OLDWICK, N.J.--(BUSINESS WIRE)--A.M. Best has affirmed the issuer credit rating (ICR) of “bbb” and the unsecured debt and preferred equity ratings of Fairfax Financial Holdings Limited (Fairfax) [TSX: FFH and FFH.U] (Toronto, Canada).
Concurrently, A.M. Best has affirmed the financial strength rating (FSR) of A (Excellent) and the ICRs of “a” of the members of the Northbridge Companies (Toronto, Ontario), which represent Fairfax’s Canadian operations, the members of the Crum & Forster Insurance Group (C&F) (Morristown, NJ) and the members of the Zenith National Insurance Group (Zenith Group) (Woodland Hills, CA).
A.M. Best also has affirmed the FSR of A- (Excellent) and the ICR of “a-” of Wentworth Insurance Company Limited (Wentworth) domiciled in Barbados.
A.M. Best also has affirmed the ICR of “bbb” and the unsecured debt ratings of Zenith National Insurance Corp. (Woodland Hills, CA), an indirect wholly owned, downstream holding company of Fairfax. The outlook for all ratings is stable. (See link below for a detailed listing of the companies and ratings.)
The ratings of Fairfax reflect its historically favorable, albeit variable, levels of pre-tax operating and net income and the company’s financial leverage and cash coverage levels that are within A.M. Best’s requirements for its rating level. At December 31, 2013, Fairfax’s adjusted debt-to-total-capital level was 29% (excluding accumulated other comprehensive income), which includes the debt of its subsidiaries that are capable of supporting their own debt. In addition, Fairfax maintained holding company cash and investments of approximately $1.2 billion at year-end 2013, which provided additional liquidity and flexibility for the group. Benefiting the liquidity position of the group has been the shift into cash and short-term investments; however, this defensive strategy coupled with hedging losses and unrealized losses on the group’s bond portfolio has, in the short term, depressed earnings.
The ratings of the Northbridge Companies acknowledge its supportive level of risk-adjusted capitalization, highly specialized product orientation, the strength of its respective franchises in the property/casualty market in Canada and the broad geographic scope of its operations. The ratings also recognize the implicit support and financial flexibility these companies are afforded through Fairfax.
Offsetting these positive rating factors are Northbridge Companies’ unfavorable personal lines underwriting performance in recent years, higher than average expense structure and susceptibility to volatile investment results as well as a decline in net investment income in recent years given its extremely liquid invested asset base, which has led to lower than average returns.
The ratings of C&F reflect its diversified product offering, historically supportive risk-adjusted capitalization and improved underwriting performance supported by recent underwriting initiatives to limit unprofitable books of business and catastrophe losses. The group also benefits from the implicit and explicit support and financial flexibility C&F is afforded as part of the Fairfax enterprise.
Offsetting these positive rating factors are C&F’s variable underwriting performance over the past few years; higher than average underwriting expense levels and adverse development and strengthening on recent accident years. Furthermore, ongoing competitive pressures in its key markets, overall weak macroeconomic conditions and the long-term investment strategy practiced by Fairfax continue to depress operating results in the short term.
The ratings of the Zenith Group recognize its supportive level of risk-adjusted capitalization, historically strong operating performance, management’s commitment to maintaining underwriting discipline through market cycles and the implicit support and financial flexibility the Zenith Group is afforded as part of the Fairfax enterprise.
Offsetting these positive rating factors are Zenith Group’s poor underwriting and operating results in recent years, which were driven by competitive market conditions and rate reductions in its largest states, although rate increases have been realized more recently and benefited recent underwriting performance. The concentration of Zenith Group’s business in California and Florida exposes it to a heightened level of regulatory and legislative changes.
The rating affirmations of Wentworth acknowledge its improved and favorable underwriting and operating performance, which has moved back to historical levels following its 2011 underwriting losses related to catastrophes. In addition, the company benefits from a strong level of risk-adjusted capitalization and the implicit support and financial flexibility afforded it through Fairfax.
Offsetting these positive rating factors are Wentworth's relatively modest business profile within the highly competitive reinsurance market and the concentration of property catastrophe exposures within its book of business, which subjects it to volatility as evidenced over the past few years.
Although A.M. Best believes Fairfax and its operating companies are well positioned at their current rating level, favorable rating actions are possible should the group maintain a strong capital position along with underwriting and operating results that outperform their peers’ averages. Factors that could lead to negative rating actions include operating performance falling short of A.M. Best's expectations and/or an erosion of surplus that causes a decline in risk-adjusted capital to a level no longer supporting the current ratings.
For a complete listing of Fairfax Financial Holdings Ltd. and its subsidiaries’ FSRs, ICRs and debt ratings, please visit www.ambest.com/press/053007fairfax.pdf.
The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.
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