Fitch takes dim view of Fairfax liquidity

Rating agency Fitch has placed a negative “rating watch” on Fairfax Financial Holdings and its subsidiaries, citing concerns over the insurer’s disclosure practices. Fitch says it will either downgrade or withdraw its ratings if its public disclosures do not give more information about the company’s financial health.
In response, Fairfax has issued a release saying it had asked the rating agency to stop rating it in the spring of 2003, and “does not maintain a relationship” with the rater. The Fitch ratings are based solely on publicly available data.
Fitch says the disclosure issues relate in party to “the myriad of evolving inter-company transactions and ownership relationships, both on- and off-shore, as well as a lack of adequate disclosures regarding certain entities and transactions that could effect parent company liquidity”. “Specifically, Fitch’s heightened concern largely stems from: an inability to reconcile second quarter holding company cash based on public disclosures; the complex series of transactions related to the Kingsmead run-off syndicates that appears to have been the catalyst for movement of the Advent collateral to Odyssey Re as provider; and a number of ownership changes and preferred stock issuances among significant subsidiaries, the rationale of which is unclear.”
Fitch says it is concerned the company faced a “liquidity squeeze” resulting from the need to support the Kingsmead run-off, which meant Odyssey Re stepped in with US$200 million in collateral balances the rater questions whether the parent’s cash balances would have been materially affected if it had to cover the funding.
The rater is also concerned that this all occurred despite Fairfax’s subsidiaries having recently experienced their most favorable market conditions, leaving concerns over where the company will end up given that many of Fairfax’s key markets are already softening.