fv10
As filed with the Securities and Exchange Commission on April 25, 2008.
Registration
No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM F-10
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
FAIRFAX FINANCIAL HOLDINGS LIMITED
(Exact name of Registrant as specified in its charter)
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Canada
(Province or other jurisdiction
of incorporation or organization)
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6331
(Primary Standard Industrial
Classification Code Number)
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Not Applicable
(I.R.S. Employer
Identification Number) |
95 Wellington Street West, Suite 800, Toronto, Ontario, Canada M5J 2N7 (416) 367-4941
(Address and telephone number of Registrants principal executive offices)
CT CORPORATION SYSTEM
111 Eighth Avenue,
13th Floor, New York, NY 10011
(212) 894-8700
(Name, address and telephone number of agent for service in the United States)
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Eric P. Salsberg
Vice President, Corporate Affairs
Fairfax Financial Holdings Limited
95 Wellington Street West, Suite 800
Toronto, Ontario, Canada M5J 2N7
Telephone (416) 367-4941
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Christopher J. Cummings
Shearman & Sterling LLP
Commerce Court West
199 Bay Street, Suite 4405
Toronto, Ontario, Canada M5L 1E8
Telephone (416) 360-8484
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David A. Chaikof
Torys LLP
70 Wellington Street West, Suite 3000
Box 270, TD Centre
Toronto, Ontario, Canada M5K 1N2
Telephone (416) 865-0040 |
Approximate date of commencement of proposed sale of the securities to the public:
From time to time after the effective date of this Registration Statement as determined by market conditions.
Province of Ontario, Canada
(Principal jurisdiction regulating this offering)
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It is proposed that this filing shall become effective (check appropriate box):
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A. þ |
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Upon filing with the Commission, pursuant to Rule 467(a) (if in connection with
an offering being made contemporaneously in the United States and Canada). |
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B. o |
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At some future date (check the appropriate box below): |
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1. o |
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pursuant to Rule 467(b) on ( ) at ( ) (designate a time not
sooner than 7 calendar days after filing). |
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2. o |
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pursuant to Rule 467(b) on ( ) at ( ) (designate a time 7
calendar days or sooner after filing) because the securities regulatory authority in
the review jurisdiction has issued a receipt or notification of
clearance on ( ). |
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3. o |
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pursuant to Rule 467(b) as soon as practicable after notification of
the Commission by the Registrant or the Canadian securities regulatory authority of the
review jurisdiction that a receipt or notification of clearance has been issued with
respect hereto. |
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4. o |
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after the filing of the next amendment to this Form (if preliminary
material is being filed). |
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If any of the securities being registered on this Form are to be offered on a delayed or continuous
basis pursuant to the home jurisdictions shelf prospectus offering procedures, check the following
box. þ |
CALCULATION OF REGISTRATION FEE
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Title of Each Class of |
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Amount to be |
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Proposed Maximum |
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Proposed Maximum Aggregate |
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Amount of |
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Securities to be Registered |
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Registered |
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Offering Price |
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Offering Price(1)(2) |
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Registration Fee |
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Subordinate
Voting Shares Preferred Shares Debt securities Warrants Share
purchase contracts Units (3) |
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Total |
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$1,000,000,000 |
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$1,000,000,000 |
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$39,300.00 (4) |
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(1) |
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Estimated solely for the purpose of calculating the amount of the registration fee pursuant to
Rule 457(o) under the Securities Act of 1933, as amended. The initial public offering price of any
debt securities denominated in any foreign currencies or currency units shall be the U.S. dollar
equivalent thereof based on the prevailing exchange rates at the respective times such securities
are first offered. With respect to debt securities issued at an offering price less than the
principal amount at maturity, the amount to be registered will be equal to the aggregate offering
price. |
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(2) |
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Exclusive of accrued interest, if any. |
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(3) |
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Such indeterminate principal amount of debt securities or number of subordinate voting shares,
preferred shares, warrants, share purchase contracts and units of Fairfax Financial Holdings
Limited, as may, from time to time, be issued at indeterminate prices, with an aggregate initial
offering price not to exceed $1,000,000,000, including such indeterminate principal amount of debt
securities or number of subordinate voting shares or preferred shares as may be issued upon
conversion or exchange of any debt securities or preferred shares that provide for conversion or
exchange into such securities or upon exercise of warrants for such securities or upon settlement
of share purchase contracts for subordinate voting shares or preferred shares.
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(4) |
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$88,275.00 was previously paid in connection with a registration statement on Form F-10 (File
No. 333-122290) filed by Fairfax Financial Holdings Limited on January 25, 2005, including
$52,948.00 paid in relation to securities remaining unsold in the offering contemplated by such
registration statement, which unsold securities were deregistered upon the filing of a registration
statement on Form F-10 (File No. 333-142069) filed by Fairfax Financial Holdings Limited on April
12, 2007. Pursuant to Rule 457(p) under the Securities Act of 1933, $23,025.00 of such amount was
offset against the filing fee due in connection with the filing of the registration statement on
Form F-10 (File No. 333-142069). The remaining $29,923.00 of such amount is being offset against
the filing fee due in connection with the filing of this registration statement, pursuant to Rule
457(p). In addition, of the $23,025.00 previously paid in connection with the filing of
registration statement on Form F-10 (File No. 333-142069), $14,349.00 was paid in relation to
securities remaining unsold in the offering contemplated by such registration statement, which
unsold securities are hereby deregistered. Pursuant to Rule 457(p) under the Securities Act of
1933, $9,377.00 of such amount is being offset against the filing fee due in connection with this
registration statement. Accordingly, no fee is being paid at the time of filing this registration
statement. |
PART I
INFORMATION REQUIRED TO BE DELIVERED TO OFFEREES OR PURCHASERS
I-1
PROSPECTUS
April 25, 2008
FAIRFAX FINANCIAL HOLDINGS LIMITED
US$1,000,000,000
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$1,000,000,000 of the securities listed above in one
or more series or issuances and their total offering price, in the aggregate, will not exceed
US$1,000,000,000. 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.
We will not offer exchangeable preferred shares, warrants, share purchase contracts, or units
comprised of one or more of the foregoing for sale 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
exchangeable preferred shares, warrants, share purchase contracts, or units comprised of one or
more of the foregoing, as the case may be, to be offered separately is first approved for filing by
the securities commissions or similar regulatory authorities in each of the provinces and
territories of Canada where the exchangeable preferred shares, warrants, share purchase contracts,
or units comprised of one or more of the foregoing, as the case may be, will be offered for sale.
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.
2
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.
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, 2007, incorporated by
reference in this prospectus.
3
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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2003 |
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2004 |
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2005 |
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2006 |
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2007 |
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Low |
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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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0.8437 |
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High |
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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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1.0908 |
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Period End |
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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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1.0120 |
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Average |
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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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0.9309 |
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On April 24, 2008, the inverse of the noon buying rate was $0.987069 = 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, 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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the occurrence of catastrophic events with a frequency or severity exceeding
our estimates; |
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the cycles of the insurance market, which can substantially influence our
and our competitors premium rates and capacity to write new business; |
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changes in economic conditions, including interest rates and the securities
markets, which could negatively affect our investment portfolio; |
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insufficient reserves for asbestos, environmental and other latent claims; |
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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, insurance producers or
reinsurance intermediaries fail to remit premiums that are owed to us or
failure by our insureds to reimburse us for deductibles that are paid by us on
their behalf; |
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an inability to realize our investment objectives; |
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risks associated with implementing our business strategies; |
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the timing of claims payments being sooner or the receipt of reinsurance
recoverables being later than anticipated by us; |
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the failure of any of the loss limitation methods we employ; |
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the inability of our subsidiaries to maintain favourable financial or
claims-paying ability ratings; |
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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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our inability to obtain reinsurance coverage in sufficient amounts, at
reasonable prices or on terms that adequately protect us; |
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our inability to access our subsidiaries cash; |
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our inability to obtain required levels of capital on favourable terms, if
at all; |
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loss of key employees; |
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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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risks associated with requests for information from government authorities; |
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risks associated with current government investigations of, and class action
litigation related to, insurance industry practices; |
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risks associated with our pending civil litigation; |
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the influence exercisable by our significant shareholder; |
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adverse fluctuations in foreign currency exchange rates; |
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our failure to realize future income tax assets; |
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our dependence on independent brokers over whom we exercise little control; |
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assessments and shared market mechanisms which may adversely affect our U.S.
insurance subsidiaries; and |
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an impairment in the carrying value of our goodwill. |
See Risk Factors for a further discussion of these risks and uncertainties.
5
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; the term Group Re refers to our wholly-owned reinsurance
business, Group Re 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; and the term Hamblin Watsa refers to our
wholly-owned investment management subsidiary, Hamblin Watsa Investment Counsel Ltd. 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 and Group Re. OdysseyRe is 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. Group Re primarily constitutes the participation by
our wholly-owned subsidiaries CRC (Bermuda) Reinsurance Limited, Wentworth Insurance Company
Ltd. (based in Barbados) and nSpire Re Limited (based in Dublin, Ireland) in the reinsurance
of our insurance company subsidiaries by quota share or through participation in those
subsidiaries third party reinsurance programs on the same terms as third party reinsurers.
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 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.
6
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, 2007, we had net unpaid loss and loss adjustment expense reserves of
approximately $10.6 billion.
Reserves do not represent an exact calculation of liability, but instead represent estimates
at a given point in time involving actuarial and statistical projections 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, 2007, we increased our loss
and loss adjustment expense reserves relating to prior periods by $22.8
7
million, primarily relating to development in the Americas division of OdysseyRe in its
asbestos and environmental loss estimates, a litigation settlement at OdysseyRe and development on
primary workers compensation business at our U.S. runoff segment.
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.
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.
8
Our portfolio holdings are subject to fluctuations in the market which could negatively affect
their value.
We hold bonds, common stocks, preferred stocks and derivative securities in our portfolio.
The market value of bonds and preferred stocks fluctuates with changes in interest rates and credit
outlook. The market value of common stocks is exposed to fluctuations in the stock market. Risks
associated with investments in derivative securities include market risk, interest rate risk,
liquidity risk and credit risk. Our use of derivatives is primarily for general protection against
declines in the fair value of the Companys financial assets and is governed by the Companys
investment policies. Derivate securities are extremely volatile, with the result that their market
value and their liquidity may vary dramatically either up or down in short periods, and their
ultimate value will therefore only be known upon their disposition.
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. |
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
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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 or health hazard claims, including claims related to exposure to potentially harmful products
or substances, such as breast implants, pharmaceutical products, chemical products, lead-based
pigments, noise-induced hearing loss, tobacco, mold and welding fumes. 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 expenses based upon known facts and current law.
Our gross asbestos reserves were $1.4 billion at December 31, 2007 and our gross reserves for
environmental and other latent claims were $545.9 million. Our asbestos reserves, net of
reinsurance but excluding vendor indemnities, were $755.9 million at December 31, 2007 and our
reserves for environmental and other latent claims, net of reinsurance but excluding vendor
indemnities, were $249.1 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.
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, 2007, we had a total of approximately $5.0 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
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.
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 net gains on
investments. The portion derived from net gains on investments generally fluctuates from year to
year. For the years ended December 31, 2007, 2006 and 2005, net gains on investments accounted for
approximately 68.3%, 51.4% and 45.3%, respectively, of our total investment income (including net
gains on investments). Net gains on investments are typically a less predictable source of
investment income than interest and dividends, particularly in the short term.
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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,
2007, 20.9%, or $4.0 billion, of our invested assets were held in cash and short term investments
pending our identification of 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 investment losses resulting from an other than temporary decline in value
could significantly decrease our net income.
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 net gains on investment 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.
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 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 our insurance and reinsurance subsidiaries are unable to maintain favorable financial strength
ratings, it may be more difficult for them to renew policies or retain business 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 each of
OdysseyRe and Northbridge and an A- rating (the fourth highest of fifteen ratings) to Crum &
Forster. 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
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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.
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, 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.
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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 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 a 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, 2007, our subsidiaries had approximately
$942.9 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.
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 credit watch positive 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.
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
significant 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
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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 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. |
The effects of these and other unforeseen emerging claims and coverage issues are extremely
hard to predict and could harm our business.
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
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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 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 a 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 adverse development 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 and a reinsurance
contract that was commuted in 2002 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.
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
continuing 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 may continue to be significant. We expect that these matters may 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.
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 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
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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.
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. Pursuant to the scheduling
stipulations, the various defendants filed their respective motions to dismiss the amended
consolidated complaint, the lead plaintiffs filed their oppositions thereto, the defendants filed
their replies to those oppositions and the motions to dismiss were argued before the Court in
December 2007. The Court has not yet issued a ruling on these motions. 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
who, the complaint (as subsequently amended) alleges, participated in a stock market manipulation
scheme involving Fairfax shares. 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 removed this lawsuit to the District Court for the District of New Jersey but pursuant
to a motion filed by us, the lawsuit was remanded to Superior Court, Morris County, New Jersey.
Most of the defendants filed motions to dismiss the lawsuit, all of which were denied during a
Court hearing in September 2007. In October 2007, defendants filed a motion for leave to appeal to
the Appellate Division from the denial of their motions to dismiss. In December 2007, that motion
for leave was denied. Subsequently, two of the defendants filed a motion seeking leave to appeal
certain limited issues to the New Jersey Supreme Court. That motion for leave was recently denied.
In December 2007, two defendants who were added to the action after its initial filing filed
motions to dismiss the claims against them. In February 2008, those motions to dismiss were
granted. The Court granted us 30 days to file an amended complaint and on March 27, 2008, we filed
an amended complaint against the two defendants. In December 2007 and January 2008, three
defendants, two of whom are individuals, filed counterclaims against us. Also named as third party
defendants on certain of these counterclaims are several of our affiliates, directors and officers,
our auditors and our outside counsel in this action. In March 2008, two of the counterclaims and
all of the third-party claims were voluntarily withdrawn. At this time, only a single counterclaim
against us alleging defamation of an individual defendant remains. Fairfax and its named
affiliates and officers intend to vigorously defend against these counterclaims, and we have filed
a motion to dismiss them. Discovery in this action is ongoing. The ultimate outcome of any
litigation is uncertain and there can be no
16
assurance that the Companys lawsuit will be successful or that the Company will be successful
in defending the counterclaim. The Companys consolidated financial statements include no
provision for loss on the counterclaim.
Our significant 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 47.6% 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.
We may be adversely affected by foreign currency fluctuations.
Our functional currency is the U.S. dollar. A portion of our premiums and our expenses are
denominated 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 future income tax assets is dependent upon the generation of taxable income in
those jurisdictions where the relevant tax losses and temporary differences exist. Capitalized
operating and capital loss carry-forwards were not as at December 31, 2007, but in prior years had
been, a major component of our future income taxes asset. Failure to achieve projected levels of
profitability could lead to a writedown in this future income taxes asset if the expected recovery
period for capitalized loss carry-forwards becomes longer than anticipated.
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 and reinsurance 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 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 and Group Re frequently pay
amounts owing in respect of claims under their 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 and
17
Group Re 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 and Group Re, 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 and Group Re
have 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.
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 which has arisen from various acquisitions
made by us or our operating subsidiaries. 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. In
2007, we sold a majority of our interest in the operating companies of our claims adjusting
subsidiary, Cunningham Lindsey Group Inc. to a third party private equity investor. Principally as
a result of that sale, goodwill decreased to $53.8 million at December 31, 2007 from $239.2 million
at December 31, 2006. Of the Cdn$199.6 million of goodwill related to the business prior to the
sale, Cdn$110.6 million was disposed of and was included in the $7.6 million net loss on the
disposition of the Cunningham Lindsey operating companies, with the remaining Cdn$89.0 million
included in the equity accounted carrying value going forward. Continued profitability of our
other acquired businesses is essential for there to be no impairment in the carrying value of the
goodwill.
USE OF PROCEEDS
The securities offered by this prospectus may be offered from time to time at the discretion
of the Company in one or more series or issuances with an aggregate offering amount not to exceed
US$1,000,000,000. The net proceeds derived from the issue of the securities, or any one of them,
under any prospectus supplement will be the aggregate offering amount thereof less any commission
and other issuance costs paid in connection therewith. The net proceeds cannot be estimated as the
amount thereof will depend on the number and price of the securities issued under any prospectus
supplement. We will set forth 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.
18
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, 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 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.
19
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.
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 U.S. 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
20
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.
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
21
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 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
22
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. As originally enacted, TRIA only
applied to acts of terrorism committed on behalf of foreign persons or interests. However, the
Terrorism Risk Insurance Program Reauthorization Act of 2007 removed this restriction so that TRIA
now applies to both domestic and foreign terrorism occurring in the United States. This
legislation also extended the TRIA program to cover insured losses arising out of acts of terrorism
occuring on or before December 31, 2014. 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.
Under TRIA, the federal government will reimburse insurers for a percentage of covered
terrorism losses above a defined insurer deductible. This deductible is calculated as 20% of an
affiliated insurance groups prior year direct earned premiums on commercial lines policies (with
certain exceptions, such as commercial auto insurance policies) covering risks in the United
States. 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 the certified
act of terrorism 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.
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 and the risk of severe losses to us from acts of terrorism remains. Moreover,
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.
The federal terrorism risk assistance provided by TRIA will expire at the end of 2014, and it
is not currently clear whether that assistance will be renewed. Any renewal may be on
substantially less favorable terms.
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
23
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 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
24
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
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
requires an insurance company to notify the Superintendent of Financial Institutions of the
declaration of a dividend at least 15 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) 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.
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United Kingdom
Acquisition or Change of Control
Under rules made by the United Kingdom Financial Services Authority (the FSA) an insurance
company or a reinsurance company that carries on business in the United Kingdom through a permanent
establishment there but which is incorporated outside the United Kingdom must notify the FSA of any
person acquiring or ceasing to have control of that company, or of an existing controller becoming
or ceasing to be a parent undertaking of that company. In broad terms, any company or individual
who holds 10% or more of the shares or voting power in the insurance company or reinsurance company
or its parent undertaking, or is able to exercise significant influence over the management of the
insurance company or reinsurance company or its parent undertaking through its shareholding or
voting power in that company or parent undertaking is considered a controller. The operating
subsidiaries of OdysseyRe in its London Market division carry on business in the United Kingdom.
Under by-laws made by Lloyds pursuant to the Lloyds Act of 1982, the prior written approval
of the Franchise Board established by the Council of Lloyds is required of anyone proposing to
become a controller of any Lloyds Managing Agent. In summary, any company or individual that
holds 10% or more of the shares or voting power in the managing agent, or its parent undertaking or
is able to exercise significant influence over the management of the managing agent or of its
parent undertaking as a result of its shareholding or voting power is a controller. The prior
approval of the FSA is also required for such a change of control. Newline, a subsidiary of
OdysseyRe, is a Lloyds Managing Agent.
Dividends
U.K. law prohibits any U.K. company from declaring a dividend to its stockholders unless such
company has profits available for distribution which in summary are accumulated realized profits
less accumulated realized losses. The determination of whether a company has profits available for
distribution must be made by reference to accounts that comply with certain requirements laid down
by statute. 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.
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.
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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. |
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
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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. |
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 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.
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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 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. |
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. |
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. |
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. |
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
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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. |
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 |
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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. |
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. |
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). |
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.
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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. |
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. |
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.
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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.
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.
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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. |
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.
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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. |
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 share capital. 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 April 24, 2008, there
were outstanding 1,548,000 Multiple Voting Shares and 17,674,358 Subordinate Voting Shares, as well
as 3,000,000 Series A preferred shares and 5,000,000 Series B preferred shares. At April 24, 2008,
799,230 Subordinate Voting Shares were effectively held by Fairfax through an ownership interest in
The Sixty Two Investment Company Limited (Sixty Two).
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.
The ten votes per share attached to the Multiple Voting Shares are automatically and
permanently reduced to one vote per share if:
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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 |
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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 Multiple Voting Shares (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
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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.
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.
We have delivered an undertaking to the securities regulatory authority in each of the
provinces of Canada that we will not distribute exchangeable preferred shares 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 exchangeable preferred shares to be distributed separately is
first approved for filing by the securities commissions or similar regulatory authorities in each
of the provinces and territories of Canada where the exchangeable preferred shares will be
distributed.
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
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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. |
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.
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).
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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.
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.
43
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 commissions or similar 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. |
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; |
45
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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. |
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 commissions or similar 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. |
46
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.
DESCRIPTION OF UNITS
The following description of the terms of the units sets forth certain general terms and
provisions of the units 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 units comprised of one or more of exchangeable preferred shares, warrants, or share
purchase contracts 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 units to be distributed
separately is first approved for filing by the securities commissions or similar regulatory
authorities in each of the provinces and territories of Canada where the units will be distributed.
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. |
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. |
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. |
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.
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 earning coverage ratios have been calculated for the twelve-month
period ended December 31, 2007. Except as described below, 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. The As Adjusted ratio for the twelve months ended
December 31, 2007 gives effect as of January 1, 2007 to:
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the conversion of our 5% convertible debentures due 2023. On January 9, 2008, the Company
called for redemption all of these debentures. On the redemption date of February 13, 2008,
$188.5 million aggregate principal amount of these debentures had been converted by their
holders into 886,888 Subordinate Voting Shares of the Company and the Company paid a nominal
amount of cash to redeem the unconverted debentures and in lieu of fractional shares; and |
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the repayment on April 15, 2008 of $62.1 million aggregate principal amount of our 6.875%
senior notes due 2008. |
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Twelve Months Ended |
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December 31, 2007 |
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Interest requirements (in millions) |
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209.5 |
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194.2 |
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Earnings before interest expense and taxes (in millions) |
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2,369.9 |
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$ |
2,369.3 |
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Earnings coverage (1) |
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11.3 |
x |
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12.2 |
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Note:
(1) Earnings coverage is equal to net income before interest expense and income taxes divided by
interest expense on all debt. |
48
Our interest expense amounted to $209.5 million for the twelve-month period ended December 31,
2007. Our earnings (losses) before interest expense and income taxes for the twelve-month period
ended December 31, 2007 was $2,369.9 million, which is 11.3 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 $194.2 million for the twelve-month period ended December 31,
2007. 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, 2007 would have
been $2,369.3 million, which would have been 12.2 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:
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our annual information form for the year ended December 31, 2007, dated March 7, 2008; |
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our audited consolidated financial statements and the notes thereto, including balance sheets
as at December 31, 2007 and 2006 and statements of earnings, comprehensive income,
shareholders equity and cash flows for each of the years in the three year period ended
December 31, 2007 and including managements report on internal control over financial
reporting set out on page 14 of the Companys 2007 Annual Report, together with the report of
the auditors on these consolidated financial statements and on the effectiveness of internal
control over financial reporting; |
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managements discussion and analysis for the annual consolidated financial statements as at
and for the periods referred to in paragraph 2; and |
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our management information circular dated March 7, 2008 in connection with the annual meeting
of shareholders held on April 16, 2008. |
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
49
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. 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.
50
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, 2007 and 2006, and for each of the
years in the three year period ended December 31, 2007 and managements assessment of effectiveness
of internal control over financial reporting (which is included in Managements Report on Internal
Control Over Financial Reporting) as of December 31, 2007 incorporated into this prospectus by
reference 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 and
Qualification of the trustee on Form T-1.
51
AUDITORS CONSENT
This consent has been issued solely to comply with the requirements of
Canadian generally
accepted auditing standards and is neither required nor intended to
satisfy the requirements
of Canadian securities legislation or the Securities Act of 1933.
We have read the short form base shelf prospectus (the prospectus) of Fairfax Financial
Holdings Limited (the company) dated
April 25, 2008 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$1,000,000,000. 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 on the consolidated balance sheets of the company as at December
31, 2007 and 2006 and the consolidated statements of earnings, comprehensive income, shareholders
equity and cash flows for each of the years in the three year period ended December 31, 2007, and
the effectiveness of internal control over financial reporting as at December 31, 2007. Our report
is dated March 7, 2008.
(Signed) PricewaterhouseCoopers LLP
Chartered Accountants, Licensed Public Accountants
Toronto, Ontario
April 25, 2008
52
PART II
INFORMATION NOT REQUIRED TO BE DELIVERED TO OFFEREES OR PURCHASERS
Under the Canada Business Corporations Act (the CBCA), a corporation may indemnify a
present or former director or officer of such corporation or another individual who acts or
acted at the corporations request as a director or officer, or an individual acting in a
similar capacity, of another entity against all costs, charges and expenses, including an
amount paid to settle an action or satisfy a judgment, reasonably incurred by the individual in
respect of any civil, criminal, administrative, investigative or other proceeding in which the
individual is involved because of that association with the corporation or other entity, and
the corporation may advance moneys to the individual for the costs, charges and expenses of any
such proceeding. The corporation may not indemnify the individual, and any advance must be
repaid by the individual, unless the individual acted honestly and in good faith with a view to
the best interests of the corporation, or, as the case may be, to the best interests of the
other entity for which the individual acted as director or officer or in a similar capacity at
the corporations request and in the case of a criminal or administrative action or proceeding
that is enforced by a monetary penalty the individual had reasonable grounds for believing that
the individuals conduct was lawful. Such indemnification and advances may be made in
connection with a derivative action only with court approval. Such individual is entitled to
indemnification or advances from the corporation as a matter of right in respect of all costs,
charges and expenses reasonably incurred by him in connection with the defence of a civil,
criminal, administrative, investigative or other proceeding to which he is subject by reason of
being or having been a director or officer of the corporation or other entity as described
above if the individual was not judged by the court or other competent authority to have
committed any fault or omitted to do anything that the individual ought to have done and if the
individual fulfils the conditions set forth above.
In accordance with and subject to the CBCA, the by-laws of Fairfax Financial Holdings
Limited (Fairfax) provide that, subject to the CBCA, Fairfax shall indemnify a director or
officer of Fairfax, a former director or officer of Fairfax, or a person who acts or acted at
Fairfaxs request as a director or officer of a body corporate of which Fairfax is or was a
shareholder or creditor, and his or her heirs and legal representatives, against all costs,
charges and expenses, including an amount paid to settle an action or satisfy a judgment,
reasonably incurred by him or her in respect of any civil, criminal or administrative action or
proceeding to which he or she is made a party by reason of being or having been a director or
officer of Fairfax or a director or officer of such body corporate, if he or she (a) acted
honestly and in good faith with a view of the best interests of Fairfax and (b) in the case of
a criminal or administrative action or proceeding that is enforced by a monetary penalty, had
reasonable grounds for believing that his or her conduct was lawful. Fairfax shall also
indemnify such person in such other circumstances as the CBCA or law permits or requires.
Fairfax maintains directors and officers liability insurance which insures the directors
and officers of Fairfax and its subsidiaries against certain losses resulting from any wrongful
act committed in their official capacities for which they become obligated to pay to the extent
permitted by applicable law.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted
to directors, officers or persons controlling the Registrant pursuant to the foregoing provisions,
the Registrant has been informed that, in the opinion of the U.S. Securities and Exchange
Commission, such indemnification is against public policy as expressed in the Securities Act and is
therefore unenforceable.
The exhibits listed in the exhibits index, appearing elsewhere in this registration statement,
have been filed as part of this registration statement.
II-1
PART III
UNDERTAKING AND CONSENT TO SERVICE OF PROCESS
Item 1. Undertaking
The Registrant undertakes to make available, in person or by telephone, representatives to
respond to inquires made by the Commission staff, and to furnish promptly, when requested to do so
by the Commission staff, information relating to the securities registered pursuant to Form F-10 or
to transactions in said securities.
Item 2. Consent to Service of Process
Concurrently with the filing of this Registration Statement on Form F-10, the Registrant has
filed with the Commission a written irrevocable consent and power of attorney on Form F-X.
CIBC Mellon Trust Company (formerly The R-M Trust Company), as co-trustee under the indenture
relating to the debt securities registered hereby, has previously filed with the Commission a
written irrevocable consent and power of attorney on Form F-X.
Any change to the name or address of the agent for service of the Registrant or CIBC Mellon
Trust Company shall be communicated promptly to the Commission by amendment to Form F-X referencing
the file number of the registration statement.
III-1
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it
has reasonable grounds to believe that it meets all of the requirements for filing on Form F-10 and
has duly caused this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Toronto, Province of Ontario, Canada, on April 25, 2008.
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FAIRFAX FINANCIAL HOLDINGS LIMITED
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By: |
/s/ Bradley P. Martin
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Bradley P. Martin |
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Vice President, Chief Operating Officer and
Corporate Secretary |
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III-2
POWERS OF ATTORNEY
Each person whose signature appears below constitutes and appoints each of V. Prem Watsa, Eric
P. Salsberg and Bradley P. Martin his true and lawful attorney-in-fact and agent, each acting
alone, with full power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any or all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the premises, as fully
to all intents and purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, each acting alone, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration
Statement has been signed by or on behalf of the following persons in the capacities and on the
dates indicated:
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Signature |
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Title |
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Date |
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/s/ V. Prem Watsa
V. Prem Watsa
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Chairman, Chief Executive Officer
and Director
(Principal Executive Officer)
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April 25, 2008 |
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/s/ Greg Taylor
Greg Taylor
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Vice President and Chief
Financial Officer
(Principal Financial Officer)
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April 25, 2008 |
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/s/ David Bonham
David Bonham
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Vice President, Financial Reporting
(Principal Accounting Officer)
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April 25, 2008 |
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/s/ Robert J. Gunn
Robert J. Gunn
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Director
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April 25, 2008 |
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/s/ Anthony F. Griffiths
Anthony F. Griffiths
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Director
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April 25, 2008 |
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/s/ Paul L. Murray
Paul L. Murray
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Director
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April 25, 2008 |
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/s/ Brandon W. Sweitzer
Brandon W. Sweitzer
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Director
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April 25, 2008 |
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Director |
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/s/ Alan D. Horn
Alan D. Horn
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Director
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April 25, 2008 |
III-3
AUTHORIZED REPRESENTATIVE
Pursuant to the requirements of Section 6(a) of the Securities Act of 1933, the Authorized
Representative has signed this Registration Statement, solely in its capacity as the duly
authorized representative of Fairfax Financial Holdings Limited in the United States, in the
Province of Ontario, Canada, on April 25, 2008.
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FAIRFAX INC.
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By: |
/s/ Bradley P. Martin
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Name: |
Bradley P. Martin |
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Title: |
Vice President and Corporate Secretary |
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III-4
EXHIBIT INDEX
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Exhibit |
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Number |
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Description |
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4.1
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The Registrants annual information form for the year ended December 31, 2007,
dated March 7, 2008 (incorporated by reference to the Registrants Annual Report on
Form 40-F filed on March 7, 2008). |
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4.2
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The Registrants audited consolidated financial statements and the notes thereto,
including balance sheets as at December 31, 2007 and 2006 and statements of
earnings, comprehensive income, shareholders equity and cash flows for each of the
years in the three year period ended December 31, 2007 and including managements
report on internal control over financial reporting set out on page 14 of the
Registrants 2007 Annual Report, together with the report of the auditors on these
consolidated financial statements and on the effectiveness of internal control over
financial reporting (incorporated by reference to the Registrants 2007 Annual
Report included in the Current Report on Form 6-K furnished on March 7, 2008). |
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4.3
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The Registrants managements discussion and analysis for the annual consolidated
financial statements as at December 31, 2007 and 2006 and for each of the years in
the three year period ended December 31, 2007 (incorporated by reference to the
Registrants 2007 Annual Report included in the Current Report on Form 6-K
furnished on March 7, 2008). |
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4.4
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The Registrants management information circular dated March 7, 2008 in connection
with the annual meeting of shareholders held on April 16, 2008 (incorporated by
reference to the Current Report on Form 6-K furnished on March 7, 2008). |
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5.1(*)
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Consent of PricewaterhouseCoopers LLP. |
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5.2(*)
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Consent of Torys LLP. |
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6.1
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Powers of Attorney (contained on the signature page of this Registration Statement). |
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7.1(*)
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Indenture dated as of December 1, 1993 among the Registrant, The Bank of New York
(formerly known as Bank of Montreal Trust Company) and CIBC Mellon Trust Company
(formerly known as The R-M Trust Company). |
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7.2
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Statement of Eligibility and Qualification of Bank of Montreal Trust Company on
Form T-1 (incorporated by reference to Registration Statement 33-71976). |
III-5