DBRS Confirms Ratings on Fairfax Financial Holdings Limited and Affiliates

DBRS Limited (DBRS) has today confirmed Fairfax Financial Holdings Limited’s (Fairfax or the Company) Issuer Rating at BBB, its Senior Unsecured Debt rating at BBB and its Preferred Shares rating at Pfd-3. The rating of Fairfax (US) Inc.’s Senior Unsecured Notes, guaranteed by Fairfax, has also been confirmed at BBB. In addition, DBRS has confirmed the Issuer Rating and the Financial Strength Rating (FSR) of Northbridge General Insurance Company (Northbridge) as well as the FSR of Federated Insurance Company of Canada (Federated), the Canadian operating subsidiaries of Fairfax, at A (low). All trends remain Positive.

Fairfax has a fairly extensive global portfolio of insurance and reinsurance entities, which it continues to develop and grow through acquisitions. The Canadian operations, through the Northbridge and Federated brands, hold a 6% market share of the Canadian commercial property and casualty (P&C) market while, through the Odyssey Re brand, Fairfax is ranked in the top 25 global P&C reinsurance writers based on 2015 non-life gross written premiums. Risks assumed are broad and diverse, including commercial and personal property and auto as well as specialized risks, such as workers compensation, pet insurance or marine. Fairfax has made a number of acquisitions recently, including Brit plc (a global Lloyd’s of London specialty insurer and reinsurer) and insurers with operations in Latin America, Eastern and Central Europe, Indonesia and South Africa.

To manage its dispersed global operations, the Company maintains a lean head office based on its approach of providing a high degree of autonomy to its business units and maintaining a multi-brand strategy; however, Fairfax’s good risk profile reflects its corporate 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. 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.

Fairfax has a strong focus on underwriting and pricing as well as a willingness to avoid writing new business when it views market pricing as inadequate. Compensation is tied to underwriting profitability as measured by the Company’s combined ratios, underscoring a disciplined approach to claims and expense management. Combined ratios have improved in the past few years and are consistently below 100% (signifying a break-even underwriting result) with the first nine months of 2016 (9M 2016) value of 93.4%. Fairfax 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 asset selection and hedging. In 2016, Fairfax’s derivative investments, which include taking equity index short positions, have resulted in large unrealized equity hedging losses ($846 million at 9M 2016) as equity markets have risen, contributing to income volatility even as the insurance operations show good operating earnings. Despite reasonable underwriting income results, earnings volatility from investment income and hedging activities are affecting fixed-charge coverage ratios that are averaging at 3.0 times (x) lower than desired levels for an “A” rating. The organization’s high cash balances and the subsidiaries’ dividend capacity alleviate concerns about Fairfax meeting its capital servicing requirements.

The Positive trend considers the Company’s improving fundamentals, including its expanding global operations and strengthening franchise as well as its ability to adapt to the current challenging operating environment.

RATING DRIVERS

Further positive ratings pressure could emerge if the Company demonstrates continued progress in strengthening its franchise, particularly with its recent acquisitions; reduces its leverage and improves its fixed-charge coverage ratios; improves income stability; and demonstrates increased market shares on a prudent basis. Negative ratings pressure could arise from reduced liquidity levels, inadequate monitoring and oversight of assumed risks as well as deterioration in underwriting results.

Notes:
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.

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 Security Criteria for Corporate Issuers (January 2016), DBRS Criteria: Rating Holding Companies and Their Subsidiaries (January 2016) and DBRS Criteria: Guarantees and Other Forms of Support (February 2016), which can be found on our website under Methodologies.

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

Lead Analyst: Stewart McIlwraith
Rating Committee Chair: Roger Lister

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.