Rating Agencies React to Fairfax 10-K Filing; Part 1 – A.M. Best Affirms Ratings; Off Watch

April 4, 2006

The rating agencies have taken different actions on Fairfax Financial Holdings and its subsidiaries, including Odyssey Re Holdings in which Fairfax has an 80 percent stake, following the Group’s filing of its Form 10-K financial statements on Friday March 31. The delayed filing had caused all three major rating agencies – A.M. Best, Standard & Poor’s and Fitch Ratings to put the Group on their respective credit watches.

A.M. Best Co. announced that it has removed the financial strength rating (FSR) and issuer credit ratings and debt ratings (ICR) of the operating subsidiaries of Odyssey Re Holdings Corp. from under review with negative implications. Best also removed from under review with negative implications the FSR and ICRs of Crum & Forster as well as Fairfax ‘s other wholly-owned operating subsidiaries and the operating subsidiaries of Northbridge Financial Corporation.

Best said: “All debt ratings of Fairfax have also been removed from under review with negative implications. Fairfax’s and Northbridge’s ratings were placed under review due to Fairfax delaying the filing of its Annual Report with Canadian regulators as a result of the delay in Odyssey’s 10-K filing.

“All of the FSRs, ICRs and debt ratings of Odyssey and Fairfax have been affirmed with a stable outlook.” Best rates Fairfax “BB+”, Odyssey Re “BBB,” and its subsidiaries “A.” The FSRs and ICRs of Northbridge have also been affirmed with a positive outlook, with the exceptions of Lombard Insurance Company, Zenith Insurance Company and CRC (Bermuda) Reinsurance Limited, which have a stable outlook.” For a complete list of the ratings go to: http://www.ambest.com/press/040308fairfax.pdf.

Best said it “has reviewed the accounting considerations that led to Odyssey’s need to re-state its financial statements for the years ended December 31, 2000 through 2004 and for the nine months ended September 30, 2005 and believe they are not of a sufficient nature to directly cause a negative rating action. In particular, the need to restate due to finite contracts risk transfer considerations was immaterial. Statutory accounting is not materially affected by the restatements, and A.M. Best’s evaluation of Odyssey’s statutory capital remains unchanged and currently supportive of its ratings.

“However, current surplus levels have been achieved through the company’s significant capital raising activities in 2005–assisted by Fairfax’s explicit support–and collectively has caused a decrease in its financial flexibility. Odyssey’s holding company cash levels are deemed sufficient to support its debt service obligations in 2006. A.M. Best maintains earnings, capital level, adverse reserve development and financial leverage expectations for Odyssey and its operating subsidiaries. Should results be inconsistent with expectations, the ratings could be re-evaluated.”

Best also indicated it “believes that Fairfax’s Crum & Foster and Northbridge operations are stable, well managed and adequately capitalized. In particular, A.M. Best incorporates in its capital model for the Crum & Forster subsidiaries a charge related to the remaining finite reinsurance contracts.”

The rating agency noted that it “closely monitors Fairfax’s holding company liquidity and the U.S. and European run-off operations, which are housed in the TIG and nSpire subsidiaries, respectively. Expectations are that earnings losses, particularly within the European run-off operations, will subside in 2006; however, the European operations will continue to be cash needy for the foreseeable future. Fairfax holding company liquidity of approximately $559 million at December 31, 2005 is expected to be sufficient for the near term and includes the cash needs of the run-off operations.

“Earnings have been noticeably augmented through significant realized gains, although projections do not include a continuation of positive past performance. A.M. Best reiterates its belief that Fairfax’s elevated financial leverage, partially due to Odyssey’s 2005 capital raising activity, remains an issue and that management’s plans to reduce leverage have been stalled by earnings losses–the result of hurricane activity–and corresponding reduced cash flow to the holding company.”

The subpoenas from the Securities and Exchange Commission that Fairfax and several of its subsidiaries have received do rfemain a problem. Best that while it recognizes this as a concern, “other insurance industry participants,” have also received subpoenas. Best concluded that the “U.S. Attorney’s office is reviewing documents provided to the SEC by Fairfax. The timing of a response from the SEC is indefinite and the nature of the response is unknown. Because this concern cannot be analyzed or quantified, it is not currently being incorporated into the ratings. However, as information becomes available, A.M. Best will respond appropriately.”

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