A.M. Best Co. announced that it has affirmed the issuer credit rating (ICR) of “bb+” and the debt ratings of Toronto-based Fairfax Financial Holdings Limited. At the same time Best affirmed the financial strength rating of “A-” (Excellent) of Crum & Forster Insurance Group, Fairfax’ New Jersey-based subsidiary, and Seneca Insurance Group of New York. Best also affirmed the financial strength rating of “B+” (Very Good) of the Texas-based TIG Insurance Group.
Commenting on the outlook for the ratings, Best said it has revised its outlook on Fairfax and on the insurance groups indicated to stable from negative. Additionally, Best said it has affirmed the financial strength rating of “B++” (Very Good) of the Texas-based Fairmont Specialty Group, also with a stable outlook.
“The revised outlook on Fairfax’ debt and ICRs was the direct result of sufficient holding company cash flow to cover fixed and variable expenses through 2006,” said Best. “The liquidity was partially the result of Fairfax’ $300 million equity offering in 2004, coupled with the maturity extensions on existing debt.” Best indicated that it “believes that management will continue to be proactive in its capital and liquidity management and that they have proven their financial flexibility. The rating affirmations also factored in Fairfax’ continued elevated financial leverage,” which Best said it “believes will remain in the 45 percent range (based on U.S. GAAP) for the foreseeable future.”
In addition Best said it has “factored into the rating outlook the significant cash needs of the European run-off, which have been estimated at the high end range of potential outcomes. The U.S. run-off – TIG Insurance Group – is sufficiently liquid to cover its claims payments and operating expenses.” Best also expressed the belief that “Fairfax’ management has options available to them to lessen the holding company liquidity burden of the European run-off and expects management will exercise one of these options prior to the end of 2006 to maintain liquidity to support future needs. A.M. Best has modeled the capital levels of both the U.S. and European run-off operations, and capital for both entities is sufficient to support reserve levels.”
Best said it had taken into account “the significant drag on earnings the run-off operations currently have and will continue to present in affirming its ratings on Fairfax and the related companies. Best indicated that it “believes that the run-off operations are exceptionally well managed and controlled, harboring an excellent database of information to assist in reserve setting, particularly with regard to asbestos and environmental, as well as ability to collect on reinsurance recoverables.”
Nevertheless the rating agency said it also expects Farifax’ earnings “to be negatively affected by expenses in excess of investment earnings, potential material reserve increases and the effects of continued commutations, which in the past have been a significant contributor to the run-off’s cash needs.”
Best said it “has confidence in the management teams of each of Fairfax’ operating entities to properly manage and control their operations through the current pricing cycle. The comfort with holding company liquidity also rests with the robust capital levels held by each of the ongoing Fairfax operating entities. Given the softening market conditions, coupled with each management team’s adherence to underwriting profitability, premium growth has declined; therefore, replenishing operating capital is not indicated for the near term. There is a sufficient cushion of capital to absorb any reasonable unforeseen events and for the operating entities to make their way through the current pricing cycle.”
Best also indicated it “believes that Crum & Forster’s management team will adhere to the concept of underwriting profitability and has instilled such a culture throughout the company. The rating affirmation reflects the favorable impact that the foundation of pricing adequacy and control has had on current accident years.
“Crum & Forster maintains a strong level of capitalization, which provides a good cushion to absorb potential future reserve deficiencies and allows for needed dividends to be upstreamed to Fairfax.” Best expects earnings to improve in the coming years, “tempered by probable continued asbestos reserve increases that will affect the bottom line.” It also noted that “Crum & Forster has been a significant purchaser of non-traditional reinsurance, and the discount on the remaining finite contracts has been factored into the capital model. Furthermore, capital will continue to support the rating in the unlikely event that the company be required to account for this reinsurance as deposit accounting.”
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