Best Affirms Fairfax, Subs Ratings

June 23, 2009

A.M. Best Co. has affirmed the issuer credit rating (ICR) of “bbb” and the unsecured debt ratings of Toronto-based Fairfax Financial Holdings Limited, as well as the financial strength ratings (FSR) of ‘A’ (Excellent) and ICRs of “a” of New Jersey-based Crum & Forster Insurance Group and New York-based Seneca Insurance Group, both wholly-owned subsidiaries of Fairfax. Best also affirmed the ICR of “bbb” and the unsecured debt ratings of Crum & Forster Holdings Corp.

In addition Best affirmed the FSR of ‘B+’ (Good) and ICR of “bbb-” and the FSR of ‘B++’ (Good) and ICR of “bbb” of TIG Insurance Group and Fairmont Specialty Group (both of Texas), respectively, which are both in run off. The outlook for all ratings is stable.

“The ratings of Crum & Forster reflect its role within Fairfax, its strong risk-adjusted capital levels, proven opportunistic underwriting strategy (particularly in underserved markets) and management’s commitment to reduce the group’s property catastrophe exposure to improve overall profitability,” Best explained.

The rating agency also noted that “significantly reduced legacy issues, including the commutation of most finite reinsurance contracts and the resolution in 2008 of its largest outstanding asbestos claim, also lends to the group’s profitability prospects going forward.

“Over the past five years, statutory surplus has grown at a compounded annual rate of 5.2 percent (after significant dividends were paid) much of which has been driven by realized investment gains and net investment income. An extraordinary dividend paid in 2008 resulted in a decline in surplus that year, but due to the growth in surplus in the preceding years, risk-adjusted capitalization remains at a level that is well supportive of the current ratings.

“Crum & Forster’s ratings also incorporate support from Fairfax, whose strong financial position, demonstrated track record of supporting subsidiaries and historic investment acumen provide the ability to support the group.”

However, Best also indicated that “Crum & Forster’s remaining legacy issues as it pertains to latent exposure written pre 1990 (or decades ago), weaker than expected underwriting results reported in 2008 and the continued challenges associated with the competitive pricing environment,” should be considered as offsetting factors.

“In 2008, underwriting results were negatively impacted by a series of one-time charges, including a reinsurance commutation, the settlement of a large latent exposure claim and weather-related losses, including hurricanes Ike and Gustav,” Best continued. “Changes in the property strategy and the significant reduction in property exposure during 2009 should have a positive impact on future results. The group commuted one of its two remaining material finite reinsurance contracts in 2008, which should increase future investment income (was not a funds held treaty).

Best said that its ratings on Fairfax “recognize the quality of its on-going operations, which are well-managed, diversified and well-capitalized. These on-going operations also are historically profitable, and the underwriting losses in 2008 were more than overcome by realized gains on investments, which produced a record level of profits for Fairfax. Operating losses at Fairfax’s run-off operations declined in 2008, and future adverse loss reserve development and operational costs are expected to be, in the future, only a modest drag. The operating losses were more than offset by investment gains in 2008.

In addition Fairfax financial leverage remains within Best’s “tolerance levels for its current ratings, measuring 26.9 percent at March 31, 2009 (based on US GAAP). This calculation includes the debt of Odyssey Re Holdings Corp., a majority-owned public company capable of servicing its debt. Debt maturities have been proactively refinanced, leaving Fairfax without a need to access public credit markets for several years.”

Best also noted that the “cash, short-term investment and marketable securities held at the holding company level totaled $786.4 million at March 31, 2009. The company repaid a loan and closed several transactions in first quarter 2009, totaling almost $400 million, which resulted in a decline in cash balances from December 31, 2008.

“Fairfax’s 2008 results reflect the investment expertise of its Hamblin Watsa Investment Counsel subsidiary. Pre-tax net gains on investments during 2008 were over $2.7 billion, up from $1.6 billion in 2007. In 2008, the company sold the majority of the credit default swaps it had purchased.

“In fourth quarter 2008, Fairfax removed its equity hedges, liquidated most of its holdings of U.S. Treasury securities and purchased U.S. state, municipal and other tax-exempt bonds (most of which carry a guarantee from a subsidiary of Berkshire Hathaway, Inc.) and established long positions in common stocks. While mark-to-market adjustments on its equity positions generated a net loss in first quarter 2009, almost 75 percent of the group’s portfolio investments (which includes investments held at subsidiaries) are held in cash, short-term investments and bonds.”

For a complete listing of Fairfax Financial Holdings Limited’s FSRs, ICRs and debt ratings, go

Source: A.M. Best –

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