Ratings Agencies Scrutinize TIG, Ranger and Other Fairfax Cos.

Fitch Ratings and A.M. Best both initiated rating actions on Fairfax Financial Holdings Inc. (Fairfax) and its subsidiaries, including TIG Insurance Group—Dallas, Ranger Insurance Group, and Commonwealth Insurance Company (Canada). The actions came one day after Fairfax announced it would restructure TIG and place a portion of the subsidiary’s business into runoff.

A.M. Best Co. announced it placed the financial strength ratings of “B++” (Very Good) of TIG and Ranger under review with developing implications. Concurrently, A.M. Best has placed the financial strength rating of “A-” (Excellent) of Commonwealth Insurance Company under review with developing implications and withdrew the financial strength rating of “B++” (Very Good) from International Insurance Company (IIC) (Illinois), which had been merged into TIG effective December 16, 2002. All other financial strength ratings and debt ratings of Fairfax Financial Holdings are unaffected.

Fitch said it downgraded the senior debt ratings of both Fairfax and TIG, as well as the insurer financial strength ratings (IFS) of the members of the TIG group, excluding Ranger, which is expected to be removed from the group during 2003. Additionally, Fitch affirmed the IFS ratings of the Fairfax Insurance Group and Odyssey Re Group.

Fairfax announced that as part of the restructuring process it will acquire the remaining 72 percent ownership interest in IIC over time. The structural realignment also includes the removal of Ranger, Commonwealth and a significant portion of OdysseyRe from under the direct ownership of TIG.

According to A.M. Best, concurrent with these actions, Fairfax placed the substantial program business of TIG into voluntary run-off. It is expected that certain books of business within TIG, considered to be ongoing, will be continued in other insurance subsidiaries, which will not be direct subsidiaries of TIG. Furthermore, the combined entity will be adding approximately $200 million to its reserves and taking approximately $35 million in restructuring charges, most of which will be offset by negative goodwill at the Fairfax level embedded in the IIC transaction.

A.M. Best expects the balance sheet and liquidity position of TIG together with the financial flexibility of the above referenced insurance subsidiaries will ultimately benefit from the actions taken and the contemplated future realignment of the existing ownership structure. Nonetheless, the under review status reflects the execution risk related to the planned transfer of books of business, the purchase of the reinsurance cover and the completion of the organizational restructuring. However, A. M. Best views the likely removal of Commonwealth from under TIG as positive.

According to Fitch, the proposed restructuring alleviates some of the concern regarding the event risk related to sizable 2003 debt maturities and Fairfax’s weak financial flexibility. As a result, Fitch downgraded its senior debt rating one notch. This largely reflects the expectation of an increase in financial leverage related to the IIC agreement and Fitch’s IFS/debt gapping guidelines. Additionally, ongoing concerns related to Fairfax’s dependence on investment gains and asset sales to achieve profitability and holding company cash targets, significant exposure to reinsurance recoverables, and loss reserve adequacy of U.S. commercial lines companies. Furthermore, Fairfax’s financial flexibility remains relatively weak, as evidenced by Fairfax’s negotiations to extend the maturity of its RHINOS and declining level of available bank lines. Although, the restructuring is expected to significantly improve holding company flexibility, particularly in light of sizable 2003 debt maturities (i.e., option to spin-off a further stake in ORH and sell/extract dividends from Commonwealth and Ranger) parental dividend flow is expected to improve only moderately.

The placement of TIG Insurance Group into runoff and the strengthening of its reserves were generally within Fitch’s prior rating expectations, however, regulatory approval to de-stack (if certain guidelines are met) a majority ownership in Odyssey Re and all of Commonwealth Insurance Co. and Ranger Insurance Co., were not. Fitch therefore downgraded TIG’s IFS rating two notches to “BB+.” This reflects an expectation of a significant decline in the overall level of surplus of TIG, concerns regarding the loss reserve adequacy at TIG Insurance Co. and IIC and the reduced financial incentive for Fairfax to support TIG following the completion of the restructuring.

Topics Agencies AM Best