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 and the Company’s Preferred Shares at Pfd-3. The trends are Stable.

Fairfax’s aggregate underwriting results have been strong year-to-date 2014, with a combined ratio of 92%, and investment and hedging results have been favourable, posting net gains of $1,909 million for a net profit of $1,626 million, which contrasts with the loss of $562.7 million for the first nine months of 2013.

Over the long term, Fairfax has generally achieved strong investment results on the investment portfolios it manages for its insurance subsidiaries. With willingness to take advantage of market disruptions and distressed valuations for particular securities and purchase hedges against general market downturns versus the actual portfolio investments, the active investment management generates volatile financial results.

Financial leverage (preferred shares and debt-to-total capital), although declining from September 2013, remains at the upper range for the rating in the mid-thirties. Fixed charge coverage ratios have been very low for the last few years, with low profitability, but the year-to-date (September 2014) results have yielded a desirable ratio. The Company maintains a minimum balance of $1 billion in cash and marketable securities at the holding company for liquidity and contingent subsidiary capital needs, which is viewed as prudent given the earnings volatility.

The Company’s management culture places a high reliance on local management to manage their businesses prudently. The decentralized structure has allowed Fairfax to grow by acquisition globally to take advantage of profitable niches held by existing businesses. DBRS realizes this decentralized management structure contrasts sharply with most Canadian financial institutions, but notes that, if done correctly and with the right businesses and people, it can be a successful strategy, which the Company has been able to demonstrate.

Notes:
The Senior Unsecured Notes of Fairfax (US) Inc. are guaranteed by Fairfax Financial Holdings Limited.

All figures are in U.S. 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 Companies in the Canadian Property and Casualty Insurance Industry (November 2013), Preferred Share and Hybrid Criteria for Corporate Issuers (Excluding Financial Institutions (December 2013), Rating Holding Companies and Their Subsidiaries (January 2014) and DBRS Criteria: Guarantees and Other Forms of Explicit Support, which can be found on our website under Methodologies