Fairfax ratings off watch negative

The negative CreditWatch credit rating of ‘BB’ on Fairfax Financial Holdings Ltd. (FFH) and Crum & Forster Holdings Corp. has been removed and Standard & Poor’s Ratings Services affirmed the ratings of both company’s.
S&P’s also removed its ‘BB-‘ counterparty credit rating on TIG Holdings Inc. from CreditWatch negative and affirmed the ratings.
In addition, the ratings agency also revised its outlook on Fairfax Financial Holdings Ltd.’s ongoing operating insurance companies (collectively, Fairfax) to stable from positive and affirmed its ‘BBB’ counterparty credit and financial strength ratings on the companies.
The outlook on all these companies is stable.
The ratings for all of these holding companies were placed on CreditWatch negative in response to the announcement by FFH on March 16, 2006, that it would delay filing its 2005 annual report. The delay was caused by the announcement by its 80%-owned affiliate, Odyssey Re Holdings Corp. (NYSE:ORH), that it filed notice with the SEC that Odyssey Re would delay the filing of its 2005 annual 10-K report.
On March 31, 2006, FFH and Odyssey Re both filed year-end 2005 results, with the cumulative impact of the restatement through Sept. 30, 2005, being a decrease to shareholders’ equity of US$35.6 million at Odyssey Re. There was no impact to FFH’s financial statements, and the company’s year-end 2005 figures remain as published on Feb. 9, 2006.
“The ratings on FFH are based on its improving competitive position, strong consolidated capitalization (even after adjustments for finite reinsurance), and improved financial flexibility,” Standard & Poor’s credit analyst Damien Magarelli explains. “Offsetting these positive factors are reserves, which though not an immediate concern, have frequently been strengthened and might require some further modest charges; some very poor acquisitions and sizeable reserve charges for which FFH has utilized finite reinsurance; and debt to support operating company obligations, resulting in high debt leverage.”
Lastly, FFH’s consolidated underwriting performance in 2005 after including hurricane losses was a 108% combined ratio, but the company’s net loss of US$498 million, largely driven by pretax losses (US$178 million) at Odyssey Re Holdings and runoff (US$642 million) remain inconsistent with a positive outlook.
A positive outlook might be warranted based on year-end 2006 financial statements, should earnings improve and produce a sizeable net profit, according to S&P’s.
The ratings agency adds that earnings should also no longer be dependant on realized capital gains, net investment income, or be reduced significantly by runoff segment losses to support a positive outlook.
The outlook, S&P’s predicts, could be changed to negative if earnings do not improve in 2006, if there is significant turnover in management, if there is significant regulatory adverse development, if reserves develop adversely, if there are significant one-off runoff segment charges, or if holding company cash is not maintained near US$300 million.