Best Affirms Fairfax Financial and Most Subs Ratings

May 4, 2012

A.M. Best Co. has affirmed the issuer credit rating (ICR) of “bbb” and the unsecured debt and preferred equity ratings of Fairfax Financial Holdings Limited. Best also affirmed the financial strength rating (FSR) of ‘A’ (Excellent) and ICRs of “a” of Northbridge Indemnity Insurance Corporation (NIIC) (formerly Commonwealth Insurance Company), based in Vancouver, B.C., Federated Insurance Company of Canada, based in Winnipeg, Manitoba, Northbridge Commercial Insurance Corporation (formerly Markel Insurance Company of Canada), Northbridge General Insurance Corporation (formerly Lombard General Insurance Company of Canada) and Zenith Insurance Company.

In addition Best has affirmed the FSR of ‘A-‘ (Excellent) and ICR of “a-“of Northbridge Personal Insurance Corporation (formerly Lombard Insurance Company). However Best has downgraded the FSR to ‘A-‘ (Excellent) from ‘A’ (Excellent) and ICR to “a-” from “a” of Seattle-based Commonwealth Insurance Company of America (CICA), a wholly owned subsidiary of NIIC.

“The aforementioned companies are subsidiaries of Northbridge Financial Corporation (Northbridge Companies), an indirect, wholly owned downstream holding company of Fairfax,” Best explained. They are all domiciled in Toronto, Ontario, unless otherwise specified.

In further actions Best affirmed the FSRs of ‘A’ (Excellent) and ICRs of “a” of the New Jersey-based Crum & Forster Insurance Group (C&F) and California-based Zenith National Insurance Group and their property/casualty members, as well as the FSR of ‘A’ (Excellent) and ICRs of “a+” of New York-based Seneca Insurance Group and its property/casualty members.

Best has also downgraded the FSR to ‘A-‘ (Excellent) from ‘A’ (Excellent) and the ICR to “a-” from “a” of CRC Reinsurance Limited (CRC) and affirmed the FSR of ‘A-‘ (Excellent) and the ICR of “a-” of Wentworth Insurance Company Limited, both of which are domiciled in Barbados.

At the same time, Best affirmed the FSRs of ‘B++’ (Good) and the ICRs of “bbb” of New Hampshire-based Fairmont Specialty Group and its property/casualty members and General Fidelity Insurance Company, based in Charleston, South Carolina. Best said the “Fairmont Specialty Group and its members are no longer associated with the Fairmont Specialty brand, which is used by several C&F rating units.”

Best has also affirmed the FSR of ‘B+’ (Good) and the ICR of “bbb-” of New Hampshire-based TIG Insurance Company, but has downgraded the FSR to ‘B+’ (Good) from’ B++’ (Good) and the ICR to “bbb-” from “bbb+” of Clearwater Insurance Company, headquartered in Stamford, Connecticut, and has revised the outlook for the ICR to stable from negative, while the outlook for the FSR is stable.

Lastly Best affirmed the ICRs of “bbb” and the unsecured debt ratings of Crum & Forster Holdings Corp. and Zenith National Insurance Corp., both of which are indirect, wholly owned, downstream holding companies of Fairfax.

Best said the outlook for all of these ratings is stable, except where otherwise specified.

The ratings of Fairfax reflect its “historical favorable levels of pre-tax operating and net income and the company’s financial leverage and cash coverage levels that are within Best’s requirements for its rating level,” the report explained. “At December 31, 2011, Fairfax’s adjusted debt-to-total-capital level was 32 percent, 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 $1.0 billion at year-end 2011.”

Best said the ratings of the Northbridge Companies “acknowledge their supportive level of risk-adjusted capitalization, highly specialized product orientation, the strength of their respective franchises in the property/casualty market and the broad geographic scope of their operations. The ratings also recognize the implicit support and financial flexibility these companies are afforded through Fairfax.”

As offsetting factors Best cited “ongoing competitive market conditions, variability of net investment income in recent years and general decline in underwriting results.”

The rating actions on CICA reflect its “generally below average and variable net underwriting and operating results and management’s recent decision to stop writing new business and begin to non-renew all business effective May 1, essentially placing the company into run off,” the report continued. Best said that as a result it “no longer views CICA as an integral part of NIIC’s business; therefore, CICA is no longer afforded NIIC’s ratings. Offsetting these negative rating factors are CICA’s adequate level of risk-adjusted capitalization and the implicit support and financial flexibility afforded as part of the Fairfax enterprise.”

Crum & Forster’s ratings “acknowledge its historically better than average loss and loss adjustment expense ratio, significantly diminished asbestos and environmental exposure (via a recently completed inter-company transaction with an affiliate), diversified product offering, supportive risk-adjusted capitalization and the implicit support and financial flexibility C&F is afforded as part of the Fairfax enterprise,” Best explained.

As offsetting factors Best cited “C&F’s elevated underwriting expense levels, which in part has resulted in generally poor underwriting results in recent years, and ongoing competitive pressures in its key markets.

“The ratings of the Zenith Group 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.”

As offsetting factors Best singled out “Zenith 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 noted more recently), along with weak macroeconomic conditions that have contributed to an overall reduction in its premium volumes (despite solid growth in 2011) over the years and areas of prior year adverse reserve development. The concentration of Zenith Group’s business in two states, California and Florida, exposes it to a heightened level of regulatory and legislative changes.”

Best explained that its rating actions on CRC reflect its “recent poor underwriting and operating performance, which is not in line with historical levels, its increased exposure to global property shock losses and limited business profile as an internal reinsurer for affiliates, which is expected to reduce over time.” However, offsetting these negative factors are “CRC’s adequate level of risk-adjusted capitalization and the implicit support and financial flexibility the company is afforded through Fairfax.

“The rating actions on Clearwater recognize its diminished risk-adjusted capitalization following its assumption of the asbestos and environmental reserves of C&F.” But “the implicit support and financial flexibility Clearwater is afforded as part of the Fairfax enterprise” should be considered as offsetting these negative factors.

Best said that, although it “believes Fairfax and its operating companies are well positioned at their current rating levels,” there are factors that could lead to negative rating actions. These include “operating performance falling short of Best’s expectations, driven by either underwriting or investment results, or a decline in risk-adjusted capitalization that would no longer support their 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/050302fairfax.pdf .

Source: A.M. Best

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