FFH Outlook Now Stable, says S&P

Standard & Poor’s has announced:

  • Our positive outlook was predicated on Fairfax Financial Holdings Ltd. achieving a redundant capitalization at the ‘AA’ confidence level.
  • While capital management actions are supportive, robust business growth, investment redeployment, and financial markets volatility will make it difficult for the company to achieve the ‘AA’ capitalization level over the next 12 months.
  • Therefore, we are revising our outlook to stable from positive and affirming all of our ratings on Fairfax and its operating subsidiaries. The stable outlook reflects our view that Fairfax will maintain strong business and financial risk profiles supported by improving re/insurance pricing.

We could lower the ratings in the next two years if, contrary to our expectations:

  • Capitalization declines sustainably below the ‘A’ confidence level; or
  • The volatility profile changes due to an increase in risk tolerance or shifts in investment or business mix resulting in high-risk exposure.

We could raise our ratings on the company in the next two years if Fairfax is able to:

  • Strengthen its risk-adjusted capitalization and maintain redundancy at the ‘AA’ confidence level;
  • Sustain strong earnings in line with those of higher-rated peers; and
  • Keep a fixed-charge coverage ratio sustainably above 4x and financial leverage (excluding nonrecourse debt held at non-insurance operations) less than 35%.

The outlook revision reflects our view that Fairfax’s capitalization will likely remain below the ‘AA’ confidence level this year despite active capital management actions and strong earnings over the past two years. Although capital grew in this period, robust insurance business growth, investment repositioning, financial markets volatility, and interest rate declines diminish S&P Global Ratings’ view of total available capital relative to increased capital requirements.

Fairfax’s proportion of risky assets (equities, non-investment-grade bonds, and alternative investments) is relatively high compared with that of peers and stood at 36.9% of total consolidated investments (including cash) at year-end 2019. This investment allocation exposes the company’s capital to market volatility. Even though its investments in associates (including private equity), which represented 12.4% of its total investments, are not exposed to mark-to-market volatility, the underlying economic trends will equally affect such holdings as well. However, the company’s large holdings of cash and short-duration securities partially mitigate the risk from the recent increase in credit spreads. The company’s consolidated investment portfolio of $39 billion as of Dec. 31, 2019, is composed of bonds (41.8%), public and private equity investments (29.1%), short-term investments (16.3%), and cash and cash equivalents (11.1%). Of the bonds holdings of $16.3 billion, investment-grade securities constituted 85.3% (includes ‘BBB’ rated securities, which were 19.7% of the total).

The May, 2018, setting of the Outlook to Positive was reported on PrefBlog.

Affected issues are FFH.PR.C, FFH.PR.D, FFH.PR.E, FFH.PR.F, FFH.PR.G, FFH.PR.H, FFH.PR.I, FFH.PR.J, FFH.PR.K and FFH.PR.M .

4 Responses to “FFH Outlook Now Stable, says S&P”

  1. stusclues says:

    Presumably S&P would not look favourably at Prem going on a shopping spree in the equity markets. However, I will note that BAM has decided to do precisely that with their decision this week to pivot to from private investments to public ones.

  2. fsabbagh says:

    If the banks decide to suspend dividends, i would expect that this would also apply to their preferreds. (eg RY.PR.W) Would they be able to re-instate their dividend on their common without paying out the preferreds? Is there a loophole they can use?


  3. DanG says:

    James answered a similar question on April 1.

    Cut and pasted below.

    what likelyhood do you see of issues that have stopped dividends on their common shares also halting or deferring dividends on their preferred issues?
    Well, it depends on the company and why they stopped paying dividends on the common!
    In general, though, companies will pay dividends on their preferreds for as long as they possibly can, right up until the time they file for CCCA protection; my two long-standing examples of this are Nortel and Quebecor World. Aimia suspended its preferred dividends without filing (and have since reinstated them), but they had special legal problems of their own.
    The market will accept a cut or suspension of common dividends as part of the ordinary course of business; unfortunate business, of course, but still in bounds. Suspending preferred dividends, however, is regarded as being tantamount to default, making refinancing much more difficult.

  4. jiHymas says:

    James answered a similar question on April 1.

    The original answer is here.

    If the banks decide to suspend dividends,

    See also the discussion (and links) in the April 2 market action post.

    Would they be able to re-instate their dividend on their common without paying out the preferreds? Is there a loophole they can use?


    (eg RY.PR.W)

    RY.PR.W isn’t usually good to use as an example because it’s somewhat peculiar as most recently discussed here.

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