Cash and Investments

12 Months Ended

Dec. 31, 2018

The company's cash and investments are classified at FVTPL except for investments in associates, and other invested assets which are classified as other.



	December 31, 2018			December 31, 2017
Holding company
Cash and cash equivalents⁽¹⁾		227.7			995.4
Short term investments		19.8			115.4
Bonds		503.4			380.9
Preferred stocks		4.5			2.8
Common stocks⁽²⁾		704.7			784.9
Derivatives (note 7)		75.6			11.2
		1,535.7			2,290.6
Assets pledged for short sale and derivative obligations:
Short term investments		13.7			77.8
Bonds		7.8			—
		21.5			77.8

		1,557.2			2,368.4
Short sale and derivative obligations (note 7)		(6.6	)		(11.5	)
		1,550.6			2,356.9

Portfolio investments
Cash and cash equivalents⁽¹⁾		4,583.7			7,384.1
Short term investments		2,138.3			9,998.4
Bonds		19,256.4			9,164.1
Preferred stocks		260.1			296.8
Common stocks⁽²⁾		4,431.4			4,838.7
Investments in associates (note 6)		3,471.9			2,487.0
Derivatives (note 7)		229.8			192.6
Other invested assets⁽³⁾		333.8			62.8
		34,705.4			34,424.5
Assets pledged for short sale and derivative obligations:
Cash and cash equivalents (note 27)		3.0			16.8
Short term investments		36.8			145.7
Bonds		124.8			32.2
		164.6			194.7

Fairfax India cash, portfolio investments and associates⁽¹⁾		1,905.6			1,762.5
Fairfax Africa cash, portfolio investments and associates⁽¹⁾		657.3			631.5
		2,562.9			2,394.0

		37,432.9			37,013.2
Short sale and derivative obligations (note 7)		(142.9	)		(114.7	)
		37,290.0			36,898.5

Total investments		38,840.6			39,255.4


(1)	Includes aggregate restricted cash and cash equivalents at December 31, 2018 of $577.1 (December 31, 2017 - $835.0). See note 27 for details.


(2)	Includes aggregate investments in limited partnerships and other funds with carrying values at December 31, 2018 of $2,055.8 and $150.3 (December 31, 2017 - $1,903.7 and $90.9).


(3)	Comprised primarily of investment property.

Fairfax India and Fairfax Africa cash, portfolio investments and associates were comprised as follows:



	Fairfax India		Fairfax Africa
	December 31, 2018	December 31, 2017	December 31, 2018	December 31, 2017
Cash and cash equivalents⁽¹⁾	67.7	44.0	231.9	329.7
Short term investments	—	34.3	38.7	57.2
Bonds	576.4	694.2	92.7	19.4
Common stocks	158.5	40.5	3.9	4.9
Investments in associates (note 6)	1,103.0	949.5	288.1	219.8
Derivatives and other invested assets	—	—	2.0	0.5
	1,905.6	1,762.5	657.3	631.5


(1)	Included restricted cash at December 31, 2018 of $15.6 at Fairfax India (December 31, 2017 - $15.5) and nil at Fairfax Africa (December 31, 2017 - $313.0). See note 27 for details.

Restricted cash and cash equivalents at December 31, 2018 of $577.1 (December 31, 2017 - $835.0) was comprised primarily of amounts required to be maintained on deposit with various regulatory authorities to support the subsidiaries' insurance and reinsurance operations, and is included on the consolidated balance sheet as shown in note 27.

The company's subsidiaries have pledged cash and investments, inclusive of trust funds and regulatory deposits, as security for their own obligations to pay claims or make premium payments (these pledges are either direct or to support letters of credit). In order to write insurance business in certain jurisdictions (primarily U.S. states) the company's subsidiaries must deposit funds with local insurance regulatory authorities to provide security for future claims payments as ultimate protection for the policyholder. Additionally, some of the company's subsidiaries provide reinsurance to primary insurers, for which funds must be posted as security for losses that have been incurred but not yet paid. These pledges are in the normal course of business and are generally released when the payment obligation is fulfilled.

The table that follows summarizes assets pledged to third parties by the nature of the pledge requirement (excluding assets pledged in favour of Lloyd's (note 20), for short sale and derivative obligations and for certain intercompany reinsurance arrangements). Pledged assets primarily consist of cash and cash equivalents, short term investments and bonds within portfolio investments on the consolidated balance sheet.



	December 31, 2018	December 31, 2017
Regulatory deposits	4,503.3	4,256.8
Security for reinsurance and other	1,601.1	1,449.2
	6,104.4	5,706.0

Fixed Income Maturity Profile

Bonds are summarized by their earliest contractual maturity date in the table below. Actual maturities may differ from maturities shown below due to the existence of call and put features. At December 31, 2018 bonds containing call and put features represented approximately $3,366.0 and $292.0 respectively (December 31, 2017 - $3,390.3 and $93.3) of the total fair value of bonds. The table below does not reflect the impact of $471.9 (December 31, 2017 - $1,693.8) notional amount of U.S. treasury bond forward contracts (described in note 7) that reduce the company's exposure to interest rate risk. The increase in the company's holdings of bonds due in 1 year or less and due after 1 year through 5 years was primarily due to the reinvestment of cash and short term investments into short-dated U.S. treasury bonds, high quality U.S. corporate bonds and Canadian government bonds (net purchases of $9,120.3, $2,848.7 and $928.6 respectively), partially offset by sales of U.S. state and municipal bonds (net proceeds of $1,833.0).



	December 31, 2018			December 31, 2017
	Amortized cost⁽¹⁾	Fair value⁽¹⁾		Amortized cost⁽¹⁾	Fair value⁽¹⁾
Due in 1 year or less	9,610.5	9,606.5		3,383.9	3,537.6
Due after 1 year through 5 years	9,112.7	9,174.4		3,540.7	3,720.2
Due after 5 years through 10 years	808.4	802.7		1,017.6	1,054.3
Due after 10 years	956.9	977.9		1,872.1	1,978.7
	20,488.5	20,561.5		9,814.3	10,290.8
Effective interest rate		3.5	%		4.0	%


(1)	Includes bonds held by the holding company, Fairfax India and Fairfax Africa.

The pre-tax effective interest rate on the company's bond portfolio was 3.5% (December 31, 2017 - 4.0%).

Fair Value Disclosures

The company’s use of quoted market prices (Level 1), valuation models with significant observable market information as inputs (Level 2) and valuation models with significant unobservable information as inputs (Level 3) in the valuation of securities and derivative contracts by type of issuer was as follows:



	December 31, 2018									December 31, 2017
	Total fair value asset (liability)		Quoted prices (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)			Total fair value asset (liability)		Quoted prices (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Cash and cash equivalents⁽¹⁾	5,114.0		5,114.0		—			—		8,770.0		8,770.0		—			—

Short term investments:
Canadian government	198.9		198.9		—			—		7.1		7.1		—			—
Canadian provincials	171.6		171.6		—			—		281.9		281.9		—			—
U.S. treasury	758.5		758.5		—			—		9,225.5		9,225.5		—			—
Other government	814.7		692.4		122.3			—		403.0		307.0		96.0			—
Corporate and other	303.6		—		303.6			—		511.3		—		466.3			45.0
	2,247.3		1,821.4		425.9			—		10,428.8		9,821.5		562.3			45.0
Bonds:
Canadian government	964.7		—		964.7			—		84.4		—		84.4			—
Canadian provincials	51.9		—		51.9			—		93.8		—		93.8			—
U.S. treasury	10,464.0		—		10,464.0			—		1,779.3		—		1,779.3			—
U.S. states and municipalities	363.2		—		363.2			—		2,452.1		—		2,452.1			—
Other government	1,593.3		—		1,593.3			—		1,799.4		—		1,799.4			—
Corporate and other	7,124.4		—		5,131.5			1,992.9		4,081.8		—		2,185.7			1,896.1
	20,561.5		—		18,568.6			1,992.9		10,290.8		—		8,394.7			1,896.1
Preferred stocks:
Canadian	168.3		—		7.8			160.5		240.7		—		11.3			229.4
U.S.	5.0		—		—			5.0		5.0		—		—			5.0
Other	91.3		1.1		—			90.2		53.9		1.5		3.6			48.8
	264.6		1.1		7.8			255.7		299.6		1.5		14.9			283.2
Common stocks:
Canadian	873.3		669.6		96.0			107.7		958.7		825.9		110.3			22.5
U.S.	1,423.8		302.0		48.6			1,073.2		1,583.3		474.8		66.9			1,041.6
Other⁽²⁾	3,001.4		1,056.7		476.9			1,467.8		3,127.0		1,713.7		506.0			907.3
	5,298.5		2,028.3		621.5			2,648.7		5,669.0		3,014.4		683.2			1,971.4

Derivatives and other invested assets	641.2		—		164.3			476.9		267.1		—		89.5			177.6

Short sale and derivative obligations	(149.5	)	—		(149.3	)		(0.2	)	(126.2	)	—		(126.2	)		—

Holding company cash and investments and portfolio investments measured at fair value	33,977.6		8,964.8		19,638.8			5,374.0		35,599.1		21,607.4		9,618.4			4,373.3

	100.0	%	26.4	%	57.8	%		15.8	%	100.0	%	60.7	%	27.0	%		12.3	%

Investments in associates (note 6)⁽³⁾	5,223.1		2,344.9		36.9			2,841.3		4,629.3		2,004.3		45.3			2,579.7


(1)	Includes restricted cash and cash equivalents at December 31, 2018 of $577.1 (December 31, 2017 - $835.0). See note 27 for details.


(2)	Includes other funds invested principally in fixed income securities with a carrying value at December 31, 2018 of $150.3 (December 31, 2017 - $90.9) that are excluded when measuring the company's equity and equity-related exposure.


(3)	The carrying value of investments in associates is determined using the equity method of accounting so fair value is presented separately in the table above.

Transfers between fair value hierarchy levels are considered effective from the beginning of the annual reporting period in which the transfer is identified. During 2018 a listed equity investment was transferred from Level 1 to Level 3 as the company is restricted from selling that investment for a specified period and applied a discount for lack of marketability (a significant unobservable valuation input) to the quoted price. The increase in the company's Level 3 financial assets during 2017 was partially due to the consolidation of certain Allied World investments in limited partnerships that were classified as Level 3 common stocks ($583.8) based on their unobservable net asset values and inability to be liquidated or redeemed within three months. In addition, during 2017 a private placement debt security was transferred from Level 2 to Level 3 due to the modification of its terms and its credit spread (a key valuation input) becoming unobservable. During 2018 and 2017 there were no significant transfers of financial instruments between Level 1 and Level 2 and there were no other significant transfers of financial instruments in or out of Level 3 as a result of changes in the observability of valuation inputs.

A summary of changes in Level 3 financial assets measured at fair value on a recurring basis for the years ended December 31 follows:



	2018
	Private placement debt securities		Private company preferred shares			Limited partnerships and other			Private equity funds		Common shares			Derivatives and other invested assets			Total
Balance - January 1	1,941.1			283.2			1,598.7		170.5			202.2			177.6		4,373.3
Net realized and unrealized gains (losses) included in the consolidated statement of earnings	(78.4	)		(46.0	)		155.7		10.9			(24.0	)		(44.5	)	(26.3	)
Purchases	458.7			47.7			383.1		2.6			7.5			362.1		1,261.7
Sales and distributions	(266.3	)		(24.4	)		(316.3	)	(5.8	)		(3.5	)		(0.5	)	(616.8	)
Transfer into category	—			—			—		—			491.4			—		491.4
Unrealized foreign currency translation losses on foreign operations included in other comprehensive income	(62.2	)		(4.8	)		(10.5	)	(8.2	)		(5.6	)		(18.0	)	(109.3	)
Balance - December 31	1,992.9			255.7			1,810.7		170.0			668.0			476.7		5,374.0



	2017
	Private placement debt securities		Private company preferred shares			Limited partnerships and other			Private equity funds		Common shares			Derivatives and other invested assets			Total
Balance - January 1	1,053.1			44.0			981.4		167.8			155.4			97.8		2,499.5
Net realized and unrealized gains (losses) included in the consolidated statement of earnings	190.2			1.3			243.4		(5.5	)		22.6			(9.9	)	442.1
Purchases	430.2			268.4			221.2		—			11.1			72.3		1,003.2
Sales and distributions	(209.7	)		(34.1	)		(443.4	)	—			(19.4	)		—		(706.6	)
Acquisitions of subsidiaries (note 23)	22.4			—			583.8		—			29.9			9.7		645.8
Transfer into category	384.0			—			—		—			—			7.1		391.1
Unrealized foreign currency translation gains on foreign operations included in other comprehensive income	70.9			3.6			12.3		8.2			2.6			0.6		98.2
Balance - December 31	1,941.1			283.2			1,598.7		170.5			202.2			177.6		4,373.3

The table below presents details of the valuation techniques and unobservable inputs used in estimating fair values for the company's significant Level 3 financial assets:



Asset class	Carrying value at December 31, 2018	Valuation technique	Significant unobservable input	Input range used				Effect on estimated fair value if input value is increased^(a)
Asset class	Carrying value at December 31, 2018	Valuation technique	Significant unobservable input	Low		High
Limited partnerships and other^(b)(1)	1,810.7	Net asset value	Net asset value / Price	N/A		N/A		Increase
Private placement debt securities^(c)(2)	1,298.9	Discounted cash flow	Credit spread	2.6	%	18.5	%	Decrease
Private placement debt securities^(c)(3)	504.7	Net asset valuation of secured loans	Recoverability of assets	60.0	%	100.0	%	Increase
Common shares^(b)(4)	439.1	Quoted price net of discount	Discount for lack of marketability	11.6	%	11.6	%	Decrease
Common shares^(b)(5)	77.1	Market comparable	Book value multiple	1.3		1.3		Increase
Private company preferred shares^(d)(6)	148.9	Discounted cash flow	Credit spread	5.1	%	5.7	%	Decrease
Investment property^(e)	123.2	Market approach	Recent transaction price	N/A		N/A		Increase
Private equity funds^(b)(1)	98.8	Net asset value	Net asset value / Price	N/A		N/A		Increase
Private equity funds^(b)(5)	71.2	Market comparable	Price/Earnings multiple	10.0		10.0		Increase
Warrants^(e)(7)	77.3	Option pricing model	Equity volatility	26.4	%	42.6	%	Increase
CPI-linked derivatives^(e)(8)	24.9	Option pricing model	Inflation volatility	0.0	%	4.4	%	Increase
Warrant forwards^(e)(9)	23.0	Forward pricing model	Probability of exercise	100	%	100	%	Increase


(a)	Decreasing the input value would have the opposite effect on the estimated fair value.


(b)	Included within holding company cash and investments or common stocks on the consolidated balance sheet.


(c)	Included within holding company cash and investments or bonds on the consolidated balance sheet.


(d)	Included within preferred stocks on the consolidated balance sheet.


(e)	Included within holding company cash and investments or derivatives and other invested assets on the consolidated balance sheet.

(1)

Valued primarily based on net asset value statements provided by third party fund managers and general partners. The fair values in those statements are determined using quoted prices of the underlying assets, and to a lesser extent, observable inputs where available and unobservable inputs, in conjunction with industry accepted valuation models, where required. In some instances, such investments are classified as Level 3 if they require at least three months' notice to liquidate or redeem. Reasonably possible alternative assumptions have not been applied to the estimated fair value of these investments due to their diverse nature and resulting dispersion of prices. At December 31, 2018 limited partnerships and other consisted of 50 investments, the largest being $442.7.

(2)

Valued using industry accepted discounted cash flow models that incorporate market unobservable credit spreads of the issuers. At December 31, 2018 this asset class consisted of 12 investments, the largest being $512.4. By increasing (decreasing) the credit spreads within a reasonably possible range, the fair value of these private placement debt securities would decrease by $36.4 (increase by $36.1).


(3)	At December 31, 2018 this asset class consisted of 3 investments, the largest being $253.0.

(4)

A discount for lack of marketability is applied to the quoted price of common shares that the company is restricted from selling for a specified period, and is determined using an industry accepted option pricing model that incorporates market unobservable long-dated equity volatilities. A higher (lower) equity volatility generally results in a higher (lower) option value and a lower (higher) fair value of the common shares.

(5)

Fair values are determined by reference to various valuation measures for comparable companies and transactions, including relevant valuation multiples. In some instances, such investments are classified as Level 3 because the valuation multiples applied by the company were adjusted for differences in attributes between the investment and the underlying companies or transactions from which the valuation multiples were derived.


(6)	Valued using industry accepted discounted cash flow models that incorporate market unobservable credit spreads of the preferred shares.


(7)	Valued using industry accepted option pricing models that incorporate market unobservable long-dated equity volatilities. A higher equity volatility generally results in a higher fair value due to the higher probability of obtaining a greater return from the warrant.


(8)	Valued based on broker-dealer quotes which utilize market observable inputs except for inflation volatility which is market unobservable.


(9)	The company estimated the probability of exercise at December 31, 2018 to be 100%, so a decrease in the probability of exercise would decrease the estimated fair value of the warrant forwards.

Investment Income

An analysis of investment income for the years ended December 31 follows:

Interest and dividends and share of profit of associates



	2018		2017
Interest income:
Cash and short term investments	158.1		117.5
Bonds	555.0		441.9
Derivatives and other invested assets	30.8		(44.8	)
	743.9		514.6
Dividends:
Preferred stocks	11.0		2.1
Common stocks	70.5		71.1
	81.5		73.2

Investment expenses	(41.9	)	(28.8	)

Interest and dividends	783.5		559.0

Share of profit of associates⁽¹⁾	221.1		200.5


(1)	Includes impairment charges on investments in associates of $57.3 during 2018 (2017 - $46.6). See note 6 for details.

Net gains (losses) on investments



		2018											2017
	Net realized gains (losses)				Net change in unrealized gains (losses)				Net gains (losses) on investments				Net realized gains (losses)				Net change in unrealized gains (losses)				Net gains (losses) on investments
Bonds		126.2				(335.9	)			(209.7	)			445.7				(167.7	)			278.0
Preferred stocks		(21.9	)			(10.7	)			(32.6	)			0.2				(0.5	)			(0.3	)
Common stocks		196.4				(581.1	)			(384.7	)			126.5		⁽⁶⁾		585.7		⁽⁶⁾		712.2
		300.7				(927.7	)			(627.0	)			572.4				417.5				989.9

Derivatives:
Common stock and equity index short positions		(46.8	)	⁽¹⁾		8.6				(38.2	)			(485.6	)	⁽¹⁾		67.7				(417.9	)
Common stock and equity index long positions		(37.2	)	⁽¹⁾		(49.1	)			(86.3	)			21.6		⁽¹⁾		(2.0	)			19.6
Equity warrant forward contracts		75.4		⁽²⁾		38.5		⁽²⁾		113.9				—				—				—
Equity warrants and call options		(15.1	)			(54.8	)			(69.9	)			22.9				15.4				38.3
CPI-linked derivatives		—				(6.7	)			(6.7	)			—				(71.0	)			(71.0	)
U.S. treasury bond forwards		49.6				(2.9	)			46.7				(174.5	)			21.3				(153.2	)
Other		0.1				19.8		⁽²⁾		19.9				(8.4	)			8.1				(0.3	)
		26.0				(46.6	)			(20.6	)			(624.0	)			39.5				(584.5	)

Foreign currency net gains (losses) on:
Investing activities		(43.1	)			(128.2	)			(171.3	)	⁽³⁾		0.8				88.0				88.8		⁽³⁾
Underwriting activities		31.6				—				31.6				(74.9	)			—				(74.9	)
Foreign currency contracts		(21.5	)			29.4				7.9				(21.0	)			9.9				(11.1	)
		(33.0	)			(98.8	)			(131.8	)			(95.1	)			97.9				2.8

Gain on deconsolidation of subsidiary and disposition of associates		1,028.8		⁽⁴⁾⁽⁵⁾		—				1,028.8				999.9		⁽⁷⁾⁽⁸⁾		—				999.9

Other		(0.1	)			3.6				3.5				2.1				57.3				59.4

Net gains (losses) on investments		1,322.4				(1,069.5	)			252.9				855.3				612.2				1,467.5


(1)	Amounts recorded in net realized gains (losses) include net gains (losses) on total return swaps where the counterparties are required to cash-settle monthly or quarterly the market value movement since the previous reset date notwithstanding that the total return swap positions remain open subsequent to the cash settlement.


(2)	Includes the Seaspan forward contracts described in note 6.


(3)	Foreign currency net losses on investing activities during 2018 primarily reflected strengthening of the U.S. dollar relative to the Indian rupee and the euro. Foreign currency net gains on investing activities during 2017 primarily reflected strengthening of the euro, Canadian dollar and British pound sterling relative to the U.S. dollar.


(4)	During 2018 Thomas Cook India entered into a strategic agreement with the founder of Quess that resulted in Quess becoming an associate of Thomas Cook India whereas it was previously a consolidated subsidiary. Accordingly, the company re-measured the carrying value of Quess to its fair value of $1,109.5, recognized a non-cash gain of $889.9 and commenced applying the equity method of accounting.


(5)	During 2018 the company sold its equity accounted investments in Arbor Memorial Services Inc. and an insurance brokerage for net proceeds of $179.2 (Cdn $235.4) and $58.8 (Cdn$76.3) and recorded net realized gains of $111.8 and $17.6 (Cdn$22.7) respectively. See note 6 for details.


(6)	During 2017 the company increased its equity interest and potential voting interest in EXCO Resources, Inc. ("EXCO") to 15.8% and 21.8% respectively and commenced applying the equity method of accounting, resulting in unrealized losses of $121.6 on EXCO being reclassified to realized losses with a net impact of nil in the consolidated statement of earnings.


(7)	During 2017 the company sold a 24.3% equity interest in ICICI Lombard for net proceeds of $908.5 and recorded a net realized gain of $595.6. The company's remaining 9.9% equity interest in ICICI Lombard was reclassified to common stock at FVTPL and re-measured to fair value for a net realized gain of $334.5.


(8)	During 2017 the company acquired control of Grivalia Properties by increasing its equity interest to 52.7% and commenced consolidating Grivalia Properties in the Other reporting segment. Accordingly, the company re-measured its equity accounted carrying value of Grivalia Properties to fair value and recorded a net realized gain of $51.3.