DBRS Confirms Ratings of Fairfax Financial Holdings at BBB; Assigns Financial Strength Rating of A (low) to Canadian Subsidiaries; Trends Now Positive

DBRS Limited (DBRS) has today confirmed Fairfax Financial Holdings Limited’s (Fairfax or the Company) ratings, including its Issuer Rating at BBB, its Senior Unsecured Debt rating at BBB and its Preferred Shares rating at Pfd-3. The trend has been changed to Positive from Stable. The rating of Fairfax (US) Inc.’s Senior Unsecured Notes, guaranteed by Fairfax, has also been confirmed at BBB. The trend has also changed to Positive, in line with Fairfax. At the same time, DBRS assigned a Financial Strength Rating (FSR) of A (low), with a Positive trend, to both Northbridge General Insurance Company (Northbridge) and Federated Insurance Company of Canada (Federated), the Canadian operating subsidiaries of Fairfax. All ratings actions are detailed in the table below. The rating actions taken today follow the publication of DBRS’s new methodology, “Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations” (December 2015) (Global Insurance Methodology).

Under the Global Insurance Methodology, Fairfax’s Issuer Rating has been notched down two notches from the FSR of its operating companies. Among other factors, the notching reflects the structural subordination of the holding company’s creditors to the operating company’s creditors in an insolvency situation, and recognizes the reliance of the holding company on the upstreaming of earnings from its operating companies.

The change in the trend to Positive reflects the progress that Fairfax is making with its franchise and operations. The Company continues to develop its worldwide organization of insurance and reinsurance entities using a multi-brand strategy. The Canadian operations, through the Northbridge and Federated brands, hold a 5% market share of the Canadian commercial property and casualty (P&C) market, while through the Odyssey Re brand, Fairfax is ranked in the top 20 global P&C reinsurance writers. The Company has other brands from its successful acquisition activity that cater to particular risks, for example, workman’s compensation, pet insurance or marine. Fairfax has a strong focus on underwriting and pricing, and a willingness to avoid writing new business when it views market pricing as inadequate. The Company is noted for its expertise in active investment management, often taking controlling shares in portfolio investments, but also has a guiding principle to protect the Company from downside risks through both asset selection and hedging. Reflecting its strong liquidity position, the holding company maintains a liquid investment pool that helps to ensure that it can meet its capital servicing charges and has the mobility to move capital to recapitalize a subsidiary if required.

While Fairfax has good earnings ability, its earnings tend to be more volatile through its underwriting results and its investment portfolio because of market value changes in its bond and equity holdings. To manage its dispersed global operation, the Company maintains a lean head office based on its approach of providing a high degree of autonomy to its business units. However, Fairfax’s good risk profile reflects its centralized risk management function, which uses the risk management functions of each of the business operations to collect and monitor information regarding aggregate and emerging risks. The decentralized structure with specialized and diverse insurance risks is an operational challenge that is managed through an accounting system that provides performance information for numerous risk segments on both a local and aggregate basis.

The Positive trend considers the Company’s improving fundamentals, its recent acquisition of Brit PLC, a global Lloyd’s of London specialty insurer and reinsurer, and its ability to adapt to the current environment. Further positive ratings pressure could emerge if the Company reduces its leverage and improves its fixed charge coverage ratios, enhances its income stability and increases its market shares on a prudent basis. Negative ratings pressure could arise if the Company’s fundamentals weaken because of reduced liquidity levels and inadequate monitoring/oversight of risks.

Notes:
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 Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations (December 2015), DBRS Criteria: Preferred Share and Hybrid Criteria for Corporate Issuers (January 2015), DBRS Criteria: Guarantees and Other Forms of Explicit Support (February 2015) and Rating Holding Companies and Their Subsidiaries (January 2015), which can be found on our website under Methodologies.