DBRS Limited (DBRS Morningstar) confirmed all ratings of Fairfax Financial Holdings Limited (Fairfax or the Company) and its related entities, including Fairfax’s Issuer Rating, at BBB (high) and Northbridge General Insurance Corporation’s (Northbridge) Financial Strength Rating at “A.” The trends on all ratings are Stable.
KEY RATING CONSIDERATIONS
The rating confirmations and Stable trends reflect the Company’s resilient, diversified franchise; consistent underwriting profitability; strong liquidity position; and sound regulatory capital. Indeed, Fairfax is a major international P&C insurance and reinsurance player with a significant presence in key global markets through its geographically diversified insurance and reinsurance operating subsidiaries. The Company maintains ample cashable assets at both the holding and operating companies, as well as access to committed banking lines of credit. Fairfax’s subsidiaries maintain appropriate regulatory capital ratios with buffers above required solvency levels, allowing the Company to handle reasonably adverse events. The ratings also consider Fairfax’s exposures to equity market volatility as well as lower-rated bonds.
DBRS Morningstar would upgrade the ratings on Fairfax and its subsidiaries if there were a sustained material improvement in risk profile and overall profitability, while maintaining strong regulatory capital ratios at its operating insurance companies combined with a material reduction in financial leverage below 25%.
Conversely, the ratings would be downgraded if there is a sustained deterioration in overall profitability, capitalization, or market positioning, combined with a significant reduction in holding-company liquidity levels.
DBRS Morningstar views Fairfax's franchise strength as Strong/Good reflecting the size and diversity of its core operations. Fairfax has developed an extensive portfolio of global insurance and reinsurance subsidiaries over time, which the Company continues to expand through organic growth and prudent strategic acquisitions. Management of the Company’s insurance and reinsurance operating subsidiaries is decentralized, with each organization having its own autonomous management team. Written premiums are dominated by commercial insurance business with concentrations in some markets, such as U.S. workers’ compensation insurance, trucking insurance in Canada, several specialty lines, and reinsurance businesses. Written gross premiums have increased over the past five years to $19.1 billion reported for YE2020. The Company ranks among the top five providers of commercial P&C insurance in Canada based on 2020 direct premiums written. Fairfax’s largest U.S.-based subsidiary, Odyssey Group, ranks among the 25 largest global P&C reinsurers. The Company’s U.K. subsidiary, Brit Limited (Brit), is a large Lloyd’s of London syndicate and a market leader in specialty insurance and reinsurance.
Fairfax’s Good/Moderate risk profile is supported by the Company’s strong underwriting and risk-limit controls, effective claims management, and appropriate reinsurance coverage for aggregate claim events or large losses. Moreover, Fairfax has appropriate internal controls and has been able to operate successfully in multiple jurisdictions. A ratings constraint, Fairfax’s investment strategy that includes equities, as well as a higher proportion of lower-rated bonds, adds volatility to its income as a result of the fluctuating market valuations of its investments.
DBRS Morningstar assesses the Company’s earnings ability as Good/Moderate. Fairfax is characterized by disciplined underwriting, supported by a long-term value-investing approach. The Company's model of growing through acquisitions results in significant earnings diversity, which is positive for the ratings. Fairfax has a history of acquiring well-managed companies and ensuring that it retains management to continue running these businesses. Although each operating subsidiary is managed autonomously, Fairfax has experienced managers in each operation who share a common focus on underwriting profitability.
DBRS Morningstar assesses the Company’s liquidity profile as Strong/Good. Fairfax’s credit ratings benefit from a sizable holding of liquid assets at the parent holding-company level. The Company maintains a strong financial position at the holding company level, with approximately a $1.5 billion total for cash and liquid investments as at Q3 2021. DBRS Morningstar considers this level of cash and investments as providing an important liquidity cushion for any potential uptick in insurance claims from the subsidiaries or potential catastrophe losses. The Company maintains a committed credit facility of $2 billion that is available to support liquidity needs. The credit facility was undrawn as at September 30, 2021.
DBRS Morningstar assess the capitalization of the Company as Good/Moderate. Fairfax’s insurance and reinsurance operating subsidiaries are appropriately capitalized, with each major subsidiary having available capital exceeding the required regulatory minimums. The Company’s fixed-charge coverage ratios have been volatile over time because of the impact of International Financial Reporting Standards’ accounting treatment of unrealized capital gains and losses within the investment portfolio. However, Fairfax's financial leverage ratio (as calculated by DBRS Morningstar) improved to 33.0% as of 9M 2021 from 38.2% the prior year. The reduction in leverage is as a result of the Company's commitment to reduce debt. Fairfax’s net earnings have been very strong this year, with 9M 2021 reported net income of $2.7 billion, which has contributed significantly to the reduction in the Company’s leverage ratio.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
The Grid Summary Grades for Fairfax are as follows: Franchise Strength – Strong/Good; Risk Profile – Good/Moderate; Earnings Ability – Good/Moderate; Liquidity – Strong/Good; Capitalization – Good/Moderate.
All figures are in U.S. dollars unless otherwise noted.
The principal methodologies are the Global Methodology for Rating Insurance Companies and Insurance Organizations (https://www.dbrsmorningstar.com/research/381667; July 16, 2021) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (https://www.dbrsmorningstar.com/research/379424; May 31, 2021). Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (https://www.dbrsmorningstar.com/research/373262; February 3, 2021).
The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found on the issuer page at www.dbrsmorningstar.com.
The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed ratings:
Each of the principal methodologies employed in the analysis addressed one or more particular risks or aspects of the rating and were factored into the rating decision. Specifically, the “Global Methodology for Rating Insurance Companies and Insurance Organizations” (July 16, 2021) was used to evaluate the issuers, while the “DBRS Morningstar Criteria: Guarantees and Other Forms of Support” (May 31, 2021) was used to rate subsidiary debt issuances guaranteed by Fairfax Financial Holdings Limited and “DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings” (February 3, 2021) was used to assess ESG factors.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.
For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.
Lead Analyst: Victor Adesanya, Vice President
Rating Committee Chair: Michael Driscoll, Managing Director, Head of NA FIG
Initial Rating Date: November 8, 1993
For more information on this credit or on this industry, visit www.dbrsmorningstar.com.
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