Wanna see what Warren Buffett's worst nightmare looks like? Then take a glance at Fairfax Financial ( FFH), the troubled Canadian investment company that owns a raft of American insurance firms.

Toronto-based Fairfax used to be known as the Berkshire Hathaway ( BRK.A) of the North because of its Buffett-aping CEO and its enviable record of earning strong returns by buying cheap companies. After a recent series of stumbles, though, it's clear that chief exec Prem Watsa has fallen well short of the Sage of Omaha.

Now, has Fairfax fallen into a deep hole it can't climb out of? That is the question hanging over the publicity-shy, Indian-born Watsa as he leads the company into what is shaping up as its toughest year yet.

Tough Times

Fairfax, recently listed on the New York Stock Exchange, has been hit by credit downgrades and deep reserve deficiencies in its U.S. insurance companies, including TIG Insurance, which is highly exposed to the disastrous workers compensation product.

True, Watsa, in Fairfax's faux-frank Berkshire-style annual reports, has readily confessed that times are tough and that big acquisitions have failed to hit targets. But investors want more than selective repentance. Indeed, to understand the true health of Fairfax, details are needed on a number of key, but complex, areas.

First, there are reinsurance deals. Reinsurance at its simplest -- and rarely is it simple -- is the insurance that insurance companies themselves purchase to adjust their exposure, free up capital and manage earnings. Reinsurance can take many forms, however, and some deals can be structured so that the reinsurer is, for all intents and purposes, lending money to the company ceding the risk.

With Fairfax, some investors wonder whether a large and critical reinsurance deal struck with Swiss Re is really a form of debt, which, if treated as such, would increase the company's leverage. In addition, the Swiss Re premiums are being paid by the Fairfax holding company, not the insurance subs, where cost trends are closely watched.

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