Best Affirms Fairfax Financial and Subs Ratings; Outlook Stable

March 29, 2013

A.M. Best Co. has affirmed the issuer credit rating (ICR) of “bbb” and the unsecured debt and preferred equity ratings of Toronto-based Fairfax Financial Holdings Limited, and has also affirmed the financial strength rating (FSR) of ‘A’ (Excellent) and ICRs of “a” of the members of the Northbridge Companies, also based in Toronto, which represent Fairfax’s Canadian operations.

In addition Best upgraded the FSR to ‘A’ (Excellent) from ‘A-‘ (Excellent) and ICR to “a” from “a-” of Northbridge Personal Insurance Corporation, “due to its status as a member of the Northbridge Companies, which provides it with operating efficiencies, underwriting expertise and other implicit benefits such as marketing and common management.”

Best has also affirmed the FSR of ‘A-‘ (Excellent) and ICRs of “a-” of Commonwealth Insurance Company of America (CICA), based in Seattle, CRC Reinsurance Limited (CRC) and Wentworth Insurance Company Limited, both domiciled in Barbados. CICA was a wholly owned subsidiary of Northbridge Indemnity Insurance Corporation before its January 2013 sale to an affiliate and its placement into run off.

Best then withdrew the ratings of CICA and CRC as Fairfax has requested that both companies no longer participate in Best’s interactive rating process.

Best has also affirmed the FSRs of ‘A’ (Excellent) and ICRs of “a” of the members of the Crum & Forster Insurance Group (C&F), based in Morristown, New Jersey, and the Zenith National Insurance Group, based in Woodland Hills, Calif. as well as the FSR of ‘A’ (Excellent) and ICRs of “a+” of the members of the New York City-based Seneca Insurance Group.

Finally, Best has affirmed the ICRs of “bbb” and the unsecured debt ratings of Zenith National, which is an indirect wholly owned downstream holding company of Fairfax.

The outlook for all of these ratings is stable.

Fairfax ratings reflect its “historically favorable, albeit variable, levels of pre-tax operating and net income and its financial leverage and cash coverage levels, which are within Best’s requirements for its rating level,” said the report.

Best noted that as of December 31, 2012, “Fairfax’s adjusted debt-to-total-capital level was 27.2 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 2012, which provides additional liquidity and flexibility for the group.”

Best said the “ratings of the members 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 in Canada 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 partial offsetting factors Best cited the Northbridge Companies’ members “unfavorable underwriting performance in recent years as a result of ongoing competitive market conditions, higher than average expense structure and difficult personal lines operating environment, given the high level of fraudulent claims and punitive legislation. Additionally a decline in net investment gains in recent years and extremely liquid invested asset base has led to lower than average returns.”

Best said its ratings on Crum & Forster “acknowledge its diversified product offering, supportive risk-adjusted capitalization that benefits from its significantly diminished asbestos and environmental exposure (via a recently completed inter-company transaction with an affiliate), and the implicit support and financial flexibility C&F is afforded as part of the Fairfax enterprise.”

Partially offsetting these positive factors “are C&F’s elevated underwriting expense levels and adverse development on new and older accident years, which has resulted in generally poor underwriting results in recent years,” said Best. “Furthermore, ongoing competitive pressures in its key markets and overall weak macroeconomic conditions continue to depress operating results.”

Best explained that its ratings for 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 it is afforded as part of the Fairfax enterprise.”

As offsetting factors Best noted the 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), 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 added.

Best said its rating affirmations on Wentworth “reflect its improved underwriting and operating performance, which have returned to the historical levels that followed its 2011 underwriting losses relating to catastrophe losses. In addition, the company benefits from a strong level of risk-adjusted capitalization and the implicit support and financial flexibility it receives through Fairfax.”

As offsetting factors Best noted “Wentworth’s 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 a substantial degree of volatility, as evidenced over the past few years.”

In conclusion Best said that, although it “believes Fairfax and its operating companies are well positioned at their current rating levels, factors that could lead to negative rating actions 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.”

A complete listing of Fairfax Financial Holdings Ltd. and its subsidiaries’ FSRs, ICRs and debt ratings is available from A.M. Best.

Source: A.M. Best

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