Best Affirms Ratings for Northbridge (Fairfax) Operating Companies

October 16, 2009

A.M. Best Co. has affirmed the financial strength ratings (FSR) of ‘A’ (Excellent) and issuer credit ratings (ICR) of “a” of Markel Insurance Company of Canada, Federated Insurance Company of Canada, Commonwealth Insurance Company, Commonwealth Insurance Company of America (based in Seattle), Lombard General Insurance Company of Canada and Zenith Insurance Company, both of Toronto, as well as CRC (Bermuda) Reinsurance Limited.

Best also affirmed the FSR of ‘A-‘ (Excellent) and ICR of “a-” of Lombard Insurance Company. All the above companies, except CRC, are wholly owned subsidiaries of Canada’s Northbridge Financial Corporation, an indirect, wholly owned downstream holding company of Fairfax Financial Holdings Limited. CRC is a direct subsidiary of Fairfax. The outlook for all ratings is stable.

Best said it has withdrawn the ICR of “bbb” of Northbridge, “due to the reprivatization of the company’s common shares by Fairfax,” and has assigned the rating an “nr”.

“The ratings of Markel, Federated, Lombard General and Zenith acknowledge their historic underwriting and operating performances, respective niche profiles, well respected franchises, consistent long-term earnings capabilities and stable balance sheets, which are based in part on conservative reserve cultures,” Best explained.

However, the rating agency noted that “the continued soft pricing market in 2008 and into 2009, weather-related losses and, at Markel, foreign exchange translation of U.S. dollar-denominated reserves (which are ultimately offset by the translation of corresponding levels of U.S. dollar-denominated investments),” should be considered as offsetting factors.

Best also indicated that investment market conditions have led to some variability in the companies’ net income in recent years. Accounting presentation requirements of the Office of the Superintendent of Financial Institutions (OSFI) have caused fluctuations in net investment income in recent years, as it now reflects unrealized gains and losses.

“The ratings of Commonwealth reflect its supportive risk-adjusted capital level, its niche position within the commercial insurance sector (particularly in Canada), geographic diversification within North America and the implicit and explicit support of Fairfax;” Best continued. “Offsetting these rating factors are variability in Commonwealth’s underwriting and operating results in recent years due to the effects of weather-related and catastrophic losses and the foreign exchange translation on its U.S. dollar-denominated reserves.

“The ratings of Lombard recognize its supportive level of risk-adjusted capital, generally favorable accident year underwriting performance generated by its personal lines business and the implicit and explicit support of Fairfax.” As offsetting factors, Best cited: “The impact of soft market conditions on the company’s recent underwriting performance and its historically below average calendar year results, due in part to adverse loss reserve development of older accident years when Lombard had commercial liability exposures.

“The ratings of CRC reflect its adequate level of risk-adjusted capitalization, favorable long-term operating and underwriting results and the implicit and explicit support of Fairfax. Offsetting rating factors are the significant operating loss posted by CRC in 2008, the increase in exposure to catastrophe events through its quota-share agreement with Advent Syndicate 780 and the concentration in its source of business, with the majority of premiums generated by relationships with its Fairfax affiliates.”

Best said the stable rating outlook acknowledges its “belief that the companies will maintain supportive levels of risk-adjusted capital and demonstrate operating results in line with their historic norms. The outlook also reflects the financial flexibility the companies receive as part of the Fairfax enterprise.”

Best summarized the ratings as follows:
The FSRs of ‘A’ (Excellent) and ICRs of “a” have been affirmed for the following operating subsidiaries of Northbridge Financial Corporation:
— Commonwealth Insurance Company
— Commonwealth Insurance Company of America
— Federated Insurance Company of Canada
— Lombard General Insurance Company of Canada
— Markel Insurance Company of Canada
— Zenith Insurance Company

The FSR of ‘A-‘ (Excellent) and ICR of “a-” have been affirmed for Lombard Insurance Company.

The FSR of ‘A’ (Excellent) and ICR of “a” has been affirmed for CRC (Bermuda) Reinsurance Limited.

The ICR of “bbb” has been withdrawn and assigned an “nr” for Northbridge Financial Corporation.

Source: A.M. Best –

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