The counterparty credit rating on Fairfax Financial Holdings Ltd. (Fairfax) is based on its operating companies' good competitive position and diversification in the U.S., Canada, and internationally. Operating performance significantly improved in 2002 and 2003, although the runoff operations are still creating a significant drag on total company earnings. Fairfax's capital adequacy and financial flexibility are both improving, and investments are viewed as a strength for the rating. Offsetting these positive factors are continual reserve strengthenings (including one in the fourth quarter of 2003), a dependence on realized gains to maintain earnings, high reinsurance recoverables, and a corporate strategy that has orchestrated some acquisitions that have not met expectations. Fairfax's competitive position is viewed as good based on its diversification
