Rating Agencies React to Fairfax 10-K Filing; Part 2 – Fitch Maintains Credit Watch on Group

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.

In contrast to A.M. Best, Fitch said that its ratings “for Fairfax Financial Holdings Limited (Fairfax), Odyssey Re Holdings Corp and its insurance subsidiaries (Odyssey Re), and TIG Holdings Inc. (TIG) remain on Rating Watch Negative.”

Fitch’s analysis continued: “TIG’s Negative Rating Watch reflects the alignment of the company’s and Fairfax’s debt ratings given that Fairfax has traditionally guaranteed TIG’s debt. The holding company ratings of Crum & Forster Holdings Corp, and the insurance company ratings of Crum & Forster Insurance Group, Northbridge Financial Insurance Group, and TIG Insurance Group are not affected by this action.

“In addition to the restatements previously announced, Odyssey Re restated one additional ceded reinsurance contract entered into in 1995, which was changed from prospective to retroactive reinsurance accounting for 2002 and subsequent periods. The result was to increase Odyssey Re’s net loss in 2005 to $105.4 million from $101.8 million reported previously, with a cumulative impact to Sept. 30, 2005 shareholders’ equity of a $35.6 million decrease, compared to a decrease of $8.4 million previously reported, all of which will be earned in future periods.

“As a result of the restatements, Odyssey Re identified a material weakness in its internal control over the accurate accounting for its finite reinsurance transactions as of year-end 2005. Odyssey Re will implement a remediation plan to address the material weakness. Fairfax did not restate its financial results due to Odyssey Re’s restatement, concluding that it was not material to Fairfax. In addition, the material weakness at Odyssey did not result in a material weakness at Fairfax.”

Fitch did say that it “views as a positive development Odyssey Re’s 10K filing with relatively minor additional restatements as it has reduced a significant uncertainty. However, the ratings remain on Negative Rating Watch due to the substantial uncertainty surrounding the ongoing investigations of Fairfax and Odyssey Re.” However it added that the “ratings of Fairfax and its subsidiaries incorporate a certain amount of risk related to the ultimate potential negative effect of issues surrounding the company’s use of finite reinsurance and transactions in Fairfax securities, which have led to various subpoenas received by Fairfax, its subsidiaries, its independent auditors and a shareholder.”

Fitch also said that the ” the increased risk that the ongoing investigations by the Securities and Exchange Commission (SEC) and the U.S. Attorney’s office for the Southern District of New York could bring about a civil action against the company. Fitch believes that any such action could negatively affect the companies’ franchise, reputation, and competitive position, particularly for Odyssey Re as a reinsurer, in addition to the financial implications of any fines and/or penalties levied. Fitch will continue to monitor events for any additional developments related to these ongoing investigations.”