S&P Raises Fairfax Financial’s Rating Outlook to ‘Watch Positive’

March 12, 2008

Standard & Poor’s Ratings Services has placed its counterparty credit and financial strength ratings on Canada’s Fairfax Financial Holdings Ltd. (FFH), FFH’s operating insurance companies (collectively, Fairfax), and Crum & Forster Holdings Corp. on CreditWatch with positive implications (for rating action on Cunningham Lindsey Group – see national section).

“The CreditWatch is based on strong earnings in 2007, and we expect 2008 to be another strong year,” explained S&P credit analyst Damien Magarelli.

S&P noted: “Fairfax exhibited strong and improved underwriting and a combined ratio of 94 percent in 2007. Investment results in 2007 were very strong, due to significant increased net investment gains related to credit default swaps (CDS) of $1.1 billion, which Fairfax sold for proceeds of $199 million in 2007 and $651 million through Feb. 15, 2008. Thus, earnings will likely be very strong for Fairfax in 2008 due to investment earnings alone.

“The combination of strong underwriting and investment returns has contributed to 2007’s shareholders’ equity increasing 49 percent to $4.1 billion from $2.8 billion, and this further supports the CreditWatch.”

S&P indicated that, “following a further review of governance, a one-notch upgrade might be possible in the next three months if the review highlights that this area does not restrict the rating. If the governance review concludes that this function and related management controls are not consistent with a higher rating, the outlook will likely be revised to stable.”

As far as the rating itself is concerned, S&P explained that it is “based on a good competitive position that is diversified geographically and by sector, as well as reduced debt leverage. Fairfax historically measured very high debt leverage, but this has been steadily declining the past few years and at year-end 2007 was 28 percent–now a strength to the rating. This is expected to be maintained at less than 30 percent.”

S&P also indicated that it “expects strong underwriting performance with a combined ratio of less than 100 percent, while strong holding company liquidity is maintained with at least $250 million in cash. Negative factors to the rating are governance, which though improving, is still a concern; high reinsurance recoverables, although declining; and the historical use of finite reinsurance, although many of these contracts have been commuted. ”

Source: Standard & Poor’s – www.standardandpoors.com

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