S&P Affirms Fairfax ‘BBB’ / ‘BB’ Ratings

March 24, 2004

Standard & Poor’s Ratings Services announced that it has affirmed its ‘BBB’ counterparty credit and financial strength ratings on Fairfax Financial Holdings Ltd.’s (FFH) ongoing operating insurance companies and its ‘BB’ counterparty credit and financial strength ratings on TIG Holdings Inc.’s runoff subsidiaries.

S&P also said it has affirmed its ‘BB’ counterparty credit ratings on FFH and Crum & Forster Holdings Corp. and its ‘BB-‘ counterparty credit rating on TIG Holdings Inc. The outlook on all these companies is stable.

The rating agency also assigned its ‘BB’ senior debt rating to FFH’s debt-exchange offer, which may offer up to $545 million in new senior notes. “The debt-exchange offer is aimed at refinancing existing debt obligations of FFH and TIG, and no incremental debt is expected. FFH will likely pay down debt obligations with varying maturity dates (2005, 2006, and 2008) at interest rates of 7.375 percent, 6.975 percent, and 8.125 percent, respectively,” said the announcement.

S&P said it viewed the transaction “as marginally favorable to FFH because of the decrease in near-term liquidity requirements, but the benefit is mitigated by the immediate reduction in holding-company cash.”

S&P credit analyst Damien Magarelli noted: “The ratings on FFH and its member companies (collectively referred to as Fairfax) are based on the operating companies’ good competitive position and diversification in the U.S., Canada, and internationally. Operating performance has significantly improved in 2002 and 2003, though the runoff operations are still creating a significant drag on total company earnings.”

S&P indicated that “FFH’s capital adequacy and financial flexibility are both improving, and investments are viewed as a strength to the rating.” It warned, however that these positive traits have been somewhat offset by “continuous reserve strengthenings (including another in the fourth quarter of 2003), a dependence on realized gains to maintain earnings, high reinsurance recoverables, and a corporate strategy that has orchestrated some acquisitions that have not met expectations.”

“The stable outlook is based on the view that Fairfax’s earnings should continue to improve and that Fairfax should maintain good capitalization in 2004,” the bulletin continued. “However, Standard & Poor’s has imbedded a potential reserve charge in 2004 within its expectations for the current rating. On a pretax reserve charge of about 3 percent of year-end 2003 reserves (primarily coming from runoff operations) and maintain the current rating. However, if adverse reserve development in 2004 is larger than this amount, the rating would be reviewed for a likely revision to the rating or outlook.”

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