DBRS Morningstar Changes Trends on Fairfax India Holdings Corporation to Positive from Stable, Confirms Ratings

DBRS Limited (DBRS Morningstar) changed the trend on all the ratings of Fairfax India Holdings Corporation (Fairfax India or the Company) to Positive from Stable. At the same time DBRS Morningstar confirmed the Issuer Rating and the Unsecured Senior Notes rating at BBB (low). This follows DBRS Morningstar’s confirmation and trend change on the Issuer Rating of the Company’s parent, Fairfax Financial Holdings Limited (Fairfax; rated BBB (high) with a Positive trend by DBRS Morningstar), on December 6, 2022.

KEY RATING CONSIDERATIONS
As a supported rating, Fairfax India’s ratings and trends typically move in tandem with Fairfax’s Issuer Rating. This reflects DBRS Morningstar’s expectation of support for the Company from Fairfax. Fairfax India is an investment holding company whose objective is to achieve long-term capital appreciation. The level of parental support is deemed to be high, which is reflected by the effective control and significant economic ownership by Fairfax; the Company’s name, which links it to Fairfax; and the Company’s use of other Fairfax subsidiaries for investment management and other services. Together, these characteristics provide significant motivation for Fairfax to support the Company, if needed. The two-notch differential between the ratings of Fairfax India and Fairfax considers that the Company is a noninsurance subsidiary based in Toronto whose underlying assets are predominantly located and operated in India.

RATING DRIVERS
Based on DBRS Morningstar’s expectation of support from the ultimate parent, the ratings of Fairfax India would be upgraded if there were an upgrade in the ratings of Fairfax, provided the sovereign ratings of the Republic of India (India) remain above investment-grade.

Conversely, the ratings of Fairfax India would be downgraded, if there were (1) a downgrade of Fairfax, (2) a reduction in the perceived support from Fairfax, or (3) a downgrade of the sovereign ratings of India to below investment-grade.

RATING RATIONALE
Fairfax India is a publicly traded investment holding company focused on investing in diverse businesses, including public and private equity securities and debt instruments in India. Fairfax India's investments are made indirectly through its wholly owned subsidiaries based in Mauritius (FIH Mauritius Investments Ltd. and FIH Private Investments Ltd), and Anchorage Infrastructure Investments Holdings Limited. Its investments in publicly listed and private companies include businesses with customers, suppliers, and business primarily conducted in or dependent on India. The Company seeks out organizations where the possibility of a long-term business partnership is feasible. The selection criteria are focused on businesses that are expected to benefit from the trends supporting India's economic growth that meet Fairfax India’s criteria for ethics, management continuity, valuation, financial track record, and cash flows.

The ratings of Fairfax India reflect DBRS Morningstar's assessment of the potential support that would be expected from the Company's controlling shareholder, Fairfax. With total assets of $88.9 billion as at the nine months ended September 30, 2022, Fairfax is a large global insurance/reinsurance group whose subsidiaries are active in the property and casualty (P&C) insurance and reinsurance business. Fairfax’s insurance subsidiaries are geographically diversified, with footprints in more than 40 countries in North America, Europe, Latin America, Asia, and Africa, and managed through a decentralized multibrand strategy. Investment management for all subsidiaries, including Fairfax India, is provided centrally by Hamblin Watsa Investment Counsel Ltd. (HWIC), a wholly owned subsidiary of Fairfax.

Although there is no explicit support from the controlling shareholder, the assessment considers the position of Fairfax India within Fairfax’s overall group structure. Fairfax's aggregate ownership, control and/or direction of the subordinate voting shares and multiple voting shares represented a 95.0% voting interest and a 42.2% equity interest in Fairfax India. Fairfax India maintains an investment advisory agreement with Fairfax and HWIC. The agreement covers the provision of advice for all investment transactions and portfolio administration services. Fairbridge Capital Private Limited, a wholly owned India-based investment advisor subsidiary of Fairfax, acts as a subadvisor to Fairfax India in the sourcing and assessment of investment opportunities.

Fairfax India has a diverse portfolio of investments in private and publicly traded companies. As a result of these equity investments, the Company has significant market risk that contributes to earnings volatility. Nonetheless, the Company has generated positive and consistent earnings over the past five years.

The Company’s current sources of capital include interest income on holdings of India sovereign and corporate bonds, dividends from investments, sales of assets, and the equity markets through share issuance. Fairfax India also has $500 million of senior unsecured seven-year debt (issued in February 2021) outstanding and access to an undrawn $175 million revolving credit facility with a syndicate of banks.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE (ESG) CONSIDERATIONS

Environmental Factors
Environmental concerns regarding Climate and Weather Risks are relevant to the ratings of Fairfax (the parent) as a P&C insurer/reinsurer but did not affect the assigned ratings or trends. As part of its P&C product offering, Fairfax is exposed to weather-related losses from natural catastrophic events such as wind, wildfire, hail, flooding, and other extreme weather events. These events can lead to earnings volatility and increased reinsurance cost. DBRS Morningstar considered this ESG factor as part of product risk when assessing Fairfax’s risk profile. Fairfax has not yet adopted the processes of the Task Force on Climate-Related Financial Disclosures.

There were no Social or Governance factors that had a significant or relevant effect on the credit analysis.

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/396929 (May 17, 2022).

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Insurance Companies and Insurance Organizations, https://www.dbrsmorningstar.com/research/402220 (August 31, 2022). In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings, https://www.dbrsmorningstar.com/research/396929 (May 17, 2022) in its consideration of ESG factors.

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.

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 under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.

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