S&P Raises Fairfax Operating Companies Ratings

June 10, 2008

Standard & Poor’s Ratings Services has raised its counterparty credit and financial strength ratings on Fairfax Financial Holdings Ltd.’s (FFH) operating insurance companies (collectively, Fairfax) to ‘BBB+’ from ‘BBB’, as well as its ratings on FFH and Crum & Forster Holdings Corp. to ‘BB+’ from ‘BB’. The outlook for the ratings is stable.

“The upgrade is based on strong earnings in 2007 and in 2008 relative to peers,” explained credit analyst Damien Magarelli. “Previously restrictive negative ratings factors are still viewed negatively, but no longer limit the rating to the same degree: governance has improved, ERM remains adequate, and reserves and reinsurance recoverables are not as great a concern.”

S&P noted: “The ratings are based on a good competitive position that is diversified geographically and by sector, as well as reduced debt leverage. Fairfax historically had very high debt leverage, but this has been steadily declining the last few years and at first quarter 2008 was 24 percent–now a strength to the rating.

“Negative factors to the rating are the lack of a strong earnings track record in a softening price market, high reinsurance recoverables, though declining, and the historical use of finite reinsurance, though many of these contracts have been commuted.

“The stable outlook,” S&P continued, “is based on the view that FFH’s earnings in 2008 will be unusually strong based on investment earnings within the CDS portfolio as well as strong underwriting performance with a combined ratio near 100 percent from continuing operations.”

It is “further supported by a good competitive position, decreasing financial leverage (to be maintained at less than 30 percent) with interest coverage at 3x excluding realized capital gains, and strong liquidity to be measured in part by the maintenance of $350 million in cash and short-term investments at the holding company level.”

However, S&P indicated that a “negative outlook may result if Fairfax changes its investments strategy to a less conservative one, increases its holdings of common stock to more than 30 percent, increases its reinsurance recoverables, accounts significant reserve charges, or reduces its cash and short-term investment holdings to less than $350 million.”

On the other hand, S&P said, “a positive outlook [which could eventually see the ratings raised to the ‘A’ level] is possible if Fairfax shows disciplined underwriting in a softening market, does not have significant reserve charges, does not have accounting restatements, and reduces its reinsurance recoverables, while earnings remain strong on a consolidated basis.”

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

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