Fitch Affirms Fairfax's Ratings; Outlook Stable

Tue May 14, 2013 11:28am EDT

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(The following statement was released by the rating agency) CHICAGO, May 14 (Fitch) Fitch Ratings has affirmed the ratings of Fairfax Financial Holdings Limited (Fairfax) as follows: --Issuer Default Rating (IDR) at 'BBB'; --Senior debt at 'BBB-'. Fitch has also affirmed the ratings of Fairfax's subsidiaries. A full list of rating actions follows at the end of this press release. The Rating Outlook is Stable. KEY RATING DRIVERS Fitch's rationale for the affirmation of Fairfax's ratings reflects the company's sizable cash position and favorable financial flexibility. The ratings also reflect anticipated challenges in the overall competitive, but generally improving, property/casualty market rate environment, the potential for additional adverse reserve development, particularly on older accident years and in runoff operations, earnings volatility from catastrophes and investments, and increased financial leverage. Fairfax posted improved net earnings of $163 million in first-quarter 2013 and $541 million for full-year 2012, following $48 million for 2011, as results have benefited from more modest catastrophe losses. Fairfax reported catastrophe losses of $32 million in first-quarter 2013 and $410 million in 2012, which included $261 million from Hurricane Sandy in the fourth quarter. This is down from over $1 billion of catastrophe losses in 2011 that was driven by several significant international catastrophe events. Fairfax reported a first-quarter 2013 consolidated combined ratio of 94%, which included 2.3 points for catastrophe losses. This is improved from 99.8% for full-year 2012, which included 7.0 points for catastrophe losses (4.5 points from Hurricane Sandy). Excluding the effect of catastrophes and favorable reserve development, Fairfax's underlying run-rate accident year combined ratio remains reasonable at 94.2% for first-quarter 2013, compared with 95.8% and 96.6% for 2012 and 2011. The company continues to maintain a sizable amount of holding company cash and investments of $1.1 billion (excluding assets pledged for short sale and derivative obligations) at March 31, 2013. Fitch believes this provides Fairfax with a sufficient cushion in meeting potential subsidiary cash flow shortages and liquidity to service its debt. Fairfax also continues to demonstrate favorable financial flexibility with Crum & Forster, Northbridge Financial Insurance Group, Zenith Insurance Group, and Odyssey Reinsurance Company serving as key sources of dividends as wholly owned major ongoing operating subsidiaries. Fairfax's financial leverage ratio (adjusted for equity credit and excluding unrealized net gains/losses on fixed maturities) was 34.1% at March 31, 2013, up from 33% at Dec. 31, 2012, as overall debt increased with a CDN$250 million re-opening of senior notes used to repurchase $48.4 million of holding company debt. The company also intends to utilize the debt proceeds to repay Odyssey Re Holdings Corp.'s $182.9 million senior notes at maturity in November 2013. Operating earnings-based interest and preferred dividend coverage (excluding net gains and losses on investments) has been very low in recent years as operating earnings have declined with weaker underwriting results and high catastrophe losses. Including holding company cash, operating earnings-based coverage has been better, averaging 6.3x from 2008 to 2012. RATING SENSITIVITIES The key rating triggers that could result in an upgrade include consistent underwriting profitability with combined ratios of 100% or better, overall flat-to-favorable loss reserve development, financial leverage maintained below 25%, sustained operating earnings based interest and preferred dividend coverage of at least 3.0x and continued maintenance of at least $1 billion of holding company cash and investments. The key rating triggers that could result in a downgrade include declines in book value per share for an extended time period, sizable adverse loss reserve development, movement to materially below-average underwriting or investment performance, financial leverage maintained above 35%, operating earnings plus holding company cash based interest and preferred dividend coverage of less than 4x, significant acquisitions that reduce the company's financial flexibility and a substantial decline in the holding company's cash position. Fitch affirms the following ratings with a Stable Outlook: Fairfax Financial Holdings Limited --Issuer Default Rating (IDR) at 'BBB'; --$82 million 8.25% due Oct. 1, 2015 at 'BBB-'; --$144 million 7.375% due April 15, 2018 at 'BBB-'; --CDN$400 million 7.5% due Aug. 19, 2019 at 'BBB-'; --CDN$275 million 7.25% due June 22, 2020 at 'BBB-'. --$500 million 5.8% due May 15, 2021 at 'BBB-'; --CDN$400 million 6.4% due May 25, 2021 at 'BBB-'; --CDN$450 million 5.84% senior notes due Oct. 14, 2022 at 'BBB-'; --$92 million 8.3% due April 15, 2026 at 'BBB-'; --$91 million 7.75% due July 15, 2037 at 'BBB-'; --CDN$250 million series C preferred shares at 'BB'; --CDN$200 million series E preferred shares at 'BB'; --CDN$250 million series G preferred shares at 'BB'; --CDN$300 million series I preferred shares at 'BB'; --CDN$237.5 million series K preferred shares at 'BB'. Fairfax, Inc. --IDR at 'BBB'. Crum & Forster Holdings Corp. --IDR at 'BBB'; Crum & Forster Insurance Group: Crum and Forster Insurance Company Crum & Forster Indemnity Company The North River Insurance Company United States Fire Insurance Company First Mercury Insurance Company --Insurer Financial Strength (IFS) at 'A-'. Northbridge Financial Insurance Group: Federated Insurance Company of Canada Northbridge Commercial Insurance Corporation Northbridge General Insurance Corporation Northbridge Indemnity Insurance Corporation Northbridge Personal Insurance Corporation Zenith Insurance Company (Canada) --IFS at 'A-'. Odyssey Re Holdings Corp. --IDR at 'BBB'; --$50 million series A unsecured due March 15, 2021 at 'BBB-'; --$50 million series B unsecured due March 15, 2016 at 'BBB-'; --$40 million series C unsecured due Dec. 15, 2021 at 'BBB-'; --$183 million 7.65% due Nov. 1, 2013 at 'BBB-'; --$125 million 6.875% due May 1, 2015 at 'BBB-'. Odyssey Reinsurance Company --IFS at 'A-'. Zenith National Insurance Corp. --IDR at 'BBB'. Zenith Insurance Company ZNAT Insurance Company --IFS at 'A-'. Contact: Primary Analyst Brian C. Schneider, CPA, CPCU, ARe Senior Director +1-312-606-2321 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst Dafina M. Dunmore, CFA Director +1-312-368-3136 Committee Chairperson Mark E. Rouck, CPA, CFA Senior Director +1-312-368-2085 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. The issuer did not participate in the rating process, or provide additional information, beyond the issuer's available public disclosure. Applicable Criteria and Related Research: --Insurance Rating Methodology (Jan. 11, 2013). Applicable Criteria and Related Research Insurance Rating Methodology — Amended here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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