adequate capital or if we fail to refinance our existing
debt as it comes due, our business, operating results and
financial condition could be adversely affected.
We are
a holding company, and we may not have access to the cash that
is needed to meet our financial obligations.
We are a holding company and conduct substantially all our
business through our subsidiaries and receive substantially all
our earnings from them. Therefore, in the event of the
insolvency or liquidation of a subsidiary, following payment by
such subsidiary of its liabilities, the subsidiary may not have
sufficient remaining assets to make payments to us as a
shareholder or otherwise. In the event of a default by a
subsidiary under our credit agreement or other indebtedness, its
creditors could accelerate the debt, prior to such subsidiary
distributing amounts to us that we could use to make payments on
our outstanding debt. In addition, if we caused a subsidiary to
pay a dividend to us to make payment on our outstanding debt,
and the dividend were determined to be improperly paid, holders
of our outstanding debt would be required to return the payment
to the subsidiarys creditors. As of December 31,
2006, our subsidiaries had approximately $981.3 million of
indebtedness.
Although substantially all of our operations are conducted
through our subsidiaries, none of our subsidiaries is obligated
to make funds available to us for payment on our outstanding
debt. Accordingly, our ability to meet our financial
obligations, including to make payments on our outstanding debt,
is dependent on the distribution of earnings from our
subsidiaries. The ability of our subsidiaries to pay dividends
to us in the future will depend on their statutory surplus, on
earnings and on regulatory restrictions. The ability of our
subsidiaries to pay dividends or make distributions or returns
of capital to us is subject to restrictions set forth in the
insurance laws and regulations of Canada, the United States,
Ireland and the United Kingdom and is affected by our
subsidiaries credit agreements, indentures, rating
agencies, the discretion of insurance regulatory authorities and
capital support agreements with our subsidiaries. No assurance
can be given that some or all of our operating
subsidiaries jurisdictions will not adopt statutory
provisions more restrictive than those currently in effect. Our
subsidiaries may incur additional indebtedness that may severely
restrict or prohibit the making of distributions, the payment of
dividends or the making of loans by our subsidiaries to us. We
cannot assure you that the agreements governing the current and
future indebtedness of our subsidiaries will permit our
subsidiaries to provide us with sufficient dividends,
distributions or loans to meet our financial obligations,
including to fund payments on our outstanding debt when due.
The
failure of any of the loss limitation methods we employ could
have a material adverse effect on our financial condition or our
results of operations.
Unlike most businesses, the insurance and reinsurance business
can have enormous costs that can significantly exceed the
premiums received on the underlying policies. We seek to limit
our loss exposure by employing a variety
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of policy limits and other terms and conditions and through
prudent underwriting of each program written. We also seek to
limit our loss exposure by geographic diversification. We cannot
be sure that any of these loss limitation methods will be
effective. There can be no assurance that various provisions of
our policies, such as limitations or exclusions from coverage or
choice of forum, will be enforceable in the manner we intend,
thus substantially increasing the potential exposure we face
under such policies.
If the
value of our goodwill is impaired we would be required to write
down the value of such assets.
A portion of our assets is comprised of goodwill, primarily
related to our claims adjusting subsidiary Cunningham Lindsey.
We test the carrying value of goodwill and other intangible
assets for impairment at least annually. Should we identify that
the value of goodwill is impaired, we would be required to write
down the value of such assets to their fair value. Of Cunningham
Lindseys goodwill of $193.6 million at
December 31, 2006, $150.4 million was related to its
United Kingdom operations. The recoverability of this goodwill
is sensitive to the ability of the United Kingdom operations to
meet their profit and cash flow forecasts for 2007 and future
years. Failure to meet those forecasts could result in a
writedown of its goodwill.
Proceedings
by government authorities could materially and negatively impact
our business and the market price of our
securities.
On September 7, 2005, we announced that we had received a
subpoena from the SEC requesting documents regarding any
nontraditional insurance or reinsurance product transactions
entered into by the entities in the consolidated group and any
non-traditional insurance or reinsurance products offered by the
entities in that group. On September 26, 2005, we announced
that we had received a further subpoena from the SEC as part of
its investigation into such loss mitigation products, requesting
documents regarding any transactions in our securities, the
compensation for such transactions and the trading volume or
share price of such securities. Previously, on June 24,
2005, we announced that our Fairmont subsidiary had received a
subpoena from the SEC requesting documents regarding any
nontraditional insurance product transactions entered into by
Fairmont with General Re Corporation or affiliates thereof. The
U.S. Attorneys office for the Southern District of
New York is reviewing documents produced by us to the SEC and is
participating in the investigation of these matters. We are
cooperating fully with these requests. We have prepared
presentations and provided documents to the SEC and the
U.S. Attorneys office, and our employees, including
senior officers, have attended or have been requested to attend
interviews conducted by the SEC and the
U.S. Attorneys office.
The Company and Prem Watsa, our Chief Executive Officer,
received subpoenas from the SEC in connection with the answer to
a question on the February 10, 2006 investor conference
call concerning the review of our finite reinsurance contracts.
In the fall of 2005, we prepared and provided to the SEC a list
intended to identify certain finite contracts and contracts with
other non-traditional features of all Fairfax group companies.
As part of the 2005 year-end reporting and closing process,
we internally reviewed all of the contracts on the list provided
to the SEC and some additional contracts as deemed appropriate.
That review led to the restatement by OdysseyRe. That review
also led to some changes in accounting for certain contracts at
nSpire Re. Subsequently, during 2006 following an internal
review of the Companys consolidated financial statements
and accounting records that was undertaken in contemplation of
the commutation of the Swiss Re corporate insurance cover, we
also restated various of our previously reported consolidated
financial statements and related disclosures. That restatement
included a restatement of the accounting for certain reinsurance
contracts that were commuted in 2004 to apply the deposit method
of accounting rather than reinsurance accounting. All of the
above noted items and related adjustments are reflected in our
comparative results. We continue to respond to requests for
information from the SEC and there can be no assurance that the
SECs review of documents provided will not give rise to
further adjustments.
We understand that the SEC has issued subpoenas to various third
parties involved in the matters which are the subject of the SEC
subpoenas issued to us, including our independent auditors
(which in Canada received a letter requesting cooperation and in
the U.S. received a subpoena) and a shareholder (that has
previously disclosed receipt of a subpoena). In addition, it is
possible that other governmental and enforcement agencies will
seek to review information related to these matters, or that we,
or other parties with whom we interact, such as customers or
shareholders, may become subject to direct requests for
information or other inquiries by such agencies.
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These inquiries are ongoing and we continue to comply with
requests for information from the SEC and the
U.S. Attorneys office. At the present time we cannot
predict the outcome from these outstanding inquiries or the
ultimate effect on our business, operations or financial
condition, which effect could be material and adverse. The
financial cost to us to address these matters has been and is
likely to continue to be significant. We expect that these
matters will continue to require significant management
attention, which could divert managements attention away
from our business. In addition, we could be materially adversely
affected by negative publicity related to these inquiries or any
similar proceedings. Any of the possible consequences noted
above, or the perception that any of them could occur, could
have an adverse effect upon the market price for our securities.
We are
subject to significant pending civil litigation, which will be
expensive and time consuming and if decided against us, could
require us to pay substantial judgments or
settlements
During 2006, several lawsuits seeking class action status were
filed against us and certain of our officers and directors in
the United States District Court for the Southern District of
New York. The Court made an order consolidating the various
pending lawsuits and granted the single remaining motion for
appointment as lead plaintiffs. The Court also issued orders
approving scheduling stipulations filed by the parties to the
consolidated lawsuit. On February 8, 2007, the lead
plaintiffs filed an amended consolidated complaint, which states
that the lead plaintiffs seek to represent a class of all
purchasers and acquirers of securities of Fairfax between
May 21, 2003 and March 22, 2006 inclusive. The amended
consolidated complaint names as defendants Fairfax, certain of
our officers and directors, OdysseyRe and our auditors. The
amended consolidated complaint alleges that the defendants
violated U.S. federal securities laws by making material
misstatements or failing to disclose certain material
information regarding, among other things, Fairfaxs and
OdysseyRes assets, earnings, losses, financial condition,
and internal financial controls. The amended consolidated
complaint seeks, among other things, certification of the
putative class; unspecified compensatory damages (including
interest); unspecified monetary restitution; unspecified
extraordinary, equitable
and/or
injunctive relief; and costs (including reasonable
attorneys fees). These claims are at a preliminary stage.
The court has scheduled the next conference for April 5,
2007, and pursuant to the scheduling stipulations, the
defendants will file their answers or motions to dismiss the
amended consolidated complaint on or before May 10, 2007.
The ultimate outcome of any litigation is uncertain and should
the consolidated lawsuit be successful, the defendants may be
subject to an award of significant damages, which could have a
material adverse effect on our business, results of operations
and financial condition. The consolidated lawsuit may require
significant management attention, which could divert
managements attention away from our business. In addition,
we could be materially adversely affected by negative publicity
related to this lawsuit. Any of the possible consequences noted
above, or the perception that any of them could occur, could
have an adverse effect upon the market price for our securities.
Fairfax, OdysseyRe and the named officers and directors intend
to vigorously defend against the consolidated lawsuit and our
financial statements include no provision for loss.
On July 26, 2006, we filed a lawsuit seeking
$6 billion in damages from a number of defendants. The
complaint, filed in Superior Court, Morris County, New Jersey,
alleges violations of various state laws, including the New
Jersey Racketeer Influenced and Corrupt Organizations Act
(RICO), pursuant to which treble damages may be available. The
defendants have removed this lawsuit to the District Court for
the District of New Jersey, and we have filed a motion to remand
the lawsuit to Superior Court, Morris County, New Jersey. There
can be no assurance that this lawsuit will be successful.
Certain
business practices of the insurance industry have become the
subject of investigations by government authorities and the
subject of class action litigation.
In recent years, the insurance industry has been the subject of
a number of investigations, and increasing litigation and
regulatory activity by various insurance, governmental and
enforcement authorities, concerning certain practices within the
industry. These practices include the payment of contingent
commissions by insurance companies to insurance brokers and
agents and the extent to which such compensation has been
disclosed, the solicitation and provision of fictitious or
inflated quotes, the alleged illegal tying of the placement of
insurance business to the purchase of reinsurance, and the sale
and purchase of finite reinsurance or other non-traditional or
loss mitigation insurance products and the accounting treatment
for those products. We have received inquiries and informational
requests from insurance departments in certain states in which
our insurance subsidiaries operate. We
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cannot predict at this time the effect that current
investigations, litigation and regulatory activity will have on
the insurance or reinsurance industry or our business, whether
such activity will expand into areas not yet contemplated, or
whether activities or practices currently thought to be lawful
will be characterized in the future as unlawful. Our involvement
in any investigations and related lawsuits would cause us to
incur legal costs and, if we were found to have violated any
laws, we could be required to pay fines and damages, perhaps in
material amounts. In addition, we could be materially adversely
affected by the negative publicity for the insurance industry
related to these proceedings, and by any new industry-wide
regulations or practices that may result from these proceedings.
It is possible that these investigations or related regulatory
developments will mandate changes in industry practices in a
fashion that increases our costs of doing business or requires
us to alter aspects of the manner in which we conduct our
business.
USE OF
PROCEEDS
Unless we otherwise indicate in the applicable prospectus
supplement, we currently intend to use the net proceeds from the
sale of our securities for general corporate purposes. We may
set forth additional information on the use of net proceeds from
the sale of securities we offer under this prospectus in a
prospectus supplement relating to the specific offering. We may,
from time to time, issue debt instruments, incur additional
indebtedness and issue equity securities or warrants other than
through the issue of securities pursuant to this prospectus.
INSURANCE
REGULATORY MATTERS
We are subject to regulation under the insurance statutes,
including insurance holding company statutes, of the various
jurisdictions in which our operating subsidiaries are domiciled,
including by the federal, state and provincial regulators of the
United States, Canada and the United Kingdom. In addition, we
are subject to regulation by the insurance regulators of other
jurisdictions in which we, or our operating subsidiaries, do
business.
United
States
General
Our United States operating subsidiaries are subject to detailed
regulation throughout the United States. Although there is
limited federal regulation of the insurance business in the
United States, each state has a comprehensive system for
regulating insurers operating in that state. The laws of the
various states establish supervisory agencies with broad
authority to regulate, among other things, licenses to transact
business, premium rates for certain coverages, trade practices,
market conduct, agent licensing, policy forms, underwriting and
claims practices, insurance policy termination, reserve
adequacy, transactions with affiliates, and insurer solvency.
Many states also regulate investment activities on the basis of
quality, distribution and other quantitative criteria. Further,
most states compel participation in and regulate composition of
various shared market mechanisms. States have also enacted
legislation that regulates insurance holding company systems,
including acquisitions, dividends, the terms of affiliate
transactions, and other related matters. Our United States
operating subsidiaries are domiciled in Arizona, California,
Connecticut, Delaware, New Jersey, New York, Rhode Island, Texas
and Washington.
Insurance companies are also affected by a variety of state and
federal legislative and regulatory measures and judicial
decisions that define and qualify the risks and benefits for
which insurance is sought and provided. These include
redefinitions of risk exposure in such areas as product
liability, environmental damage and workers compensation.
In addition, individual state insurance departments may prevent
premium rates for some classes of insureds from reflecting the
level of risk assumed by the insurer for those classes. Such
developments may result in adverse effects on the profitability
of various lines of insurance. In some cases, these adverse
effects on profitability can be minimized, when possible,
through the repricing of coverages if permitted by applicable
regulations, or the limitation or cessation of the affected
business, which may be restricted by state law.
Most states have insurance laws requiring that property and
casualty rate schedules, policy or coverage forms, and other
information be filed with each such states regulatory
authority. In many cases, such rates
and/or
policy forms must be approved prior to use. A few states have
recently considered or enacted limitations on the ability of
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insurers to share data used to compile rates. Such limitations
have had, and are expected to have, no significant impact on us.
Insurance companies are required to file detailed annual and, in
most states, quarterly reports with the state insurance
regulators in each of the states in which they do business, and
their business and accounts are subject to examination by such
regulators at any time. In addition, these insurance regulators
periodically examine each insurers financial condition,
adherence to statutory accounting practices, and compliance with
insurance department rules and regulations, including market
conduct.
Insurance
Regulation Concerning Change or Acquisition of
Control
The insurance regulatory codes in our operating
subsidiaries respective domiciliary states each contain
similar provisions (subject to certain variations) to the effect
that the acquisition of control of a domestic
insurer or of any person that directly or indirectly controls a
domestic insurer cannot be consummated without the prior
approval of the domiciliary insurance regulator. In general, a
presumption of control arises from the direct or
indirect ownership, control, possession with the power to vote
or possession of proxies with respect to 10% or more of the
voting securities of a domestic insurer or of a person that
controls a domestic insurer. A person seeking to acquire
control, directly or indirectly, of a domestic insurance company
or of any person controlling a domestic insurance company
generally must file with the relevant insurance regulatory
authority a statement relating to the acquisition of control
containing certain information required by statute and published
regulations and provide a copy of such statement to the domestic
insurer and obtain the prior approval of such regulatory agency
for the acquisition. In addition, certain state insurance laws
contain provisions that require pre-acquisition notification to
state agencies of a change of control of a non-domestic
insurance company admitted in that state. While such
pre-acquisition notification statutes do not authorize the state
agency to disapprove the change of control, such statutes do
authorize certain remedies, including the issuance of a cease
and desist order with respect to the non-domestic admitted
insurers doing business in the state if certain conditions
exist, such as undue market concentration.
These laws regulating change of control may discourage potential
acquisition proposals and may delay, deter or prevent a change
of control of Fairfax, including through transactions and in
particular unsolicited transactions, that some or all of our
shareholders might consider to be desirable.
Regulation
of Dividends and Other Payments
We are a legal entity separate and distinct from our
subsidiaries. As a holding company with no other business
operations, our primary sources of cash to meet our obligations,
including principal and interest payments with respect to
indebtedness, are available dividends and other statutorily
permitted payments, such as tax allocation payments and
management and other fees, from our operating subsidiaries. Our
operating subsidiaries are subject to various state statutory
and regulatory restrictions, including regulatory restrictions
that are imposed as a matter of administrative policy,
applicable generally to any insurance company in its state of
domicile, which limit the amount of dividends or distributions
an insurance company may pay to its shareholders without prior
regulatory approval. Ordinary dividends, for which no regulatory
approval is generally required, are limited to amounts
determined by formula, which varies by state. The formula
typically is based on the level of statutory surplus at the end
of the prior year, as well as on some measure of statutory
earnings for the prior year, both as determined in accordance
with Statutory Accounting Principles (SAP), which differs from
Canadian and U.S. GAAP. In addition, dividends generally
may be paid only out of earned surplus as defined by
each state. In every case, surplus subsequent to the payment of
any dividends must be reasonable in relation to an insurance
companys outstanding liabilities and must be adequate to
meet its financial needs.
No assurance can be given that some or all of our operating
subsidiaries domiciliary states will not adopt statutory
provisions more restrictive than those currently in effect.
If insurance regulators determine that payment of a dividend or
any other payments to an affiliate (such as payments under a
tax-sharing agreement or payments for employee or other
services) would, because of the financial condition of the
paying insurance company or otherwise, result in such insurance
company being in a hazardous financial condition, the regulators
may prohibit such payments that would otherwise be permitted
without prior approval.
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Statutory
Surplus and Capital
In connection with the licensing of insurance companies, an
insurance regulator may limit or prohibit the writing of new
business by an insurance company within its jurisdiction when,
in the regulators judgment, the insurance company is not
maintaining adequate statutory surplus or capital. We do not
currently anticipate that any regulator would limit the amount
of new business that our operating subsidiaries may write given
their current levels of statutory surplus and capital.
Risk-Based
Capital
In order to enhance the regulation of insurer solvency, the
National Association of Insurance Commissioners (NAIC) adopted
risk-based capital (RBC) requirements for property and casualty
insurance companies. These RBC requirements, which have been
codified in most US jurisdictions, are designed to monitor
capital adequacy and to raise the level of protection that
statutory surplus provides for policyholders. The RBC formula
measures four major areas of risk facing property and casualty
insurers: (i) underwriting risk, which is the risk of
errors in pricing and reserve setting; (ii) asset risk,
which is the risk of asset default for fixed-income assets and
loss in market value for equity assets; (iii) credit risk,
which is the risk of losses from unrecoverable reinsurance and
the inability of insurers to collect agents balances; and
(iv) off-balance sheet risk, which is primarily the risk
created by excessive growth. The RBC formula provides a
mechanism for the calculation of an insurance companys
Authorized Control Level (ACL) RBC amount.
The NAIC RBC model law stipulates four levels of regulatory
action with the degree of regulatory intervention increasing as
the ratio of surplus to RBC decreases. The initial level, the
Company Action Level, requires the insurance company
to submit a plan of corrective action to the relevant insurance
commissioner if its surplus falls below 200% of the ACL amount
(or below 250% of the ACL amount, when there has been a
negative trend as defined under the model law). The
next level, the Regulatory Action Level, requires
the company to submit a plan of corrective action and also
allows the regulator to perform an examination of the
companys business and operations and issue a corrective
order if the surplus falls below 150% of the ACL amount. The
third level, the ACL, permits the regulator to place the company
under regulatory control, including rehabilitation or
liquidation, if its surplus falls below 100% of that amount. The
final action level, the Mandatory Control Level,
requires the insurance commissioner to place the company under
regulatory control if its surplus falls below 70% of the ACL
amount.
NAIC
IRIS Ratios
In the 1970s, the NAIC developed a set of financial
relationships or tests called the Insurance
Regulatory Information System (IRIS) that was designed to
facilitate early identification of companies that may warrant
special attention by insurance regulatory authorities. Insurance
companies submit data on an annual basis to the NAIC, which in
turn analyzes the data utilizing ratios covering 12 categories
of financial data with defined usual ranges for each
category. An insurance company may fall out of the usual range
for one or more ratios because of specific transactions that are
in themselves immaterial or eliminated at the consolidated
level. Generally, an insurance company may become subject to
increased scrutiny if it falls outside the usual ranges on four
or more of the ratios. Certain IRIS ratios of some of our
operating subsidiaries fall outside of the usual ranges. In all
instances where
follow-up
information has been requested, our responses have not resulted
in additional requests or further action.
Investment
Regulation
Our operating subsidiaries are subject to state laws and
regulations that require diversification of investment
portfolios and that limit the amount of investments in certain
investment categories. Failure to comply with these laws and
regulations may cause non-conforming investments to be treated
as non-admitted assets for purposes of measuring statutory
surplus and, in some instances, would require divestiture. As of
the date of this prospectus, we believe our investments comply
with such laws and regulations in all material respects.
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Credit
for Reinsurance and Licensing
A primary insurer ordinarily will enter into a reinsurance
agreement only if it can obtain credit for the reinsurance ceded
on its statutory financial statements. In general, credit for
reinsurance is allowed in the following circumstances:
(1) if the reinsurer is licensed in the state in which the
primary insurer is domiciled or, in some instances, in certain
states in which the primary insurer is licensed; (2) if the
reinsurer is an accredited or otherwise approved
reinsurer in the state in which the primary insurer is domiciled
or, in some instances, in certain states in which the primary
insurer is licensed; (3) in some instances, if the
reinsurer (a) is domiciled in a state that is deemed to
have substantially similar credit for reinsurance standards as
the state in which the primary insurer is domiciled and
(b) meets certain financial requirements; or (4) if
none of the above apply, to the extent that the reinsurance
obligations of the reinsurer are collateralized appropriately,
typically through the posting of a letter of credit for the
benefit of the primary insurer or the deposit of assets into a
trust fund established for the benefit of the primary insurer.
As a result of the requirements relating to the provision of
credit for reinsurance, our United States insurance subsidiaries
face the above constraints in their dealings with
out-of-state
reinsurers and our reinsurance subsidiaries are indirectly
subject to certain regulatory requirements imposed by
jurisdictions in which ceding companies are licensed.
Guaranty
Funds
All 50 states have separate insurance guaranty fund laws
requiring property and casualty insurance companies doing
business within their respective jurisdictions to be members of
their guaranty associations. These associations are organized to
pay covered claims (as defined and limited by the various
guaranty association statutes) under insurance policies issued
by insolvent insurance companies. Such guaranty association
laws, except the one applicable in New York, create
post-assessment associations that make assessments against
member insurers to obtain funds to pay association covered
claims after an insurer becomes insolvent. These associations
levy assessments (up to prescribed limits) on all member
insurers in a particular state on the basis of the proportionate
share of the premiums written by member insurers in the covered
lines of business in that state. Maximum assessments permitted
by law in any one year generally vary between 1% and 2% of
annual premiums written by a member in that state. New York has
a pre-assessment guaranty fund, which makes assessments prior to
the occurrence of an insolvency. Florida, New Jersey, New York
and Pennsylvania have created, by statute, a separate guaranty
association for workers compensation business. Some states
permit member insurers to recover assessments paid through
surcharges on policyholders or through full or partial premium
tax offsets, while other states permit recovery of assessments
through the rate filing process.
Our policy is to accrue for insolvencies when the loss is
probable and the assessment amount can be reasonably estimated.
In the case of most insurance insolvencies, our ability to
reasonably estimate the insolvent insurers liabilities or
develop a meaningful range of the insolvent insurers
liabilities is significantly impaired by inadequate financial
data with respect to the estate of the insolvent company as
supplied by the guaranty funds. Although the amounts of any
future assessments by guaranty funds cannot be predicted with
certainty, we believe that future guaranty association
assessments for known insurer insolvencies will not have a
material adverse effect on our results of operations or
financial condition.
Shared
Markets
As a condition of their licenses to do business, our operating
subsidiaries are required to participate in mandatory property
and casualty shared market mechanisms or pooling arrangements,
which provide various types of insurance coverage to individuals
or other entities that are otherwise unable to purchase such
coverage in the commercial insurance marketplace. Our United
States operating subsidiaries participation in such shared
markets or pooling mechanisms is generally proportionate to the
amount of each of our operating subsidiaries direct
premiums written for the type of coverage written by the
specific pooling mechanism in the applicable state.
Many states have laws that established second-injury funds to
provide compensation to injured employees for aggravation of a
prior condition or injury. Insurers writing workers
compensation in those states having second-injury funds are
subject to the laws creating the funds, including the various
funding mechanisms that those states have adopted to fund the
second-injury funds. Several of the states having larger
second-injury funds utilize a
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premium surcharge that effectively passes the cost of the fund
on to policyholders. Other states assess the insurer based on
paid losses and allow the insurer to recoup the assessment
through future premium rates.
Commercial automobile insurance and workers compensation
lines have mandatory pooling arrangements on a
state-by-state
basis for segments of the market that have difficulty finding
coverage from insurers. The shared market mechanisms for
providing commercial automobile coverages are generally assigned
risk plans, reinsurance facilities and joint underwriting
facilities. Additionally, another pooling mechanism, a
Commercial Automobile Insurance Procedure (CAIP), uses a limited
number of servicing carriers to handle assignments from other
insurers. The CAIP servicing carrier is paid a fee for the
responsibility of handling the commercial automobile policy and
paying claims. For workers compensation, the pooling in
each state is generally in the form of a reinsurance-type
arrangement with servicing carriers providing the policy
services and claims handling services. The National Council of
Compensation Insurance provides services for calculating member
pooling of losses and expenses in 32 states, with the
remainder of the states having their own independent servicing
plans. Certain of our operating subsidiaries participate in the
Florida Hurricane Catastrophe Fund, a state-mandated catastrophe
reinsurance fund. Business insurance is also subject to pooled
insurance on a small scale for commercial properties insured
through the various Fair Access to Insurance Requirements Plans
that exist in most states.
The amount of future losses or assessments from the shared
market mechanisms and pooling arrangements described above
cannot be predicted with certainty. The underwriting results of
these pools traditionally have been unprofitable. Although it is
possible that future losses or assessments from such mechanisms
and pooling arrangements could have a material adverse effect on
our results of operations, we do not expect future losses or
assessments to have a material adverse effect on our liquidity
or capital resources.
Liquidation
of Insurers
The liquidation of United States insurance companies, including
reinsurers, is generally conducted pursuant to state insurance
law. In the event of the liquidation of one of our United States
operating insurance subsidiaries, liquidation proceedings would
be conducted by the insurance regulator of the state in which
the subsidiary is domiciled, which would serve as the domestic
receiver of its properties, assets and business. Liquidators
located in other states (known as ancillary liquidators) in
which we conduct business may have jurisdiction over assets or
properties located in such states under certain circumstances.
In a liquidation, policyholders would have priority over
investors.
Privacy
Regulation
The Gramm-Leach-Bliley Act and regulations promulgated under the
Act, as well as state privacy statutes and regulations, govern
the privacy of consumer financial information. The regulations
limit disclosure by financial institutions of nonpublic
personal information about individuals who obtain
financial products or services for personal, family, or
household purposes. The Act and the regulations, as well as
state privacy laws, generally apply to disclosures to
nonaffiliated third parties, subject to specified exceptions,
but not to disclosures to affiliates. Privacy regulation is an
evolving area of state and federal regulation, which requires us
to continue to monitor developments.
Terrorism
Risk Insurance Act of 2002
The Terrorism Risk Insurance Act of 2002 (TRIA) established a
program under which the U.S. federal government will share
with the insurance industry the risk of loss from certain acts
of terrorism certified as such by the Secretary of the Treasury.
TRIA provides federal reimbursement only for acts of terrorism
committed on behalf of foreign persons or foreign interests, and
is subject to certain other limitations and restrictions. With
the enactment on December 22, 2005 of the Terrorism Risk
Insurance Extension Act of 2005, TRIA has now been modified and
extended to cover insured losses arising out of acts of
terrorism occurring on or before December 31, 2007. The
program is applicable to substantially all commercial property
and casualty lines of business (with the notable exception of
reinsurance), and participation by insurers writing such lines
is mandatory. Under TRIA, insurers are required to offer
coverage for losses arising from acts of terrorism certified by
the Secretary of the Treasury on terms and in amounts which may
not differ materially from other policy coverages.
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Under TRIA, the federal government will reimburse insurers for a
percentage of covered losses above a defined insurer deductible.
The deductible for each participating insurer is based on a
percentage of the direct earned premiums in the preceding
calendar year of the insurer, defined to include its
subsidiaries and affiliates. In 2007, the deductible is equal to
20% of the insurers direct earned premiums for 2006. For
losses occurring in 2007, the federal government will reimburse
85% of covered losses over the deductible. However, no federal
reimbursement is available unless the aggregate industry-wide
losses from a certified act of terrorism occurring in 2007
exceed $100 million. Under certain circumstances, the
federal government may require insurers to levy premium
surcharges on policyholders to recoup for the federal government
its reimbursements paid.
Although TRIA is scheduled to expire on December 31, 2007,
Congress is expected to introduce legislation for its extension
later this year. However, even if TRIA is extended, it is not
clear how much protection the federal government will provide to
the insurance industry against terrorism losses occurring after
December 31, 2007. While the provisions of TRIA and the
purchase of certain terrorism reinsurance coverage mitigate our
exposure in the event of a large-scale terrorist attack, our
effective deductible is significant. Further, our exposure to
losses from terrorist acts is not limited to certified acts of
terrorism covered by TRIA since terrorism committed on behalf of
US persons or interests is generally not excluded from our
policies and, regardless of TRIA, some state insurance
regulators do not permit terrorism exclusions for various
coverages or causes of loss. Accordingly, we continue to monitor
carefully our concentrations of risk.
Possible
Legislative and Regulatory Changes
In recent years, the insurance industry has been subject to
increased scrutiny by regulators and legislators. The NAIC and a
number of state legislatures have considered or adopted
legislative proposals that alter and, in many cases, increase
the authority of state agencies to regulate insurance companies
and holding company systems. In addition, several committees of
Congress have made inquiries and conducted hearings as part of a
broad study of the regulation of insurance companies, and
legislation has been introduced in several of the past sessions
of Congress which, if enacted, could result in the federal
government assuming some role in the regulation of the insurance
industry, such as through the establishment of federally
chartered insurers, or the repeal or curtailment of the
McCarran-Ferguson Act (which constitutes the primary federal
legislative authorization for state-based insurance regulation).
Although the federal government does not regulate the business
of insurance directly, federal initiatives often affect the
insurance business in a variety of ways.
The Fairness in Asbestos Injury Resolution Act of 2005
(FAIR) would have largely removed asbestos claims
from the courts in favor of an administrative process that would
pay awards out of a trust fund on a no fault basis
to claimants meeting asbestos exposure and medical criteria. The
proposed trust would have been funded by contributions from
corporate defendants, insurers and existing bankruptcy trusts.
In February 2006, the U.S. Senate effectively denied
passage of FAIR. At this time, we are unable to predict what
asbestos-related legislation, if any, may be proposed in the
future, or the impact such legislation may have on our
operations.
Finally, the ongoing investigations discussed above of insurance
industry business practices may result in new laws or
regulations at the state or federal level. See Risk
Factors Certain business practices of the insurance
industry have become the subject of investigations by government
authorities and the subject of class action litigation.
It is not possible to predict the outcome of any of the
foregoing legislative, administrative or congressional
activities or the potential effects thereof on us.
Canada
General
Each of our Canadian insurance subsidiaries is federally
incorporated under the Insurance Companies Act (ICA) and
is licensed under insurance legislation in each of the provinces
and territories in which it operates.
The ICA and provincial legislation require the filing by our
Canadian insurance subsidiaries of annual and other reports on
their financial condition, impose restrictions on transactions
with related parties and set forth requirements governing
reserves for actuarial liabilities and the safekeeping of assets
and other matters. The ICA is
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administered, and the activities of our insurance subsidiaries
are supervised, by the Office of the Superintendent of Financial
Institutions (OSFI). OSFI conducts examinations to ensure
compliance with applicable legislation and to confirm the
financial condition of the companies.
Investment
Powers
Under the ICA, an insurance company must maintain a prudent
portfolio of investments and loans, subject to certain overall
limitations on the amount it may invest in certain classes of
investments, such as commercial loans, real estate and equities.
Additional restrictions (and in some cases, the need for
regulatory approvals) limit the nature of an insurance
companys investments.
Capital
Requirements
Property and casualty insurers are required to meet a Minimum
Capital Test (MCT) that assesses the insurers capital
available to capital required. Federally regulated property and
casualty insurers, including our Canadian insurance
subsidiaries, must maintain available capital equal to at least
the minimum capital requirement. OSFI expects insurers to
establish a target capital level above the minimum requirement,
and to maintain ongoing capital, at no less than the supervisory
target of 150% of the MCT amount. However, OSFI may, on a
case-by-case
basis, establish in consultation with an insurer an alternate
supervisory target based upon the companys risk profile.
The ICA requires property and casualty insurance companies to
maintain a minimum amount of capital calculated by reference to,
and varying with, the risk characteristics of each category of
on and off-balance sheet assets held by the company, policy
liabilities and reinsurance receivable and recoverable. This MCT
calculation typically requires the application of quantitative
factors to assets, as well as to certain off-balance sheet
items, based on a number of prescribed risk components. The
calculation of policy liabilities takes into account the risk
associated with variations in claims, provisions, possible
inadequacy of provisions for unearned premiums and the
occurrence of catastrophes. The calculation of reinsurance
receivable and recoverable includes the risk of default for
recoverables from reinsurers arising from both credit and
actuarial risk.
Restrictions
on Dividends and Capital Transactions
Our insurance subsidiaries require regulatory approval prior to
withdrawal of capital and, in certain circumstances, prior to
the payment of dividends. The ICA prohibits the declaration or
payment of any dividend on shares of an insurance company if
there are reasonable grounds for believing a company is, or the
payment of the dividend would cause the company to be, in
contravention of applicable capital requirements. The ICA also
prohibits the declaration or payment of a dividend in any
financial year without OSFI approval if, at the time the
dividend is declared, the total of the dividends declared by the
company in that year would exceed the companys aggregate
net income up to that time in that year and its retained net
income for the preceding two financial years. The ICA also
requires an insurance company to notify the Superintendent of
Financial Institutions of the declaration of a dividend at least
10 days prior to the date fixed for its payment. Similarly,
the ICA prohibits the purchase for cancellation of any shares
issued by an insurance company or the redemption of any
redeemable shares or other similar capital transactions, if
there are reasonable grounds for believing that he company is,
or the payment would cause the company to be, in contravention
of its applicable capital requirements. These latter
transactions would also require the prior approval of the
Superintendent of Financial Institutions.
Constraints
on Shares
The ICA contains certain restrictions on the purchase or other
acquisition, issue, transfer and voting of any shares of an
insurance company. Pursuant to these restrictions, no person is
permitted to acquire shares of any of our Canadian insurance
subsidiaries, or to acquire control of a company who holds such
an interest, if the acquisition would cause the person to have a
significant interest in any class of shares of the
company, unless the prior approval of the Minister of Finance
(Canada) is obtained. In addition, we are not permitted to
record any transfer or issue of shares of an insurance
subsidiary if the transfer or issue would cause the person to
have a significant interest in the company and such interest has
not been approved. No person who has a significant interest in
such a company may exercise any voting rights attached to the
shares held by such, person unless the prior approval of the
Minister of Finance (Canada) is obtained. If a person
contravenes any of these restrictions, the Minister of Finance
(Canada)
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may, by order, direct that person to dispose of all or any
portion of those shares. For these purposes, a person has a
significant interest in a class of shares of an insurance
company where the aggregate of any shares of that class
beneficially owned by that person, or an entity controlled by
that person and by any person associated or acting jointly or in
concert with that person, exceeds 10% of all outstanding shares
of that class of shares of the company.
Provincial
Insurance Regulation
Each of our insurance subsidiaries is subject to provincial and
territorial regulation and supervision in each of the provinces
and territories of Canada in which they carry on business.
Provincial insurance regulations deal primarily with the form of
insurance contracts and the sale and marketing of insurance
products, including licensing and supervision of insurance
distributors. In the provinces of Alberta, Ontario, New
Brunswick and Newfoundland premium rates for automobile
insurance are regulated by public authorities. They require
insurers to submit proposed rates to a regulatory body and have
them approved before use. The approval process may also involve
a hearing. With respect to insurance policies, provincial
regulation automatically deems different insurance contracts to
include certain terms that cannot be changed without the
approval of the relevant regulatory authority.
Property
and Casualty Insurance Compensation Corporation
(PACICC)
The Canadian property and casualty insurance industry created
PACICC to provide Canadian policyholders with protection, within
limits, against the loss of policy benefits in the event of the
insolvency of their insurance company. PACICC is funded by its
member insurance companies, including our Canadian property and
casualty insurance subsidiaries.
United
Kingdom
Acquisition
or Change of Control
The United Kingdom Insurance Companies Act of 1982 requires
prior approval by the Financial Services Authority of anyone
proposing to become a controller of an insurance company or a
reinsurance company that carries on business in the United
Kingdom but which is incorporated outside the United Kingdom. In
this case, any company or individual who is entitled to exercise
or control the exercise of 10% or more of the voting power at
any general meeting of the insurance company or reinsurance
company or of a body corporate of which it is a subsidiary, is
considered a controller. The operating subsidiaries
of OdysseyRe in its London Market division carry on business in
the United Kingdom.
Under the bylaws made by Lloyds pursuant to the
Lloyds Act of 1982, the prior written approval of the
Council of Lloyds is required of anyone proposing to
become a controller of any Lloyds Managing
Agency. Any company or individual that holds 10% or more of the
shares in the managing agency company, or is entitled to
exercise or control the exercise of 10% or more of the voting
power at any general meeting of the Lloyds Managing Agency
or, in both cases, of another company of which the
Lloyds Managing Agency is a subsidiary, is considered a
controller. Newline, a subsidiary of OdysseyRe, is a
Lloyds Managing Agency.
Dividends
U.K. law prohibits any U.K. company from declaring a dividend to
its stockholders unless such company has profits available
for distribution. The determination of whether a company
has profits available for distribution is based on a
companys accumulated realized profits less its accumulated
realized losses. While there are no additional statutory
restrictions imposed by the United Kingdom insurance regulatory
laws upon an insurers ability to declare dividends,
insurance regulators in the United Kingdom strictly control the
maintenance of each insurance companys solvency margin
within their jurisdiction and may restrict an insurer from
declaring a dividend beyond a level which the regulators
determine would adversely affect an insurers solvency
requirements. It is common practice in the United Kingdom to
notify regulators in advance of any significant dividend payment.
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DESCRIPTION
OF DEBT SECURITIES
We may issue debt securities from time to time in one or more
series. This section summarizes the general terms and provisions
of the debt securities that will be common to all series that we
offer pursuant to this prospectus. The specific terms relating
to any series of our debt securities that we offer will be
described in a prospectus supplement. You should read the
applicable prospectus supplement for the terms of the series of
debt securities offered. Because the terms of specific series of
debt securities offered may differ from the general information
that we have provided below, you should rely on information in
the applicable prospectus supplement that contradicts any
information below.
As required by U.S. federal law for all bonds and notes of
companies that are publicly offered, the debt securities will be
governed by a document called an indenture. An
indenture is a contract between a financial institution, acting
on your behalf as trustee of the debt securities offered, and
us. The debt securities will be issued pursuant to an indenture
dated as of December 1, 1993, among us, The Bank of New
York, as the successor U.S. trustee, and CIBC Mellon Trust
Company, as the successor Canadian trustee. The
U.S. trustee and the Canadian trustee are referred to
together in this prospectus as the trustees. When we refer to
the indenture in this prospectus, we are referring
to the indenture dated December 1, 1993 under which your
debt securities will be issued, as supplemented by any
supplemental indenture which may be applicable to your debt
securities. The trustees have two main roles. First, subject to
some limitations on the extent to which the trustees can act on
your behalf, the trustees can enforce your rights against us if
we default on our obligations under the indenture. Second, the
trustees perform certain administrative duties for us.
The following section is a summary of the principal terms and
provisions of the indenture. This summary is not complete.
Because this section is a summary, it does not describe every
aspect of the debt securities or the indenture. If we refer to
particular provisions in the indenture, such provisions,
including the definition of terms, are incorporated by reference
in this prospectus as part of this summary. We urge you to read
the indenture and any supplements thereto that are applicable to
you because the indenture, as supplemented, and not this
section, defines your rights as a holder of debt securities.
General
The debt securities offered hereby will be our unsecured
obligations. The debt securities will be either our senior
unsecured obligations issued in one or more series and referred
to herein as the senior debt securities, or our
subordinated unsecured obligations issued in one or more series
and referred to herein as the subordinated debt
securities. The senior debt securities will rank equal in
right of payment to all of our other unsecured and
unsubordinated indebtedness. The subordinated debt securities
will be subordinated in right of payment to the prior payment in
full of our senior debt securities and our senior indebtedness.
You should read the applicable prospectus supplement for the
terms of the series of debt securities offered. The terms of the
debt securities described in such prospectus supplement will be
set forth in the indenture and in one or more resolutions of our
board of directors, or pursuant to authority granted by one or
more resolutions of our board of directors, or established
pursuant to one or more supplemental indentures and may include
the following, as applicable to the series of debt securities
offered thereby:
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the title of the debt securities;
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any limit upon the aggregate principal amount of the debt
securities that may be authenticated and delivered under the
indenture;
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the date or dates on which the principal of the debt securities
is payable;
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the rate or rates at which the debt securities will bear
interest, if any, the date or dates from which interest will
accrue and the dates on which interest will be payable;
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the basis upon which interest will be calculated if other than
on the basis of a
360-day year
of twelve
30-day
months;
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the place or places, if any, other than or in addition to the
City of New York, where the principal of (and premium, if any)
and any interest on debt securities will be payable, any debt
securities may be surrendered for registration of transfer, debt
securities may be surrendered for exchange and the place or
places where notices or demands to or upon us in respect of the
debt securities may be served;
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whether we have the option to redeem the debt securities,
whether in whole or in part, and the period or periods within
which, the price or prices at which, the currency in which, and
other terms and conditions upon which debt securities may be
redeemed;
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whether we have the obligation, if any, to redeem, repay or
purchase the debt securities pursuant to any sinking fund or
analogous provision or at the option of a holder of debt
securities, and the period or periods within which, the price or
prices at which, the currency in which, and other terms and
conditions upon which debt securities will be redeemed, repaid
or purchased, in whole or in part, pursuant to such obligation;
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if other than denominations of $1,000 and any integral multiple
thereof, the denominations in which any debt securities will be
issuable;
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if other than us or one of the trustees, the identity of each
registrar
and/or
paying agent;
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if other than the principal amount, the portion of the principal
amount of debt securities that will be payable upon declaration
of acceleration;
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if other than U.S. dollars, the currency in which payment
of the principal of, and premium, if any, or interest, if any,
on the debt securities will be payable or in which the debt
securities will be denominated;
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whether the amount of payments of principal of, and premium, if
any, or interest on the debt securities may be determined with
reference to a formula or other method, and the manner in which
such amounts will be determined;
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whether the principal of, and premium, if any, and interest, if
any, on the debt securities are to be payable, at our election
or at the election of a holder, in a currency other than that in
which such debt securities are denominated or stated to be
payable, the period or periods within which, and the terms and
conditions upon which, such election may be made, and the time
and manner of determining the exchange rate between the currency
in which such debt securities are denominated or stated to be
payable and the currency in which such debt securities are to be
so payable;
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the designation of the initial exchange rate agent, if any;
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any provisions limiting the applicability of, in modification
of, in addition to or in lieu of the defeasance provisions of
the indenture that will be applicable to the debt securities;
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provisions, if any, granting special rights to the holders of
debt securities upon the occurrence of such events as may be
specified;
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any deletions from, modifications of or additions to the events
of default or covenants with respect to debt securities, whether
or not such events of default or covenants are consistent with
the events of default or covenants in the indenture;
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whether any debt securities are to be issuable in global form
and, if so, whether beneficial owners of interests in any such
global security may exchange such interests for debt securities
of such series and of like tenor of any authorized form and
denomination and the circumstances under which any such
exchanges may occur;
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the person to whom any interest on any security will be payable,
if other than the person in whose name that security is
registered at the close of business on the record date for such
interest;
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if debt securities are to be issuable in definitive form,
whether upon original issue or upon exchange of a temporary
security of such series, only upon receipt of certain
certificates or other documents or satisfaction of other
conditions, the form
and/or terms
of such certificates, documents or conditions;
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any other terms, conditions, rights and preferences, or
limitations on such rights and preferences, such as the
subordination of the debt securities to our senior debt; and
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any other terms specific to the debt securities offered,
including whether the debt securities will be senior debt
securities or subordinated debt securities.
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Unless we indicate differently in the applicable prospectus
supplement, the indenture pursuant to which the debt securities
are issued does not contain any provisions that give you
protection in the event we issue a large amount of debt, or in
the event that we are acquired by another entity.
Form and
Denomination of Debt Securities
Unless we indicate differently in the applicable prospectus
supplement, the debt securities will be denominated in
U.S. dollars, in minimum denominations of $1,000 and
multiples thereof.
We may issue the debt securities in registered form, in which
case we may issue them either in book-entry form only or in
certificated form. We also will have the option of
issuing debt securities in non-registered form, as bearer
securities, if we issue the securities outside the United States
to
non-U.S. persons.
In that case, the applicable prospectus supplement will set
forth the mechanics for holding the bearer securities, including
the procedures for receiving payments, for exchanging the bearer
securities for registered securities of the same series and for
receiving notices. The applicable prospectus supplement will
also describe the requirements with respect to our maintenance
of offices or agencies outside the United States and the
applicable U.S. federal tax law requirements.
Form,
Exchange and Transfer of Registered Securities
If we cease to issue registered debt securities in global form,
we will issue them:
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only in fully registered certificated form; and
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unless we indicate otherwise in the applicable prospectus
supplement, in denominations of $1,000 and amounts that are
multiples of $1,000.
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Holders may exchange their certificated securities for debt
securities of smaller denominations or combined into fewer debt
securities of larger denominations, as long as the total
principal amount is not changed.
We will maintain an office or agency, specified in the
applicable prospectus supplement, in each place of payment for
the debt securities where securities of that series may be
presented or surrendered for payment, registration of transfer
or exchange.
Holders will not be required to pay a service charge to transfer
or exchange their certificated securities, but they may be
required to pay any tax or other governmental charge associated
with the transfer or exchange. The transfer or exchange will be
made only if our transfer agent is satisfied with the
holders proof of legal ownership.
If any debt securities of a particular series are redeemable, we
may block the transfer or exchange of those debt securities
during the period beginning 15 days before the day we mail
the notice of redemption and ending on the day of that mailing.
We may also refuse to register transfers or exchanges of any
debt securities selected for redemption or to register transfers
or exchanges of any debt securities surrendered for repayment at
the option of the holder, except that we will continue to permit
transfers and exchanges of the unredeemed portion of any debt
security that will be partially redeemed.
If a registered debt security is issued in global form, only the
depositary will be entitled to transfer and exchange the debt
security as described in this subsection because it will be the
sole holder of the debt security.
Payment
and Paying Agents
On each due date for interest payments on the debt securities,
we will pay interest to each person shown on our records as
owner of the debt securities at the close of business on a
designated day that is in advance of the due date for interest.
We will pay interest to each such person even if such person no
longer owns the debt security on the interest due date. The
designated day on which we will determine the owner of the debt
security, as shown on our
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records, is also known as the record date. The
record date will usually be about two weeks in advance of the
interest due date.
Because we will pay interest on the debt securities to the
holders of the debt securities based on ownership as of the
applicable record date with respect to any given interest
period, and not to the holders of the debt securities on the
interest due date (that is, the day that the interest is to be
paid), it is up to the holders who are buying and selling the
debt securities to work out between themselves the appropriate
purchase price for the debt securities. It is common for
purchase prices of debt securities to be adjusted so as to
prorate the interest on the debt securities fairly between the
buyer and the seller based on their respective ownership periods
within the applicable interest period.
Payments
on Global Securities
We will make payments on a global security directly to the
registered holders generally or a depositary or its nominee, and
not to any indirect holders who own beneficial interests in the
global security. An indirect holders right to those
payments will be governed by the rules and practices of the
depositary and its participants, as described under
Global Securities below.
Payments
on Certificated Securities
We will make interest payments on debt securities held in
certificated form by mailing a check or by wire transfer to an
account maintained by the holder of the certificated securities
located in the United States, as shown on our records, as of the
close of business on the record date. Alternatively, we may make
interest payments by mailing a check for such interest on each
due date for interest payments to such holder of the
certificated securities. We will make all payments of principal
and premium, if any, on the certificated securities by check at
our office or agency to be maintained in New York City, New
York, and/or
at other offices that may be specified in the applicable
prospectus supplement or in a notice to holders, against
surrender of the certificated security.
Payment
When Offices Are Closed
If payment on a debt security is due on a day that is not a
business day, we will make such payment on the next succeeding
business day. The indenture provides that such payments will be
treated as if they were made on the original due date for
payment. A postponement of this kind will not result in a
default under any debt security or indenture, and no interest
will accrue on the amount of any payment that is postponed in
this manner.
Book-entry and other indirect holders should consult their
banks or brokers for information on how they will receive
payments on their debt securities.
Events of
Default
You will have special rights if an Event of Default occurs with
respect to your debt securities and such Event of Default is not
cured, as described later in this subsection.
Unless otherwise specified in the applicable prospectus
supplement, the term Event of Default with respect
to the debt securities offered means any of the following:
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We do not pay the principal of, or any premium on, the debt
security on its due date.
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We do not pay interest on the debt security within 30 days
of its due date.
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We do not deposit any sinking fund payment, if applicable, with
respect to the debt securities on its due date.
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We remain in breach of a covenant or warranty (other than any
payment covenant or a covenant or warranty included solely for
the benefit of a different series of debt securities) in the
indenture for 60 days after we receive a written notice of
default stating that we are in breach. The notice must be sent
by either of the trustees or the holders of at least 25% of the
principal amount of the debt securities of the affected series.
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We default in the payment, at the stated maturity, of any of our
indebtedness for borrowed money in excess of $10 million,
or such indebtedness is accelerated, if such indebtedness has
not been discharged, or such
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acceleration has not been rescinded or annulled, within
10 days after written notice has been given by either
trustee, or the holders of at least 25% of the principal amount
of all of the outstanding debt securities.
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We file for bankruptcy or certain other events of bankruptcy,
insolvency or reorganization occur.
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Any other Event of Default that may be described in the
applicable prospectus supplement, and set forth in the
applicable supplemental indenture, occurs.
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An Event of Default for a particular series of debt securities
does not necessarily constitute an Event of Default for any
other series of debt securities issued under the indenture.
Remedies
if an Event of Default Occurs
If an Event of Default has occurred and has not been cured
within the applicable time period, the trustees or the holders
of 25% in principal amount of the debt securities of the
affected series (or, in some cases, the holders of 25% in
principal amount of the debt securities of all series) may
declare the entire principal amount of all the debt securities
of that series to be immediately due and payable. This is called
a declaration of acceleration of maturity. A declaration of
acceleration of maturity may be rescinded in certain
circumstances by the holders of at least a majority in principal
amount of the debt securities of the affected series or of all
series, as the case may be. A declaration of acceleration of
maturity following an event of default caused by a default in
payment or acceleration of any of our indebtedness for borrowed
money will be automatically annulled if such indebtedness is
discharged or the holders of such indebtedness rescind their
declaration of acceleration.
The trustees may withhold notice to the holders of debt
securities of any default, except in the payment of principal or
interest or the payment of any sinking fund installment, if they
consider the withholding of notice to be in the best interests
of the holders. Additionally, the trustees are not required to
take any action under the indenture at the request of any of the
holders of the debt securities unless such holders offer the
trustees reasonable protection from expenses and liability
(called an indemnity). If reasonable indemnity is
provided, the holders of a majority in principal amount of the
outstanding debt securities of the relevant series may direct
the time, method and place of conduct of any lawsuit or other
formal legal action seeking any remedy available to the
trustees. The trustees may refuse to follow those directions in
certain circumstances. No delay or omission in exercising any
right or remedy will be treated as a waiver of that right,
remedy or Event of Default.
Before a holder is allowed to bypass the trustees and bring its
own lawsuit or other formal legal action or take other steps to
enforce its rights or protect its interests relating to its debt
securities, the following must occur:
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The holder must give the trustee written notice that an Event of
Default has occurred and remains uncured.
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The holders of 25% in principal amount of all outstanding debt
securities of the relevant series or, in some cases, of all
series must make a written request that the trustee take action
because of the default that has occurred and must offer
reasonable indemnity to the trustee against the cost and other
liabilities of taking that action.
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The trustee must not have taken any action for 60 days
after receipt of the above notice, request and offer of
indemnity.
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The holders of a majority in principal amount of the debt
securities of the relevant series or, in some cases, of all
series must not have given the trustee a direction inconsistent
with the above notice or request.
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Notwithstanding the above, a holder is entitled at any time to
bring a lawsuit for the payment of money due on your debt
securities on or after the due date for payment.
Holders of a majority in principal amount of the debt securities
of the affected series or, in some cases, of all series may
waive any past defaults other than:
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the payment of principal, or any premium or interest, on the
affected series of debt securities; or
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a default in respect of a covenant that cannot be modified or
amended without the consent of each holder of the affected
series of debt securities.
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Book-entry and other indirect holders should consult their
banks or brokers for information on how to give notice or
direction to or make a request of the trustee, and how to
declare or rescind an acceleration of maturity on their debt
securities.
Limitations
on Liens on Capital Stock of Restricted Subsidiaries
The indenture provides that we may not, and may not permit any
subsidiary to, create, assume, incur or suffer to exist any
lien, other than a purchase money lien, upon any capital stock
of any restricted subsidiary, to secure any obligation, other
than the debt securities, without in any such case making
effective provision whereby all of the outstanding securities
shall be directly secured equally and ratably with such
obligation. This restriction will not apply, however, to
(i) liens on the capital stock of any restricted subsidiary
securing obligations outstanding from time to time under any
bank credit facility, provided that the principal amount
of all such obligations secured by liens on the capital stock of
any restricted subsidiary, at the time of each incurrence of any
portion of such obligation, does not exceed 15% of the sum of
(A) our consolidated shareholders equity at the end
of our most recently completed fiscal quarter immediately
preceding such incurrence for which financial statements are or
are required to be available and (B) the aggregate
principal amount of all obligations which are outstanding under
any bank credit facility immediately after giving effect to such
incurrence and which are secured by liens on the capital stock
of a restricted subsidiary, and (ii) liens securing
obligations from us to any wholly-owned restricted subsidiary or
from any wholly-owned restricted subsidiary to us or any other
wholly-owned restricted subsidiary. A restricted subsidiary is
any subsidiary that is a licensed insurance company, other than
any licensed insurance company that our board of directors, in
good faith, determines is not, individually or together with any
other licensed insurance company as to which a similar
determination has been made, material to our business,
considered as a whole.
Merger or
Consolidation
Unless otherwise specified in the applicable prospectus
supplement, the terms of the indenture will generally permit us
to amalgamate or consolidate with or merge into another
corporation or convey, transfer or lease substantially all of
our assets to another corporation. However, we may not take any
of these actions unless, among other things, the following
conditions are met:
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in the event that, as a result of the transaction, we are not
the surviving entity or we convey, transfer or lease all or
substantially all of our assets, the surviving entity must be a
corporation, partnership or trust organized under the laws of a
jurisdiction in Canada or the United States and such entity must
agree to be legally responsible for the debt securities; and
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after giving effect to the transaction, no Event of Default
shall have occurred or be continuing.
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Modification
or Waiver
There are three types of changes we can make to the indenture
and the debt securities issued thereunder.
Changes
Not Requiring Consent of Holders
There are certain changes that we may make to your debt
securities without your specific approval and without any vote
of the holders of the debt securities of the same series.
Without your approval, we will be permitted to:
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evidence the succession of another person to our obligations;
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add covenants for the benefit of the holders of all or any
series of debt securities or to surrender any right or power
conferred to us in the indenture;
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add any additional Events of Default;
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add to or change any of the provisions of the indenture to the
extent necessary to permit or facilitate the issuance of debt
securities in bearer form, registrable or not registrable as to
principal, and with or without interest coupons, or to provide
for uncertificated debt securities, in compliance with
applicable laws and regulations;
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change or eliminate any of the provisions of the indenture;
provided that any such change or elimination shall become
effective only when there are no debt securities outstanding of
any series created prior to the execution of such supplemental
indenture which is entitled to the benefit of such provision;
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secure the debt securities pursuant to the requirements of the
covenant described under Limitation on Liens of Capital
Stock of Restricted Subsidiaries;
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establish the form or terms of securities of any series as
permitted by the indenture;
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evidence and provide for the acceptance of appointment of a
successor trustee with respect to the debt securities of one or
more series and to add to or change any of the provisions of the
indenture as is necessary to provide for or facilitate the
administration of any trusts established under the indenture by
more than two trustees;
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close the indenture with respect to the authentication and
delivery of additional series of debt securities, to cure any
ambiguity, to correct or supplement any provision herein which
may be inconsistent with any other provision herein, or to make
any other provisions with respect to matters or questions
arising under the indenture; provided that any such
action will not adversely affect the interests of the holders of
debt securities of any series in any material respect; or
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supplement any of the provisions of the indenture to such extent
as shall be necessary to permit or facilitate the defeasance and
discharge of any series of debt securities; provided that
any such action will not adversely affect the interests of the
holders of debt securities of such series or any other series of
debt securities in any material respect.
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Changes
Requiring Consent of Holders
First, there will be changes that we will not be permitted to
make to the terms or provisions of your debt securities without
your specific approval. Subject to the provisions of the
indenture, without your specific approval, we will not be
permitted to:
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change the stated maturity of the principal of, or interest on,
your debt securities;
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reduce the principal amount of, or premium, if any, or interest
on, your debt securities;
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reduce the amount of principal payable upon acceleration of
maturity of your debt securities;
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make any change that adversely affects any right of repayment at
your option;
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change the place or currency of payment on your debt securities;
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impair your right to sue for payment on your debt securities;
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reduce the percentage of holders of outstanding debt securities
of your series or of all series whose consent is needed to waive
compliance with certain provisions of the indenture or to waive
certain defaults of the indenture; or
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modify any of the provisions of the indenture dealing with
modification, waiver of past defaults or the waiver of certain
covenants relating to your debt securities except to increase
the percentage of holders of the debt securities required to
approve certain matters or to require all holders of debt
securities to approve certain matters.
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Changes
Requiring Majority Approval
Subject to the provisions of the indenture, any other change to,
or waiver of, any provision of the indenture and the debt
securities issued pursuant thereto would require the following
approval:
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If the change affects only one series of debt securities, it
must be approved by the holders of a majority in principal
amount of the outstanding debt securities of that series.
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If the change affects more than one series of debt securities
issued under the indenture, it must be approved by the holders
of a majority in principal amount of the outstanding debt
securities of all series affected by the change, with all
affected series voting together as one class for this purpose.
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Waiver of our compliance with certain provisions of the
indenture must be approved by the holders of a majority in
principal amount of the outstanding debt securities of all
series issued under the indenture, voting together as one class
for this purpose, in accordance with the terms of the indenture.
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In each case, the required approval must be given in writing.
Satisfaction
and Discharge
The indenture will cease to be of further effect with respect to
any series of debt securities and the trustees will execute
proper instruments acknowledging satisfaction and discharge of
the indenture as to a particular series of debt securities, when
(A) either (1) all debt securities of such series
authenticated and delivered have been delivered to the trustees
for cancellation or (2) all debt securities of such series
not so delivered to the trustees for cancellation (i) have
become due and payable, or (ii) will become due and payable
at their maturity within one year, or (iii) if redeemable
at our option, are to be called for redemption within one year,
and we have deposited or caused to be deposited with one of the
trustees an amount, in the currency in which the debt securities
of such series are payable, sufficient to pay and discharge the
entire indebtedness on such debt securities not previously
delivered to the trustees for cancellation, for principal, and
premium, if any, and interest to the date of such deposit in the
case of debt securities that have become due and payable or to
maturity or redemption date, as the case may be and (B) we
have paid or caused to be paid all other sums payable by us.
Defeasance
If specified in the applicable prospectus supplement and subject
to the provisions of the indenture, we may elect either:
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to be released from some of the covenants in the indenture under
which your debt securities were issued (referred to as
covenant defeasance); or
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to be discharged from all of our obligations with respect to
your debt securities, except for obligations to register the
transfer or exchange of your debt securities, to replace
mutilated, destroyed, lost or stolen debt securities, to
maintain paying offices or agencies and to hold moneys for
payment in trust (referred to as full defeasance).
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Covenant
Defeasance
In the event of covenant defeasance, you would lose the
protection of some of our covenants in the indenture, but would
gain the protection of having money and government securities
set aside in trust to repay your debt securities.
Subject to the provisions of the indenture, to accomplish
covenant defeasance with respect to the debt securities offered:
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We must deposit in trust for the benefit of all holders of the
debt securities of the same series as your debt securities a
combination of money and government obligations issued in the
currency in which the debt securities of the applicable series
are payable, that would generate enough cash to make interest,
principal and any other payments on such series of debt
securities on the various dates when such payments would be due.
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No Event of Default or event which with notice or lapse of time
or both would become an Event of Default, including by reason of
the above deposit of money, notes or bonds, with respect to your
debt securities shall have occurred and be continuing on the
date of such deposit or at any time during the three-month
period after such a deposit in respect of certain bankruptcy or
insolvency events.
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We must not be insolvent on the date of the deposit of the funds
or at any time during the three-month period after the date of
such deposit.
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No breach or violation of any covenant under the indenture shall
occur as a result of such deposit.
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We must deliver to the trustees of your debt securities a legal
opinion of our counsel to the effect that, for U.S. federal
income tax purposes and Canadian federal or provincial income
tax or other tax purposes, you will not recognize income, gain
or loss as a result of such covenant defeasance and that such
covenant defeasance will not cause you to be taxed on your debt
securities any differently than if such covenant defeasance had
not occurred.
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We must deliver to the trustees of your debt securities an
officers certificate and a legal opinion of our counsel
stating that all conditions precedent to covenant defeasance, as
set forth in the indenture, had been complied with.
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We must comply with certain additional terms of, conditions to
or limitations to covenant defeasance, as set forth in the
indenture.
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If we were to accomplish covenant defeasance, you could still
look to us for repayment of the debt securities if there were a
shortfall in the trust deposit or the trustee were prevented
from making payment. In fact, if an Event of Default (such as
our bankruptcy) occurred after we accomplish covenant defeasance
and your debt securities became immediately due and payable,
there might be a shortfall in our trust deposit. Depending on
the event causing the default, you might not be able to obtain
payment of the shortfall.
Full
Defeasance
If we were to accomplish full defeasance, you would have to rely
solely on the funds or notes or bonds that we deposit in trust
for repayment of your debt securities. You could not look to us
for repayment in the unlikely event of any shortfall in our
trust deposit. The conditions to accomplish defeasance set out
in the indenture include conditions to protect the trust deposit
from claims of our lenders and other creditors if we were to
become bankrupt or insolvent.
Subject to the provisions of the applicable indenture, in order
to accomplish full defeasance with respect to the debt
securities offered:
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We must deposit in trust for the benefit of all holders of the
debt securities of the same series as your debt securities a
combination of money and government obligations issued in the
currency in which the debt securities of the applicable series
are payable, that would generate enough cash to make interest,
principal and any other payments on such series of debt
securities on the various dates when such payments would be due.
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No Event of Default or event which with notice or lapse of time
or both would become an Event of Default, including by reason of
the above deposit of money, notes or bonds, with respect to your
debt securities shall have occurred and be continuing on the
date of such deposit or at any time during the three-month
period after such a deposit in respect of certain bankruptcy or
insolvency events.
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We must not be insolvent on the date of the deposit of the funds
or at any time during the three-month period after the date of
such deposit.
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No breach or violation of any covenant under the indenture shall
occur as a result of such deposit.
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We must deliver to the trustees of such debt securities a legal
opinion of our counsel stating either that we have received, or
there has been published, a ruling by the Internal Revenue
Service or that there had been a change in the applicable
U.S. federal income tax law, in either case to the effect
that, for U.S. federal income tax purposes, you will not
recognize income, gain or loss as a result of such full
defeasance and that such full defeasance will not cause you to
be taxed on your debt securities any differently than if such
full defeasance had not occurred and we had just repaid your
debt securities ourselves at maturity.
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We must deliver to the trustees of your debt securities a legal
opinion of our counsel to the effect that, for Canadian federal
or provincial income tax purposes or other tax purposes, you
will not recognize income, gain or loss as a result of such
defeasance and that such defeasance will not cause you to be
taxed on your debt securities any differently than if such
defeasance had not occurred.
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We must deliver to the trustees of your debt securities an
officers certificate and a legal opinion of our counsel
stating that all conditions precedent to full defeasance, as set
forth in the indenture, had been complied with.
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We must comply with certain additional terms of, conditions to
or limitations to full defeasance, as set forth in the indenture.
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Consent
to Jurisdiction
The indenture provides that we will irrevocably appoint CT
Corporation System, 111 Eighth Avenue, New York, New York 10011,
as our authorized agent for service of process in any legal
action or proceeding arising out of or relating to our indenture
or the debt securities for actions brought under federal or
state securities laws or for actions brought by either trustee
in any New York Court, and will irrevocably submit to the
jurisdiction of the New York Courts for such purposes.
Information
Concerning the Trustees
The Bank of New York and CIBC Mellon Trust Company are the
trustees under the indenture. We may maintain deposit accounts
and conduct banking and other financing transactions with the
trustees in the normal course of business.
Governing
Law
The indenture is, and the debt securities will be, governed by,
and construed in accordance with, the law of the State of New
York and applicable trust indenture legislation.
Holders
of Registered Debt Securities
Book-Entry
Holders
We will issue registered debt securities in book-entry form
only, unless we specify otherwise in the applicable prospectus
supplement. Debt securities held in book-entry form will be
represented by one or more global securities registered in the
name of a depositary or its nominee. The depositary or its
nominee will hold such global securities on behalf of financial
institutions that participate in such depositarys
book-entry system. These participating financial institutions,
in turn, hold beneficial interests in the global securities
either on their own behalf or on behalf of their customers.
Under the indenture, only the person in whose name a debt
security is registered is recognized as the holder of that debt
security. Consequently, for debt securities issued in global
form, we will recognize only the depositary or its nominee as
the holder of the debt securities, and we will make all payments
on the debt securities to the depositary or its nominee. The
depositary will then pass along the payments that it receives to
its participants, which in turn will pass the payments along to
their customers who are the beneficial owners of the debt
securities. The depositary and its participants do so under
agreements they have made with one another or with their
customers or by law; they are not obligated to do so under the
terms of the debt securities or the terms of the indenture.
As a result, investors will not own debt securities directly.
Instead, they will own beneficial interests in a global
security, through a bank, broker or other financial institution
that participates in the depositarys book-entry system, or
that holds an interest through a participant in the
depositarys book-entry system. As long as the debt
securities are issued in global form, investors will be indirect
holders, and not holders, of the debt securities.
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Street
Name Holders
In the event that we issue debt securities in certificated form,
or in the event that a global security is terminated, investors
may choose to hold their debt securities either in their own
names or in street name. Debt securities held in
street name are registered in the name of a bank, broker or
other financial institution chosen by the investor, and the
investor would hold a beneficial interest in those debt
securities through the account that he or she maintains at such
bank, broker or other financial institution.
For debt securities held in street name, we will recognize only
the intermediary banks, brokers and other financial institutions
in whose names the debt securities are registered as the holders
of those debt securities, and we will make all payments on those
debt securities to them. These institutions will pass along the
payments that they receive from us to their customers who are
the beneficial owners pursuant to agreements that they have
entered into with such customers or by law; they are not
obligated to do so under the terms of the debt securities or the
terms of the indenture. Investors who hold debt securities in
street name will be indirect holders, and not holders, of the
debt securities.
Legal
Holders
Our obligations, as well as the obligations of the trustee and
those of any third parties employed by the trustee or us, run
only to the legal holders of the debt securities. We do not have
obligations to investors who hold beneficial interests in global
securities, in street name or by any other indirect means and
who are, therefore, not the legal holders of the debt
securities. This will be the case whether an investor chooses to
be an indirect holder of a debt security, or has no choice in
the matter because we are issuing the debt securities only in
global form.
For example, once we make a payment or give a notice to the
legal holder of the debt securities, we have no further
responsibility with respect to such payment or notice even if
that legal holder is required, under agreements with depositary
participants or customers or by law, to pass it along to the
indirect holders but does not do so. Similarly, if we want to
obtain the approval of the holders for any purpose (for example,
to amend the indenture or to relieve us of the consequences of a
default or of our obligation to comply with a particular
provision of the indenture), we would seek the approval only
from the legal holders, and not the indirect holders, of the
debt securities. Whether and how the legal holders contact the
indirect holders is up to the legal holders.
Notwithstanding the above, when we refer to you or
your in this prospectus, we are referring to
investors who invest in the debt securities being offered by
this prospectus, whether they are the legal holders or only
indirect holders of the debt securities offered. When we refer
to your debt securities in this prospectus, we mean
the series of debt securities in which you hold a direct or
indirect interest.
Special
Considerations for Indirect Holders
If you hold debt securities through a bank, broker or other
financial institution, either in book-entry form or in street
name, we urge you to check with that institution to find out:
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how it handles securities payments and notices;
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whether it imposes fees or charges;
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how it would handle a request for its consent, as a legal holder
of the debt securities, if ever required;
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if permitted for a particular series of debt securities, whether
and how you can instruct it to send you debt securities
registered in your own name so you can be a legal holder of such
debt securities;
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how it would exercise rights under the debt securities if there
were a default or other event triggering the need for holders to
act to protect their interests; and
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if the debt securities are in book-entry form, how the
depositarys rules and procedures will affect these matters.
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Global
Securities
A global security represents one or any other number of
individual debt securities. Generally, all debt securities
represented by the same global securities will have the same
terms. Each debt security issued in book-entry form will be
represented by a global security that we deposit with and
register in the name of a financial institution or its nominee
that we select. The financial institution that we select for
this purpose is called the depositary. Unless we specify
otherwise in the applicable prospectus supplement, The
Depository Trust Company, New York, New York, known as DTC, will
be the depositary for all debt securities that we issue in
book-entry form.
A global security may not be transferred to or registered in the
name of anyone other than the depositary or its nominee, unless
special termination situations arise. We describe those
situations below under Special Situations When
a Global Security Will Be Terminated. As a result of these
arrangements, the depositary, or its nominee, will be the sole
legal holder of all debt securities represented by a global
security, and investors will be permitted to own only beneficial
interests in a global security. Beneficial interests must be
held by means of an account with a broker, bank or other
financial institution that in turn has an account either with
the depositary or with another institution that has an account
with the depositary. Thus, an investor whose security is
represented by a global security will not be a legal holder of
the debt security, but an indirect holder of a beneficial
interest in the global security.
Special
Considerations for Global Securities
As an indirect holder, an investors rights relating to a
global security will be governed by the account rules of the
investors financial institution and of the depositary, as
well as general laws relating to securities transfers. The
depositary that holds the global security will be considered the
legal holder of the debt securities represented by such global
security.
If debt securities are issued only in the form of a global
security, an investor should be aware of the following:
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An investor cannot cause the debt securities to be registered in
his or her name, and cannot obtain non-global certificates for
his or her interest in the debt securities, except in the
special situations we describe below under
Special Situations When a Global Security Will
Be Terminated.
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An investor will be an indirect holder and must look to his or
her own bank or broker for payments on the debt securities and
protection of his or her legal rights relating to the debt
securities, as we describe under Holders of
Registered Debt Securities above.
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An investor may not be able to sell his or her interest in the
debt securities to some insurance companies and other
institutions that are required by law to own their securities in
non-book-entry form.
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An investor may not be able to pledge his or her interest in the
debt securities in circumstances where certificates representing
the debt securities must be delivered to the lender or other
beneficiary of the pledge in order for the pledge to be
effective.
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The depositarys policies, which may change from time to
time, will govern payments, transfers, exchanges and other
matters relating to an investors interest in the debt
securities. Neither the trustee nor we have any responsibility
for any aspect of the depositarys actions or for the
depositarys records of ownership interests in a global
security. Additionally, neither the trustee nor we supervise the
depositary in any way.
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DTC requires that those who purchase and sell interests in a
global security that is deposited in its book-entry system use
immediately available funds. Your broker or bank may also
require you to use immediately available funds when purchasing
or selling interests in a global security.
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Financial institutions that participate in the depositarys
book-entry system, and through which an investor holds its
interest in a global security, may also have their own policies
affecting payments, notices and other matters relating to the
debt security. There may be more than one financial intermediary
in the chain of ownership for an investor. We do not monitor and
are not responsible for the actions of any of such
intermediaries.
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Special
Situations When a Global Security Will Be
Terminated
In a few special situations described below, a global security
will be terminated and interests in the global security will be
exchanged for certificates in non-global form, referred to as
certificated debt securities. After such an
exchange, it will be up to the investor as to whether to hold
the certificated debt securities directly or in street name. We
have described the rights of direct holders and street name
holders under Holders of Registered Debt
Securities above. Investors must consult their own banks
or brokers to find out how to have their interests in a global
security exchanged on termination of a global security for
certificated debt securities to be held directly in their own
names.
The special situations for termination of a global security are
as follows:
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if the depositary notifies us that it is unwilling, unable or no
longer qualified to continue as depositary for that global
security, and we do not appoint another institution to act as
depositary within 60 days of such notification;
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if we notify the trustee that we wish to terminate that global
security; or
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if an event of default has occurred with regard to the debt
securities represented by that global security and such event of
default has not been cured or waived.
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The applicable prospectus supplement may list situations for
terminating a global security that would apply only to the
particular series of debt securities covered by such prospectus
supplement. If a global security were terminated, only the
depositary, and not we or the trustee, would be responsible for
deciding the names of the institutions in whose names the debt
securities represented by the global security would be
registered and, therefore, who would be the legal holders of
those debt securities.
DESCRIPTION
OF SUBORDINATE VOTING SHARES AND PREFERRED SHARES
The following briefly summarizes the provisions of our articles
of incorporation, including a description of our Subordinate
Voting Shares and preferred shares. The following description
may not be complete and is subject to, and qualified in its
entirety by reference to, the terms and provisions of our
articles of incorporation.
Our authorized share capital consists of an unlimited number of
Multiple Voting Shares carrying ten votes per share, an
unlimited number of Subordinate Voting Shares carrying one vote
per share and an unlimited number of preferred shares, issuable
in series. At December 31, 2006, there were outstanding
1,548,000 Multiple Voting Shares and 16,981,970 Subordinate
Voting Shares, including 799,230 shares effectively held by
Fairfax through an ownership interest in The Sixty Two
Investment Company Limited (Sixty Two), as well as 3,000,000
Series A preferred shares and 5,000,000 Series B
preferred shares.
Multiple
Voting Shares and Subordinate Voting Shares
Dividend
Rights
Holders of Multiple Voting Shares and Subordinate Voting Shares
participate equally as to dividends and are entitled to
dividends, in equal amounts per share and at the same time, that
our board of directors may declare out of legally available
funds, subject to the preferential dividend rights of the
preferred shares.
Voting
Rights
Holders of Multiple Voting Shares and Subordinate Voting Shares
are entitled to receive notice of any meeting of our
shareholders and may attend and vote at such meetings, except
those meetings where only the holders of shares of another class
or of a particular series are entitled to vote. The Multiple
Voting Shares are entitled to ten votes per share, except as set
forth below, and the Subordinate Voting Shares are entitled to
one vote per share.
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The ten votes per share attached to the Multiple Voting Shares
are automatically and permanently reduced to one vote per share
if:
(i) the number of the Multiple Voting Shares held by Sixty
Two (and its 75% owned subsidiaries, of which there are
currently none) falls below 1,197,480 shares, unless this
results from a sale of shares to purchasers who make an
equivalent unconditional offer to purchase all outstanding
Subordinate Voting Shares; or
(ii) the number of the Multiple Voting Shares held by
purchasers referred to in (i) above (and their 75% owned
subsidiaries) falls below 1,197,480.
A change of control of Sixty Two or a purchaser referred to in
(i) above will disqualify that shareholders holding
of shares for the purposes of the calculations contained in
(i) and (ii) above. Except in connection with a sale
to a purchaser who makes an offer to purchase all outstanding
Subordinate Voting Shares as contemplated by (i) above,
Sixty Two has agreed with us that it will not sell our shares
carrying multiple voting rights (except to its 75% owned
subsidiaries).
The number of votes attached to the Multiple Voting Shares will
automatically but temporarily be reduced to one vote per share
for any shareholders meeting if, during the three months
ending ten days prior to the date we send notice of the
shareholders meeting, the weighted average trading price
in the principal trading market of the Subordinate Voting Shares
for any period of thirty consecutive trading days is less than
Cdn$4.00 per share (subject to adjustment).
Preemptive,
Subscription, Redemption and Conversion Rights
Holders of Subordinate Voting Shares and Multiple Voting Shares
have no preemptive, subscription or redemption rights. Holders
of Subordinate Voting Shares have no conversion rights. Multiple
Voting Shares are convertible at any time into Subordinate
Voting Shares on the basis of one Subordinate Voting Share for
each Multiple Voting Share being converted.
Liquidation
Rights
Upon our liquidation, dissolution or winding up, whether
voluntary or involuntary, the holders of the Subordinate Voting
Shares and Multiple Voting Shares, without preference or
distinction, are entitled to receive ratably all of our assets
remaining after payment of all debts and other liabilities,
subject to the prior rights of holders of any outstanding
preferred shares and any other prior ranking shares.
Modifications
Modifications to the provisions attaching to the Multiple Voting
Shares as a class, or to the Subordinate Voting Shares as a
class, require the separate affirmative vote of two-thirds of
the votes cast at meetings of the holders of the shares of each
class.
No subdivision or consolidation of the Multiple Voting Shares or
of the Subordinate Voting Shares may take place unless the
shares of both classes are subdivided or consolidated at the
same time in the same manner and proportion.
No rights to acquire additional shares or other securities or
property of ours will be issued to holders of Multiple Voting
Shares or Subordinate Voting Shares unless the same rights are
issued at the same time to holders of shares of both classes.
Preferred
Shares
As you read this section, please remember that the specific
terms of your series of preferred shares as described in your
prospectus supplement will supplement and, if applicable, may
modify or replace the general terms described in this section.
If there are differences between your prospectus supplement and
this prospectus, your prospectus supplement will control. Thus,
the statements we make in this section may not apply to your
series of preferred shares.
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Reference to a series of preferred shares means all of the
preferred shares issued as part of the same series and having
the attributes set out in articles of amendment. Reference to
your prospectus supplement means the prospectus supplement
describing the specific terms of the preferred shares you
purchase. The terms in your prospectus supplement will have the
meanings described in this prospectus, unless otherwise
specified.
Our
Authorized Preferred Shares
Under our articles of incorporation, our board of directors is
authorized, subject to Canadian law, without shareholder
approval, from time to time to issue an unlimited number of
preferred shares in one or more series. Our board of directors
can fix the rights, privileges, restrictions and conditions of
the shares of each series. Preferred shares are entitled to
priority over our Subordinate Voting Shares and Multiple Voting
Shares as to dividends and distributions of assets upon our
liquidation, dissolution or
winding-up.
Preferred shares may be convertible into shares of any other
series or class of shares if our board of directors so
determines. Our board of directors will fix the terms of the
series of preferred shares it designates by resolution and will
file articles of amendment as required under Canadian law before
we issue any shares of the series of preferred shares.
The prospectus supplement relating to the particular series of
preferred shares will contain a description of the specific
terms of that series as fixed by our board of directors,
including, as applicable;
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the offering price at which we will issue the preferred shares;
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the title and designation of number of shares of the series of
preferred shares;
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the dividend rate or method of calculation, the payment dates
for dividends and the place or places where the dividends will
be paid, whether dividends will be cumulative or noncumulative,
and, if cumulative, the dates from which dividends will begin to
accumulate;
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any conversion or exchange rights;
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whether the preferred shares will be subject to redemption and
the redemption price and other terms and conditions relative to
the redemption rights;
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any liquidation rights;
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any sinking fund provisions;
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any voting rights; and
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any other rights, preferences, privileges, limitations and
restrictions that are not inconsistent with the terms of our
articles of incorporation.
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The preferred shares of each series shall rank on a parity with
the preferred shares of every other series with respect to
dividends and return of capital in the event of the liquidation,
dissolution or
winding-up,
and will be entitled to a preference over our Subordinate Voting
Shares and Multiple Voting Shares and over any other shares
ranking junior to the preferred shares with respect to priority
in payment of dividends and in the distribution of assets in the
event of our liquidation, dissolution or
winding-up,
whether voluntary or involuntary, or any other distribution of
our assets among shareholders for the purpose of
winding-up
our affairs. If any cumulative dividends, whether or not
declared, or declared non-cumulative dividends or amounts
payable on a return of capital in the event of the liquidation,
dissolution or
winding-up
are not paid in full in respect of any series of the preferred
shares, the preferred shares of all series will participate
ratably in respect of such dividends in accordance with the sums
that would be payable on such shares if all such dividends were
declared and paid in full, and in respect of such return of
capital in accordance with the sums that would be payable on
such return of capital if all sums so payable were paid in full;
provided, however, that if there are insufficient assets to
satisfy in full all such claims, the claims of the holders of
the preferred shares with respect to return of capital will be
paid and satisfied first and any assets remaining thereafter
will be applied towards the payment and satisfaction of claims
in respect of dividends. The preferred shares of any series may
also be given such other preferences not inconsistent with the
rights, privileges, restrictions and conditions attached to the
preferred shares as a class over our Subordinate Voting Shares
and Multiple Voting Shares and over any other shares ranking
junior to the preferred shares as may be determined in the case
of such series of preferred shares.
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Voting
Rights
The prior approval of not less than two-thirds of the votes cast
at a meeting of holders of Subordinate Voting Shares is required
before we may create any class or series of shares that have
voting rights (except as required by law or allowed if dividends
are in arrears).
Amendment
with Approval of Holders of the Preferred Shares
The rights, privileges, restrictions and conditions attached to
the preferred shares as a class may be added to, changed or
removed but only with the approval of the holders of the
preferred shares. The approval of the holders of the preferred
shares to add to, change or remove any right, privilege,
restriction or condition attaching to the preferred shares as a
class or in respect of any other matter requiring the consent of
the holders of the preferred shares may be given in such manner
as may then be required by Canadian law, subject to a minimum
requirement that such approval be given by resolution signed by
all the holders of the preferred shares or passed by the
affirmative vote of at least 2/3 of the votes cast at a meeting
of the holders of the preferred shares duly called for that
purpose.
The formalities to be observed with respect to the giving of
notice of any such meeting or any adjourned meeting, the quorum
required therefore and the conduct thereof will be those from
time to time prescribed by our by-laws with respect to meetings
of shareholders, or if not so prescribed, as required by
Canadian law as in force at the time of the meeting. On every
poll taken at every meeting of the holders of the preferred
shares as a class, or at any joint meeting of the holders of two
or more series of preferred shares, each holder of preferred
shares entitled to vote at such meeting will have one vote in
respect of each preference share held.
Redemption
If so specified in the applicable prospectus supplement, a
series of preferred shares may be redeemable at any time, in
whole or in part, at our option or the holders, or may be
subject to mandatory redemption.
Any restriction on the repurchase or redemption by us of our
preferred shares while we are in arrears in the payment of
dividends will be described in the applicable prospectus
supplement.
Any partial redemptions of preferred shares will be made in a
way that our board of directors decides is equitable.
Unless we default in the payment of the redemption price,
dividends will cease to accrue after the redemption date on
shares of preferred shares called for redemption and all rights
of holders of these shares will terminate except for the right
to receive the redemption price.
Dividends
Holders of each series of preferred shares will be entitled to
receive dividends when, as and if declared by our board of
directors from funds legally available for payment of dividends.
The rates and dates of payment of dividends will be set forth in
the applicable prospectus supplement relating to each series of
preferred shares. Dividends will be payable to holders of record
of preferred shares as they appear on our books on the record
dates fixed by the board of directors. Dividends on any series
of preferred shares may be cumulative or noncumulative, as set
forth in the applicable prospectus supplement.
Conversion
or Exchange Rights
The prospectus supplement relating to any series of preferred
shares that is convertible or exchangeable will state the terms
on which shares of that series are convertible into or
exchangeable for Subordinate Voting Shares, another series of
our preferred shares or any other securities offered pursuant to
this prospectus.
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Transfer
Agent and Registrar
The transfer agent, registrar and dividend disbursement agent
for the preferred shares will be stated in the applicable
prospectus supplement. The registrar for shares of preferred
shares will send notice to shareholders of any meetings at which
holders of the preferred shares have the right to vote on any
matter.
Series A
Preferred Shares
The Series A preferred shares are non-voting and are
redeemable at any time at our option. Dividends are payable at
an annual rate based upon, among other things, the prime rate
(however, the annual rate will in no event be less than 5%). The
Series A preferred shares are not retractable at the option
of the holder. The total number of authorized Series A
preferred shares is 8,000,000, 3,000,000 of which are currently
issued and outstanding. Series A preferred shares are
convertible into Series B preferred shares on a
one-for-one
basis on December 1, 2009 and on December 1 in every
fifth year thereafter, subject to certain conditions.
Series B
Preferred Shares
The Series B preferred shares are non-voting and are
redeemable at our option on December 1, 2009 and on
December 1 in every fifth year thereafter. Dividends are
payable at an annual rate of 6.5% per annum until
November 30, 2009 and thereafter at an annual rate based
upon, among other things, the yield of five year Government of
Canada bonds. The Series B preferred shares are not
retractable at the option of the holder. The total number of
authorized Series B preferred shares is 8,000,000,
5,000,000 of which are currently issued and outstanding.
Series B preferred shares are convertible into
Series A preferred shares on a
one-for-one
basis on December 1, 2009 and on December 1 in every
fifth year thereafter, subject to certain conditions.
DESCRIPTION
OF WARRANTS
The following description of the terms of the warrants sets
forth certain general terms and provisions of the warrants to
which any prospectus supplement may relate. We have delivered an
undertaking to the securities regulatory authority in each of
the provinces of Canada that we will not distribute warrants
separately to any member of the public in Canada unless the
offering is in connection with and forms part of the
consideration for an acquisition or merger transaction or unless
the prospectus supplement containing the specific terms of the
warrants to be distributed separately is first approved for
filing by the securities regulatory authorities in each of the
provinces and territories of Canada where the warrants will be
distributed.
We may issue warrants for the purchase of debt securities,
preferred shares or Subordinate Voting Shares. Warrants may be
issued independently or together with debt securities, preferred
shares or Subordinate Voting Shares offered by any prospectus
supplement and may be attached to, or separate from, any such
offered securities. Each series of warrants will be issued under
a separate warrant agreement to be entered into between us and a
bank or trust company, as warrant agent. The warrant agent will
act solely as our agent in connection with the warrants and will
not assume any obligation or relationship of agency or trust for
or with any holders or beneficial owners of warrants. The
following summary of certain provisions of the warrants does not
purport to be complete and is subject to, and qualified in its
entirety by, reference to the applicable warrant agreement. The
specific terms of the warrants, and the extent to which the
general terms described in this section apply to those warrants,
will be set forth in the applicable prospectus supplement.
Debt
Warrants
The prospectus supplement relating to a particular issue of debt
warrants will describe the terms of such debt warrants,
including the following:
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the title of such debt warrants;
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the offering price for such debt warrants, if any;
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the aggregate number of such debt warrants;
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the designation and terms of the debt securities purchasable
upon exercise of such debt warrants;
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if applicable, the designation and terms of the debt securities
with which such debt warrants are issued and the number of such
debt warrants issued with each such debt security;
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if applicable, the date from and after which such debt warrants
and any debt securities issued therewith will be separately
transferable;
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the principal amount of debt securities purchasable upon
exercise of a debt warrant and the price at which such principal
amount of debt securities may be purchased upon exercise (which
price may be payable in cash, securities, or other property);
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the date on which the right to exercise such debt warrants shall
commence and the date on which such right shall expire;
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if applicable, the minimum or maximum amount of such debt
warrants that may be exercised at any one time;
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whether the debt warrants represented by the debt warrant
certificates or debt securities that may be issued upon exercise
of the debt warrants will be issued in registered or bearer form;
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information with respect to book-entry procedures, if any;
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the currency or currency units in which the offering price, if
any, and the exercise price are payable;
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if applicable, a discussion of principal United States and
Canadian federal income tax considerations;
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the antidilution or adjustment provisions of such debt warrants,
if any;
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the redemption or call provisions, if any, applicable to such
debt warrants; and
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any additional terms of such debt warrants, including terms,
procedures, and limitations relating to the exchange and
exercise of such debt warrants.
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Share
Warrants
The prospectus supplement relating to any particular issue of
preference share warrants or Subordinate Voting Share warrants
will describe the terms of such warrants, including the
following:
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the title of such warrants;
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the offering price for such warrants, if any;
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the aggregate number of such warrants;
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the designation and terms of the Subordinate Voting Share or
series of preferred shares purchasable upon exercise of such
warrants;
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if applicable, the designation and terms of the offered
securities with which such warrants are issued and the number of
such warrants issued with each such offered security;
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if applicable, the date from and after which such warrants and
any offered securities issued therewith will be separately
transferable;
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the number of Subordinate Voting Share or preferred shares
purchasable upon exercise of a warrant and the price at which
such shares may be purchased upon exercise;
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the date on which the right to exercise such warrants shall
commence and the date on which such right shall expire;
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if applicable, the minimum or maximum amount of such warrants
that may be exercised at any one time;
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the currency or currency units in which the offering price, if
any, and the exercise price are payable;
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if applicable, a discussion of principal United States and
Canadian federal income tax considerations;
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the antidilution provisions of such warrants, if any;
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the redemption or call provisions, if any, applicable to such
warrants; and
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any additional terms of such warrants, including terms,
procedures and limitations relating to the exchange and exercise
of such warrants.
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Exercise
of Warrants
A warrant will entitle the holder to purchase for cash an amount
of securities at an exercise price that will be stated in, or
that will be determinable as described in, the applicable
prospectus supplement.
Warrants may be exercised at any time up to the close of
business on the expiration date set forth in the applicable
prospectus supplement. After the close of business on the
expiration date, unexercised warrants will become void.
Warrants may be exercised as set forth in the applicable
prospectus supplement. Upon receipt of payment and the warrant
certificate properly completed and duly executed at the
corporate trust office of the warrant agent or any other office
indicated in the prospectus supplement, we will, as soon as
practicable, forward the securities purchasable upon such
exercise. If less than all of the warrants represented by such
warrant certificate are exercised, a new warrant certificate
will be issued for the remaining warrants.
DESCRIPTION
OF SHARE PURCHASE CONTRACTS
We may issue share purchase contracts, representing contracts
obligating holders to purchase from or sell to us, and
obligating us to purchase from or sell to the holders, a
specified number of our Subordinate Voting Shares or preferred
shares, as applicable, at a future date or dates. We have
delivered an undertaking to the securities regulatory authority
in each of the provinces of Canada that we will not distribute
share purchase contracts to any member of the public in Canada
unless the prospectus supplement containing the specific terms
of the share purchase contracts to be distributed is first
approved for filing by the securities regulatory authorities in
each of the provinces of Canada where the share purchase
contracts will be distributed.
The price per Subordinate Voting Share or preference share, as
applicable, may be fixed at the time the share purchase
contracts are issued or may be determined by reference to a
specific formula contained in the share purchase contracts. We
may issue share purchase contracts in accordance with applicable
laws and in such amounts and in as many distinct series as we
wish.
The applicable prospectus supplement may contain, where
applicable, the following information about the share purchase
contracts issued under it:
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whether the share purchase contracts obligate the holder to
purchase or sell, or both purchase and sell, our Subordinate
Voting Shares or preferred shares, as applicable, and the nature
and amount of each of those securities, or the method of
determining those amounts;
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whether the share purchase contracts are to be prepaid or not;
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whether the share purchase contracts are to be settled by
delivery, or by reference or linkage to the value or performance
of our Subordinate Voting Shares or preferred shares;
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any acceleration, cancellation, termination or other provisions
relating to the settlement of the share purchase
contracts; and
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whether the share purchase contracts will be issued in fully
registered or global form.
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The applicable prospectus supplement will describe the terms of
any share purchase contracts. The preceding description and any
description of share purchase contracts in the applicable
prospectus supplement does not purport to be complete and is
subject to and is qualified in its entirety by reference to the
share purchase contract agreement and, if applicable, collateral
arrangements and depository arrangements relating to such share
purchase contracts.
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DESCRIPTION
OF UNITS
We may issue units comprised of one or more of the other
securities described in this prospectus in any combination. Each
unit will be issued so that the holder of the unit is also the
holder of each security included in the unit. Thus, the holder
of a unit will have the rights and obligations of a holder of
each included security. The unit agreement under which a unit is
issued may provide that the securities included in the unit may
not be held or transferred separately, at any time or at any
time before a specified date.
The applicable prospectus supplement may describe:
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the designation and terms of the units and of the securities
comprising the units, including whether and under what
circumstances those securities may be held or transferred
separately;
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any provisions for the issuance, payment, settlement, transfer
or exchange of the units or of the securities comprising the
units; and
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whether the units will be issued in fully registered or global
form.
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The applicable prospectus supplement will describe the terms of
any units. The preceding description and any description of
units in the applicable prospectus supplement does not purport
to be complete and is subject to and is qualified in its
entirety by reference to the unit agreement and, if applicable,
collateral arrangements and depositary arrangements relating to
such units.
PLAN OF
DISTRIBUTION
We may issue the securities offered by this prospectus for cash
or other consideration:
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to or through underwriters, dealers, placement agents or other
intermediaries, or
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directly to one or more purchasers, provided that applicable
exemptions are available or have been obtained.
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The prospectus supplement with respect to the securities being
offered will set forth the terms of the offering of the
securities, including:
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the name or names of any underwriters, dealers or other
placement agents,
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the purchase price of, and form of consideration for, the
securities and the proceeds, if any, to us from such sale or
exchange,
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any delayed delivery arrangements,
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any underwriting discounts and other items constituting
underwriters compensation,
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any offering price, and
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any discounts or concessions allowed or reallowed or paid to
dealers and any securities exchanges on which the securities may
be listed.
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Only underwriters named in the prospectus supplement are deemed
to be underwriters in connection with the securities offered by
that prospectus supplement.
Under agreements which may be entered into by us, underwriters,
dealers and agents who participate in the distribution of
securities may be entitled to indemnification by us against
certain liabilities, including liabilities under the
U.S. Securities Act of 1933 and Canadian provincial
securities legislation, or to contributions with respect to
payments which such underwriters, dealers or agents may be
required to make in respect thereof. The underwriters, dealers
and agents with whom we enter into agreements may be customers
of, engage in transactions with or perform services for us in
the ordinary course of business.
In connection with any offering of securities, the underwriters
may over-allot or effect transactions which stabilize or
maintain the market price of the securities offered at a level
above that which might otherwise prevail in the open market.
Such transactions, if commenced, may be discontinued at any time.
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Without limiting the generality of the foregoing, we also may
issue some or all of the securities offered by this prospectus
in exchange for property, including securities or assets of ours
or of other companies which we may acquire in the future.
EARNINGS
COVERAGE RATIOS
The following consolidated financial ratios are calculated for
the twelve-month period ended December 31, 2006. The
As Adjusted ratio for the twelve months ended
December 31, 2006 gives effect as of January 1, 2006
to:
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the repayment, on February 7, 2007,
of 45.7 million aggregate principal amount of
our 2.5% secured debt due 2007; and
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the repurchase, on March 15, 2007 and March 16, 2007,
of $13.0 million aggregate principal amount of our
7.375% senior notes due 2018.
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Except as described above, the following table does not reflect
the interest cost of our debt and the debt of our subsidiaries
issued during the periods as if it was issued at the beginning
of the periods.
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Twelve Months
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Ended
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December 31, 2006
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Actual
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As Adjusted
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Earnings coverage(1)
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5.2
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x
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5.3x
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(1) |
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Earnings coverage is equal to net income before interest expense
and income taxes divided by interest expense on all debt. |
Our interest expense amounted to $210.4 million for the
twelve-month period ended December 31, 2006. Our earnings
(losses) before interest expense and income taxes for the
twelve-month period ended December 31, 2006 was
$1,089.0 million, which is 5.2 times our interest expense
for this period.
After giving effect to each of the transactions described above,
our interest expense requirements would have amounted to
$204.2 million for the twelve-month period ended
December 31, 2006. After giving effect to each of the
transactions described above, our earnings before interest
expense and income taxes for the twelve-month period ended
December 31, 2006 would have been $1,089.0 million,
which would have been 5.3 times our interest expense
requirements for that period.
CERTAIN
INCOME TAX CONSIDERATIONS
The applicable prospectus supplement may describe the principal
Canadian federal income tax considerations generally applicable
to investors described therein of purchasing, holding and
disposing of securities, including, in the case of an investor
who is not a resident of Canada, Canadian non-resident
withholding tax considerations.
The applicable prospectus supplement may also describe certain
U.S. federal income tax considerations generally applicable
of the purchase, holding and disposition of the securities by an
investor who is a United States person, including, to the extent
applicable, certain relevant U.S. federal income tax rules
pertaining to capital gains and ordinary income treatment,
original issue discount, whether or not we will be considered a
passive foreign investment company (and if so, the tax
consequences to a United States shareholder), backup withholding
and the foreign tax credit, and any consequences relating to
securities payable in a currency other than U.S. dollars,
issued at an original discount for U.S. federal income tax
purposes or containing early redemption provisions or other
special terms.
DOCUMENTS
INCORPORATED BY REFERENCE
The following documents filed by us with the securities
commission or similar authority in each of the provinces of
Canada and filed with or furnished to the U.S. Securities
and Exchange Commission under the Securities Exchange Act of
1934, as amended, are specifically incorporated by reference in
this prospectus:
1. our annual information form for the year ended
December 31, 2006, dated March 9, 2007;
45
2. our audited consolidated financial statements and the
notes thereto, including balance sheets as at December 31,
2006 and 2005 and earnings, retained earnings and cash flow
statements for each of the years in the three year period ended
December 31, 2006, together with the report of the auditors
thereon;
3. managements discussion and analysis for the annual
consolidated financial statements as at and for the periods
referred to in paragraph 2; and
4. our management information circular dated March 9,
2007 in connection with the annual meeting of shareholders to be
held on April 18, 2007.
Any documents of the types referred to in paragraphs 1
through 4 above and any interim financial statements, business
acquisition reports or material change reports (excluding
confidential material change reports) filed by us with the
securities regulatory authorities in Canada or filed with or
furnished to the SEC after the date of this prospectus and prior
to the termination of any offering of securities hereunder shall
be deemed to be incorporated by reference into this prospectus.
In addition, any report filed with or furnished to the SEC by us
pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended, or submitted by us to the SEC
pursuant to
Rule 12g3-2(b)
under the Securities Exchange Act of 1934, as amended, after the
date of this prospectus shall be deemed to be incorporated by
reference into this prospectus and the registration statement of
which this prospectus forms a part, if and to the extent
expressly provided in such report.
Any statement contained in a document incorporated or deemed
to be incorporated by reference herein shall be deemed to be
modified or superseded for the purposes of this prospectus to
the extent that a statement contained herein, or in any other
subsequently filed document which also is or is deemed to be
incorporated by reference herein, modifies or supersedes that
statement. The modifying or superseding statement need not state
that it has modified or superseded a prior statement or include
any other information set forth in the document that it modifies
or supersedes. The making of a modifying or superseding
statement shall not be deemed an admission for any purposes that
the modified or superseded statement, when made, constituted a
misrepresentation, an untrue statement of a material fact or an
omission to state a material fact that is required to be stated
or that is necessary to make a statement not misleading in light
of the circumstances in which it was made. Any statement so
modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this
prospectus.
Upon a new annual information form and new annual financial
statements being filed with and, accepted by the applicable
securities regulatory authorities during the currency of this
prospectus, the previous annual information form, the previous
annual financial statements and all interim financial
statements, material change reports and information circulars
filed prior to the commencement of the then current fiscal year
will be deemed no longer to be incorporated into this prospectus
for purposes of future offers and sales of securities hereunder.
A prospectus supplement containing the specific terms of an
offering of our securities will be delivered to purchasers of
such securities together with this prospectus and will be deemed
to be incorporated into this prospectus as of the date of such
prospectus supplement but only for purposes of the offering of
securities covered by that prospectus supplement.
When we update our disclosure of interest coverage ratios by a
prospectus supplement, the prospectus supplement filed with
applicable securities regulatory authorities that contains the
most recent updated disclosure of interest coverage ratios and
any prospectus supplement supplying any additional or updated
information we may elect to include (provided that such
information does not describe a material change that has not
already been the subject of a material change report or a
prospectus amendment) will be delivered to purchasers of
securities together with this prospectus and will be deemed to
be incorporated into this prospectus as of the date of the
prospectus supplement.
Information has been incorporated by reference in this
prospectus from documents filed with securities commissions or
similar authorities in Canada. Copies of the documents
incorporated herein by reference may be obtained on request
without charge from Bradley P. Martin, Vice President, Chief
Operating Officer and Corporate Secretary, at Suite 800, 95
Wellington Street West, Toronto, Ontario M5J 2N7. For the
purpose of the Province of Quebec, this simplified prospectus
contains information to be completed by consulting the permanent
information
46
record. A copy of the permanent information record may be
obtained from our Vice President and Corporate Secretary at the
above-mentioned address. Copies of documents that we have filed
with the securities regulatory authorities in Canada may be
obtained over the Internet at the Canadian Securities
Administrators website at www.sedar.com.
We are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and in accordance
therewith file or furnish reports and other information with or
to the SEC. Our recent SEC filings may be obtained over the
Internet at the SECs website at www.sec.gov. You may also
read and copy any document we file or furnish with or to the SEC
at the public reference facilities maintained by the SEC at
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549. Please call
1-800-SEC-0330
for further information on the operations of the public
reference facilities and copying charges.
LEGAL
MATTERS
Certain legal matters relating to the securities offered by this
short form base shelf prospectus will be passed upon on our
behalf by Torys LLP, our Canadian counsel, and
Shearman & Sterling LLP, our U.S. counsel. As of
the date hereof, the lawyers of Torys LLP, directly or
indirectly, in aggregate, own less than one percent of our
outstanding subordinate voting shares.
EXPERTS
The consolidated financial statements as of December 31,
2006 and 2005 and for each of the years in the three year period
ended December 31, 2006 incorporated by reference into this
prospectus have been so incorporated in reliance on the report
of PricewaterhouseCoopers LLP, independent auditors, given on
the authority of said firm as experts in accounting and auditing.
AUDITORS,
TRANSFER AGENT AND REGISTRAR
Our auditors are PricewaterhouseCoopers LLP, Chartered
Accountants, Royal Trust Tower, Suite 3000, P.O.
Box 82, 77 King Street West, Toronto, Ontario, Canada M5K
1G8.
Our transfer agent and registrar for the Subordinate Voting
Shares in Canada is CIBC Mellon Trust Company at its principal
office in Toronto, 320 Bay Street, P.O. Box 1, Toronto,
Ontario, M5H 4A6, and in the United States is Mellon Investor
Services LLC, 120 Broadway, 13th Floor, New York, New
York, 10271.
LIST OF
DOCUMENTS FILED WITH THE SEC
The following documents have been filed with the SEC as part of
the Registration Statement of which this prospectus forms a
part: the documents referred to above under the heading
Documents Incorporated by Reference; consents of the
independent auditors and Torys LLP; powers of attorney; the
indenture; and the Statement of Eligibility of the Trustee on
Form T-1.
47
AUDITORS
CONSENT
We have read the short form base shelf prospectus (the
prospectus) of Fairfax Financial Holdings Limited
(the company) dated April 10, 2007 which may
allow the company to offer for sale from time to time
Subordinate Voting Shares, Preferred Shares, Debt Securities,
Warrants, Share Purchase Contracts and Units in the aggregate
amount of US$750,000,000. We have complied with Canadian
generally accepted standards for an auditors involvement
with offering documents.
We consent to the incorporation by reference in the
above-mentioned prospectus of our report to the shareholders of
the company relating to consolidated balance sheets of the
company as at December 31, 2006 and 2005 and the
consolidated statements of earnings, retained earnings and cash
flows for each of the years in the three year period ended
December 31, 2006, managements assessment of the
effectiveness of internal control over financial reporting and
the effectiveness of internal control over financial reporting.
Our report is dated March 9, 2007.
(Signed) PricewaterhouseCoopers LLP
Chartered Accountants, Licensed Public Accountants
Toronto, Ontario
April 10, 2007
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The
exchange agent for the exchange offer is:
D.F. King & Co., Inc.
By Regular, Registered or Certified Mail;
Hand or Overnight Courier:
48 Wall Street, 22nd Floor
New York, NY 10005
Attn: Elton Bagley
By Facsimile Transmission:
(for Eligible Institutions Only)
(212) 809-8838
To Confirm by Telephone or for Information Call:
(212) 493-6996
Questions, requests for assistance and requests for additional
copies of this prospectus and
related letter of transmittal may be directed to the information
agent or any of the dealer managers at
each of their addresses set forth below:
The information agent for the exchange offer is:
D.F. King & Co., Inc.
48 Wall Street, 22nd Floor
New York, NY 10005
Attn: Elton Bagley
Toll free:
(888) 628-9011
Banks and Brokerage Firms, Please Call:
(212) 269-5550
The dealer managers for the exchange offer are:
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Merrill Lynch &
Co.
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BMO Capital Markets
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Ferris, Baker Watts
Incorporated
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4 World Financial Center, 7th
Floor
New York, New York 10080
Attention: Liability Management
(212) 449-4914
(collect)
(888) 654-8637
(toll-free)
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3 Times Square, 28th Floor
New York, New York 10036
Attention: Debt Capital Markets
(212) 702-1233 (collect)
(800) 810-1700 (toll-free)
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100 Light Street
Baltimore, Maryland 21202
Attention: Corporate Finance
(804) 782-4020 (collect)
(888) 258-0150 (toll-free)
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