A.M. Best has affirmed the issuer credit rating (ICR) of “bbb” and the unsecured debt and preferred equity ratings of Toronto-based Fairfax Financial Holdings Limited.
Best also affirmed the financial strength rating (FSR) of ‘A’ (Excellent) and the ICRs of “a” of the members of the Northbridge Companies, also based in Toronto, which represent Fairfax’s Canadian operations, the members of the Crum & Forster Insurance Group (C&F), based in Morristown, New Jersey and the members of the Zenith National Insurance Group, based in Woodland Hills, Calif.; as well as the FSR of ‘A-‘ (Excellent) and the ICR of “a-” of Wentworth Insurance Company Limited, which is domiciled in Barbados.
In addition Best has affirmed the ICR of “bbb” and the unsecured debt ratings of Zenith National Insurance Corp., an indirect wholly owned, downstream holding company of Fairfax.
The outlook for all ratings is stable.
The ratings of Fairfax reflect its “historically favorable, albeit variable, levels of pre-tax operating and net income and the company’s financial leverage and cash coverage levels that are within requirements for its rating level,” the report said.
As of December 31, 2013, “Fairfax’s adjusted debt-to-total-capital level was 29 percent (excluding accumulated other comprehensive income), which includes the debt of its subsidiaries that are capable of supporting their own debt. In addition, Fairfax maintained holding company cash and investments of approximately $1.2 billion at year-end 2013, which provided additional liquidity and flexibility for the group.”
The report also pointed out the “benefitting the liquidity position of the group has been the shift into cash and short-term investments; however, this defensive strategy coupled with hedging losses and unrealized losses on the group’s bond portfolio has, in the short term, depressed earnings.
“The ratings of the Northbridge Companies acknowledge its supportive level of risk-adjusted capitalization, highly specialized product orientation, the strength of its respective franchises in the property/casualty market in Canada and the broad geographic scope of its operations. The ratings also recognize the implicit support and financial flexibility these companies are afforded through Fairfax.”
As potential offsetting factors for the Northbridge Companies Best cited their “unfavorable personal lines underwriting performance in recent years, higher than average expense structure and susceptibility to volatile investment results as well as a decline in net investment income in recent years given its extremely liquid invested asset base, which has led to lower than average returns.”
Best said the ratings of C&F “reflect its diversified product offering, historically supportive risk-adjusted capitalization and improved underwriting performance supported by recent underwriting initiatives to limit unprofitable books of business and catastrophe losses. The group also benefits from the implicit and explicit support and financial flexibility C&F is afforded as part of the Fairfax enterprise.
C&F’s ratings are, however, partially offset by its “variable underwriting performance over the past few years; higher than average underwriting expense levels and adverse development and strengthening on recent accident years,” the report said. “Furthermore, ongoing competitive pressures in its key markets, overall weak macroeconomic conditions and the long-term investment strategy practiced by Fairfax continue to depress operating results in the short term.”
Zenith Group’s ratings “recognize its supportive level of risk-adjusted capitalization, historically strong operating performance, management’s commitment to maintaining underwriting discipline through market cycles and the implicit support and financial flexibility the Zenith Group is afforded as part of the Fairfax enterprise,” the report said.
As partial offsetting factors for Zenith Best cited the Group’s “poor underwriting and operating results in recent years, which were driven by competitive market conditions and rate reductions in its largest states, although rate increases have been realized more recently and benefitted recent underwriting performance. The concentration of Zenith Group’s business in California and Florida exposes it to a heightened level of regulatory and legislative changes.”
The rating affirmations of Wentworth “acknowledge its improved and favorable underwriting and operating performance, which has moved back to historical levels following its 2011 underwriting losses related to catastrophes,” the report said. “In addition, the company benefits from a strong level of risk-adjusted capitalization and the implicit support and financial flexibility afforded it through Fairfax.”
Offsetting factors applicable to Wentworth are its “relatively modest business profile within the highly competitive reinsurance market and the concentration of property catastrophe exposures within its book of business, which subjects it to volatility as evidenced over the past few years.”
Best concluded that, although it believes” Fairfax and its operating companies are well positioned at their current rating level, favorable rating actions are possible should the group maintain a strong capital position along with underwriting and operating results that outperform their peers’ averages.
Factors that could lead to negative rating actions include operating performance falling short of A.M. Best’s expectations and/or an erosion of surplus that causes a decline in risk-adjusted capital to a level no longer supporting the current ratings.”
For a complete listing of Fairfax Financial Holdings Ltd. and its subsidiaries’ FSRs, ICRs and debt ratings, go to: www.ambest.com/press/053007fairfax.pdf
Source: A.M. Best