Fitch still unimpressed with Fairfax

Rating agency Fitch, in a lengthy press release, says it will maintain its negative outlook on financial services giant Fairfax Financial Holdings Ltd. irregardless of the company’s third quarter filings.
Fitch had earlier placed the negative watch on the company citing, amongst other things, weak disclosure relative to its decision to buy back debt, given that Fitch rates the company based on public data only.
Fitch says recent moves by Fairfax should prove positive in terms of its credit quality. This includes a pending US$300 million stock offering, as well the commutation of reinsurance transactions intended to lessen pressure on Fairfax’s nSpire Re subsidiary.
“However, Fitch continues to believe that Fairfax’s long-term credit fundamentals remain weak and that management continues to face challenges with liquidity issues despite substantial funds generated via capital market access or realized gains in recent years,” the release notes.
Among the issues Fitch sees are: high financial leverage, with a 45% pro forma debt to capital ratio; unfavorable operating earnings caused in part by run-off operations; high exposure to reinsurers with recoverables at 277% of shareholders’ equity; and unfavorable loss reserve development. The rater says Fitch will also be vulnerable to softening in the U.S. commercial market.
Fitch also takes a dim view of a host of transactions made by Fairfax which it says have “further reduced flexibility”, including the “highly unusual” sale of common stock below book value. The rater continues to take issue with the level of disclosure on the part of Fairfax, and says it may withdraw its rating of the company.