DBRS Comments on Fairfax Share Issue

DBRS has today commented on Fairfax Financial Holdings Limited’s (Fairfax or the Company) announcement that it has received commitments for $1 billion in common share equity to finance the repurchase of the 27.4% of Odyssey Re Holdings Corp. (Odyssey) which it originally sold to the public in 2001. Since the Company has not taken on additional debt to finance this repurchase, DBRS views this action and its financing by common share equity positively.

This action follows the Company’s early 2009 repurchase of the 24.8% of Northbridge Financial Corporation which it did not own, which was financed with $374 million of holding company cash. These repurchases of minority interests were facilitated by the improved financial flexibility of Fairfax, reflecting strong investment performance over the past two years due to its contrarian investment strategies. Cash has correspondingly been accumulating at the holding company level and debt has actively been reduced. This summer, improved tone in the debt capital markets and an improving credit profile gave Fairfax the opportunity to raise CAD 400 million of ten-year senior debt.

On a pro forma basis, these various transactions result in a consolidated debt ratio of 26.1%, which, while higher than the level at year-end 2008, remains below the 40%-plus ratio of earlier in the decade. Giving credit for the cash at the holding company level, the Company’s consolidated net debt ratio on a pro forma basis is 15.1%.

Fairfax now owns 100% of each of its major operating subsidiaries: Crum & Forster, Northbridge and Odyssey Re. The public floats for Northbridge and Odyssey were created in order to finance some earlier investments and to fund other corporate cash requirements, including cash required in the Company’s run-off lines. With these repurchases of minority interests, Fairfax has effectively used its investing acumen to increase its financial flexibility by increasing its control over subsidiary cash flows and allowing the earnings of these highly successful operating subsidiaries to accrue to the Company’s benefit only.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Canadian Life Insurance Companies, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.