Rating Agencies React to Fairfax 10-K Filing; Part 3 – Off S&P Credit/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.

Standard & Poor’s Ratings Services announced that it has “removed its ‘BB’ counterparty credit ratings on Fairfax Financial Holdings Ltd. (FFH) and Crum & Forster Holdings Corp. (Crum Holdings) from CreditWatch negative and affirmed the ratings.” S&P also removed its “BB-” counterparty credit rating on TIG Holdings Inc. from CreditWatch negative and affirmed the ratings.

However, S&P said it has “revised its outlook on Fairfax Financial Holdings Ltd.’s (FFH) ongoing operating insurance companies (collectively, Fairfax) to stable from positive and affirmed its ‘BBB’ counterparty credit and financial strength ratings on the companies.” The outlook on all of the companies is stable.

After noting the delayed filings as the reason from the Credit/Watch placement, S&P noted that, following the filing “There was no impact to FFH’s financial statements, and the company’s year-end 2005 figures remain as published on Feb. 9, 2006.”

S&P credit analyst Damien Magarelli commented: “The ratings on FFH are based on its improving competitive position, strong consolidated capitalization (even after adjustments for finite reinsurance), and improved financial flexibility.

“Offsetting these positive factors are reserves, which though not an immediate concern, have frequently been strengthened and might require some further modest charges; some very poor acquisitions and sizeable reserve charges for which FFH has utilized finite reinsurance; and debt to support operating company obligations, resulting in high debt leverage.”

S&P noted: “Lastly, FFH’s consolidated underwriting performance in 2005 after including hurricane losses was a 108 percent combined ratio, but the company’s net loss of $498 million, largely driven by pretax losses ($178 million) at Odyssey Re Holdings and runoff ($642 million) remain inconsistent with a positive outlook. A positive outlook might be warranted based on year-end 2006 financial statements, should earnings improve and produce a sizeable net profit.

“Earnings should also no longer be dependant on realized capital gains, net investment income, or be reduced significantly by runoff segment losses to support a positive outlook. The outlook could be changed to negative if earnings do not improve in 2006, if there is significant turnover in management, if there is significant regulatory adverse development, if reserves develop adversely, if there are significant one-off runoff segment charges, or if holding company cash is not maintained near $300 million.”

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