DBRS Confirms Fairfax Financial Holdings Limited at BBB and Pfd-3

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Debt of Fairfax Financial Holdings Limited (Fairfax or the Company) at BBB. The Preferred Shares were confirmed at Pfd-3. The trends are Stable.

Although Fairfax’s aggregate underwriting results have been good in 2013, the Company recorded a loss of $562.7 million for the first nine months largely due to losses in the investment portfolio of $828.6 million in Q3 2013 ( $1,235 million year-to-date); This includes $890.7 million of mark-to-market losses on bonds due to increases in interest rates. The resulting negative return on equity caps a string of single-digit returns seen over the previous three years.

Over the long-term Fairfax has generally achieved strong investment results on the investment portfolios it manages for its insurance subsidiaries. The strategy of Fairfax has historically been to achieve growth by acquisition and to invest acquired premiums to outperform the market benchmarks for equities and fixed income. Although contributing to earnings volatility, the Company’s unique long-term value approach to investing has served it well over time. The investment strategy is geared to growing the Company’s book value over time, thereby protecting its capital. This investment style does, however, give rise to what might be perceived as aggressive market calls. Most recently, this approach has been evident in Fairfax’s investments in BlackBerry. At Q3 2013, Fairfax held approximately $400 million of BlackBerry shares (Fairfax’s investments are marked to market each quarter through income), which it had intended to contribute to a bid to take the cell phone maker private. Following a 30 day due diligence period Fairfax announced it would instead invest $250 million in a $1 billion convertible bond offering. After reviewing BlackBerry’s books, Fairfax remains convinced there is sufficient value in BlackBerry to confidently provide this additional financing. The investment is certainly large, but manageable within Fairfax’s investment portfolio. While DBRS’s ratings for Fairfax incorporate this investment style, DBRS is always watching for indications that the risk appetite has grown. So far, DBRS does not believe the recent BlackBerry-related events represent a change with ratings implications for Fairfax.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodologies are Rating Canadian Property and Casualty Insurance Companies (November 2013), DBRS Criteria: Preferred Share and Hybrid Criteria for Corporate Issuers (November 2012) and Rating Holding Companies and Their Subsidiaries (September 2012), which can be found on our website under Methodologies.

DBRS will publish an interim report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.