Standard & Poor’s Ratings Services and A.M. Best Co. have both assigned ratings to the C$400 million (US $368 million) 7.5 percent senior unsecured fixed rate notes due 2019 to be issued by Fairfax Financial Holdings Limited.
Best assigned a debt rating of “bbb” to the notes with a stable outlook, and S&P assigned its ‘BBB-’ rating.
S&P’s announcement said the “rating reflects Fairfax’s strong business and financial profile. Fairfax, through its insurance operating subsidiaries, including Northbridge Financial, Crum & Forster, and Odyssey Re, maintains a competitive presence in the North American commercial insurance marketplace and the global reinsurance market.
“Fairfax reported consolidated pretax operating income of US$373 million in the first half of 2009, a satisfactory combined loss and expense ratio of 98.4 percent, and total shareholders’ equity of $5.6 billion. Consolidated financial leverage was 24.8 percent as of June 30, 2009. Following the issuance, Standard & Poor’s expects net debt to increase by a maximum of C$250 million (if Fairfax chooses to extinguish other debt). Thus, we expect consolidated financial leverage to increase to 26.6 percent, which is satisfactory for the current rating.
“The company, through its insurance subsidiaries, remains exposed to cyclical pricing pressures, natural and man-made catastrophes, and the potential for adverse reserve development. The company also has a decentralized business model that we believe is subject to operational risk. However, the insurance subsidiaries maintain a prudent amount of capital, and the holding company maintained a cash and short-term investment cushion of $863 million on its balance sheet as of June 30, 2009.”
S&P also indicated that in 2009, it expects Fairfax’ insurance operations “to produce a consolidated combined loss and expense ratio of approximately 100 percent. Although we expect Fairfax to continue recording above-average long-term investment results relative to common equity and bond benchmarks, the company is not immune to investment losses in a single year. We expect that consolidated financial leverage will remain satisfactory at 20 percent-30 percent and that Fairfax will maintain a prudent level of cash and short-term investments on the holding company balance sheet.”