FFH Upgraded to Pfd-3(high) by DBRS

DBRS has announced that it:

upgraded Fairfax Financial Holdings Limited’s (Fairfax or the Company) Issuer Rating to BBB (high) from BBB, its Senior Unsecured Debt rating to BBB (high) from BBB and its Preferred Shares rating to Pfd-3 (high) from Pfd-3.

The upgrade of Fairfax’s ratings primarily reflects the application of the “Global Insurance Methodology” and the assignment of an FSR of “A” to its operating insurance companies. As the parent holding company, Fairfax’s Issuer Rating of BBB (high) is positioned two notches below this FSR.

In upgrading the Issuer Rating to BBB (high), DBRS takes into account Fairfax’s good franchise strength and risk profile, including its good net earnings, liquidity and capitalization. DBRS also considered the successful completion of the acquisition of Allied World (AWAC), which enhances the Company’s global market share, product offering and geographic reach while strengthening Fairfax’s position in the U.S. Excess & Surplus insurance market, increasing the Company’s rank to within the top five.

Fairfax has eliminated all of its equity index hedges, sold the majority of its long-dated bonds and reduced the duration of its fixed-income portfolios. This is expected to result in more stable investment income and net earnings going forward. Indicative of its franchise strength, the Company is the third-largest commercial property and casualty (P&C) insurer in Canada in terms of market share based on 2016 direct written premiums, and it is one of the top 15 global non-life reinsurers after the acquisition of AWAC.

The Company’s value-based investment strategy, though effective and historically successful, tends to yield volatile results. Consequently, despite historically stable and profitable underwriting results, the earnings volatility from investment income and past hedging activities are affecting fixed-charge coverage ratios that are averaging 3.0 times (x) lower than desired levels for an “A”-rated company. Fairfax’s high cash balances and the subsidiaries’ dividend capacity alleviate concerns about Fairfax’s meeting its capital servicing requirements.

The Stable trend considers the Company’s improving fundamentals, including its expanding global operations and strengthening franchise as well as its ability to adapt to the current challenging operating environment.


Positive ratings pressure could arise if the Company demonstrates a sustained improvement in profitability through consistently high returns on equity accompanied by well-managed risk exposures with continuous protection of capital, evidenced by strong regulatory capital ratios, along with material reduction in leverage, significantly improved fixed-charge coverage ratios and a material reduction in investment income volatility. Negative ratings pressure could arise through the inadequate monitoring and oversight of assumed risks, resulting in a material deterioration in underwriting results, a sustained material decline in the regulatory capital ratios of the operating subsidiaries, a material reduction in holdco liquidity levels or a sustained significant deterioration in investment income.

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.

Note that Fairfax Financial Holdings Limited is not regulated by OSFI although Northbridge, its P&C subsidiary, is:

In Canada, property and casualty companies are regulated by the Office of the Superintendent of Financial Institutions on the basis of a minimum supervisory target of 150% of a minimum capital test (‘‘MCT’’) formula. At December 31, 2016 and 2015 Northbridge’s subsidiaries had a weighted average MCT ratio in excess of the 150% minimum supervisory target.

Therefore, I do not consider FFH issues to be subject to the potential DeemedRetraction of insurers.

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