PrefBlog

S&P revised the outlook on Fairfax Financial Holdings Inc. to Negative in February following the Brit acquisition, citing:

the significant potential decline in the group’s capital adequacy following the completion of the Brit PLC acquisition.

Today they gave the company’s capital plans their seal of approval:

• •Fairfax Financial Holdings Ltd. will likely maintain very strong capital adequacy per our capital model.
• •We are revising our outlook on Fairfax to stable from negative and affirming our ratings on Fairfax and its core insurance affiliates.
• •The stable outlook reflects our view that the pending acquisition of Brit PLC will not have a significant adverse impact on the group’s capital adequacy.

Standard & Poor’s Ratings Services said today that it revised its outlook on Fairfax Financial Holdings Ltd. to stable from negative. At the same time, we affirmed our ‘BBB-‘ long-term counterparty credit rating on Fairfax and our ‘A-‘ long-term counterparty credit and financial strength ratings on its core insurance affiliates.

Our analysis of Fairfax’s acquisition and consolidation of Brit PLC and the associated capital-raising initiatives indicates that Fairfax’s capital adequacy is likely to remain at the ‘AA’ level. Although the company will have less of a cushion than it had as of year-end 2014, its capitalization remains consistent with our expectations.
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The stable outlook is based on our view that the pending acquisition of Brit PLC will not have a significant adverse impact on the group’s capital adequacy after taking into account recent capital-raising initiatives and our expectations for organic capital growth during the next two years.

One of the methods Fairfax used to stabilize its capital levels was raising about $750-million in equities and preferreds. In addition – and perhaps more to the point – a 30% stake in Brit was conditionally sold to OMERS in mid-April:

Fairfax Financial Holdings Ltd. is bringing the Ontario Municipal Employees Retirement System in on its acquisitions of a specialty insurance company.

The two Toronto-based groups have entered into a memorandum of understanding where OMERS would take would take as much as a 30 per cent stake in Brit PLC, a specialty insurer that underwrites unique policies to protect against risks such as war and terrorism, satellite launch failures and the cancellations of sporting events. Brit is one of the largest insurers in the Lloyd’s of London marketplace, which connects global clients with insurance for complex and unusual risks.
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Right now, OMERS has no investment in Brit shares. The new deal won’t clear until after Fairfax’s offer for Brit becomes unconditional in all respects, receives regulatory approvals and other conditions.

The agreement between Fairfax and OMERS also hinges on other requirements, such as those related to Brit’s dividend, exit provisions and other governance arrangements.

Fairfax has a number of preferred share issues outstanding: FFH.PR.C, FFH.PR.D, FFH.PR.E, FFH.PR.F, FFH.PR.G, FFH.PR.I, FFH.PR.K and FFH.PR.M.

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