Fitch Ratings has affirmed the ratings of Fairfax Financial Holdings Limited (Fairfax) as follows:
--Issuer Default Rating (IDR) at 'BBB';
--Senior debt at 'BBB-'.
In addition, Fitch has assigned 'BBB-' ratings to Fairfax's recent $500 million issue of senior notes due 2021 and CDN$400 million issue of senior notes due 2021. Fitch has also affirmed the ratings of Fairfax's subsidiaries. A full list of rating actions is shown below. The Rating Outlook is Stable.
Fitch's rationale for the affirmation of Fairfax's ratings reflects the company's sizable cash position, favorable financial flexibility and reasonable financial leverage. The ratings also reflect the company's recent declining profitability from weakening underwriting and investment results, anticipated challenges in the overall competitive property/casualty market and soft rate environment and the potential for additional adverse reserve development, particularly on older accident years and in runoff operations.
Following record earnings posted by Fairfax from 2007 through the first nine months of 2010, the company has recorded a net loss in each of the past two quarters - $240 million in the first quarter of 2011 and $365 million in the fourth quarter of 2010. The recent losses are primarily due to increased catastrophes in the first quarter of 2011 with the Japanese and New Zealand earthquakes and the Australian storms and Cyclone Yasi. In addition, Fairfax has posted net investment losses from mark to market losses on bonds (as interest rates increased), economic equity hedges (as Fairfax continues to hedge its equity and equity-related portfolio) and CPI-linked derivatives (as the CPI index has increased).
Fairfax continues to maintain a sizable amount of holding company cash, short-term investments and marketable securities of $1 billion at March 31, 2011, which Fitch believes provides Fairfax a sufficient cushion in meeting potential subsidiary cash flow shortages and liquidity to service its debt, with reduced near term senior debt maturities following the recent debt refinancing. Fairfax also continues to demonstrate favorable financial flexibility, with Crum & Forster Insurance Group, Northbridge Financial Insurance Group, Zenith Insurance Group and Odyssey Reinsurance Company serving as key sources of dividends as wholly owned major ongoing operating subsidiaries.
Fairfax's equity credit adjusted debt-to-total capital ratio was 27.1% at March 31, 2011, up from 25.9% at Dec. 31, 2010 and 22.8% at March 31, 2010. This increase reflects a decline in Fairfax's common shareholders' equity to $7.2 billion at March 31, 2011, from $7.7 billion at Dec. 31, 2010 and $7.8 billion at March 31, 2010, due to net losses posted in fourth quarter 2010 and first quarter 2011 and a sizable dividend paid to common shareholders in the first quarter of 2011. Following Fairfax's recent senior note issuances in May 2011 and purchase of $694.5 million of outstanding senior notes in June 2011, pro forma equity credit adjusted debt-to-total capital increases slightly to 28.6% at March 31, 2010, within Fitch's expected range of 20%-30%.
Key rating drivers that could lead to a downgrade include declines in book value per share for an extended time period, sizable adverse loss reserve development, movement to materially below average underwriting or investment performance, equity credit adjusted debt-to-total capital maintained above 30%, significant acquisitions that reduce the company's financial flexibility and a substantial decline in the holding company's cash position.
Key rating drivers that could lead to an upgrade include consistent underwriting profitability and operating results in line with peers and industry averages, overall flat to favorable loss reserve development, equity credit adjusted debt-to-total capital maintained below 20% and continued maintenance of at least $1 billion of holding company cash, short-term investments and marketable securities.
Fitch affirms the following ratings with a Stable Outlook:
Fairfax Financial Holdings Limited
--IDR at 'BBB';
--Senior debt at 'BBB-';
--$157 million 7.75% due April 15, 2012 at 'BBB-';
--$82 million 8.25% due Oct. 1, 2015 at 'BBB-';
--$276 million 7.75% due June 15, 2017 at 'BBB-';
--$144 million 7.375% due April 15, 2018 at 'BBB-';
--CDN$400 million 7.5% due Aug. 19, 2019 at 'BBB-';
--CDN$275 million 7.25% due June 22, 2020 at 'BBB-'.
--$92 million 8.3% due April 15, 2026 at 'BBB-';
--$91 million 7.75% due July 15, 2037 at 'BBB-';
--CDN$250 million series C preferred shares at 'BB';
--CDN$200 million series E preferred shares at 'BB';
--CDN$250 million series G preferred shares at 'BB';
--CDN$300 million series I preferred shares at 'BB'.
Fairfax, Inc.
--IDR at 'BBB'.
Crum & Forster Holdings Corp.
--IDR at 'BBB'.
--$330 million 7.75% due May 1, 2017 at 'BBB-'.
Crum & Forster Insurance Group:
Crum and Forster Insurance Company
Crum & Forster Indemnity Company
The North River Insurance Company
United States Fire Insurance Company
--Insurer Financial Strength (IFS) at 'A-'.
Northbridge Financial Insurance Group:
Commonwealth Insurance Company
Commonwealth Insurance Company of America
Federated Insurance Company of Canada
Lombard General Insurance Company of Canada
Lombard Insurance Company
Markel Insurance Company of Canada
Zenith Insurance Company (Canada)
--IFS at 'A-'.
Odyssey Re Holdings Corp.
--IDR at 'BBB';
--$50 million series A unsecured due March 15, 2021 at 'BBB-';
--$50 million series B unsecured due March 15, 2016 at 'BBB-';
--$40 million series C unsecured due Dec. 15, 2021 at 'BBB-';
--$225 million 7.65% due Nov. 1, 2013 at 'BBB-';
--$125 million 6.875% due May 1, 2015 at 'BBB-'.
Odyssey Reinsurance Company
--IFS at 'A-'.
Zenith National Insurance Corp.
--IDR at 'BBB'.
Zenith Insurance Company
ZNAT Insurance Company
--IFS at 'A-'.
Fitch assigns the following ratings:
Fairfax Financial Holdings Limited
--$500 million 5.8% due 2021 at 'BBB-';
--CDN$400 million 6.4% due 2021 at 'BBB-'.
Fitch has withdrawn the following rating as the securities were redeemed and the entity was dissolved:
Zenith National Insurance Capital Trust I
--$38.5 million 8.55% trust preferred securities due Aug. 1, 2028 at 'BB'.
Additional information is available at 'www.fitchratings.com'. The issuer did not participate in the rating process other than through the medium of its public disclosure.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (March 31, 2011);
--'Rating Hybrid Securities' (Dec,. 29, 2009);
--'Non-Life Insurance Rating Methodology' (March 31, 2011);
--'Insurance Industry: Global Notching Methodology and Recovery Analysis' (March 31, 2011).
Applicable Criteria and Related Research:
Insurance Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=614266
Rating Hybrid Securities
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493086
Non-Life Insurance Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=604366
Insurance Industry: Global Notching Methodology and Recovery Analysis
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=614265
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Contacts:
Fitch Ratings
Primary Analyst
Brian C. Schneider, CPA, CPCU,
ARe, +1-312-606-2321
Senior Director
Fitch, Inc.
70 W.
Madison Street
Chicago, IL 60602
or
Secondary Analyst
Dafina
M. Dunmore, CFA, +1-312-368-3136
Director
or
Committee
Chairperson
Mark E. Rouck, CPA, CFA, +1-312-368-2085
Senior
Director
or
Media Relations:
Brian Bertsch,
+1-212-908-0549
Email: brian.bertsch@fitchratings.com