S&P Revises Outlook on Fairfax Financial to Stable; Affirms Ratings

Standard & Poor’s Ratings Services has 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 its ‘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,” S&P said. “Although the company will have less of a cushion than it had as of year-end 2014, its capitalization remains consistent with our expectations.

“We recognize the potential diversification benefit to Fairfax if this acquisition is well executed. Brit is a leading underwriter in the Lloyd’s market and has a strong track record of underwriting profitability, which should enhance the group’s operating performance and may lead to a modest improvement in fixed-charge coverage.”

The announcement explained that 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.

“We believe that the fixed-charge coverage will remain low for the next two years due to the depressed level of net investment income resulting from the very high level of cash and short-term investments earning minimal interest income, costs related to the equity index total return swaps being used to hedge Fairfax’s long equity positions, and the debt and preferred stock servicing costs associated with the company’s relatively high financial leverage. The company’s pure total return investment strategy will continue to add significant volatility to net earnings.”

In conclusion S&P said; “We could lower the ratings if, contrary to our expectations, capital adequacy decreases significantly below the current level, or if the company’s operating results and fixed-charge coverage were to deteriorate significantly.

“We are unlikely to raise the ratings in the medium term, though we could consider it if underwriting and investment performance shows sustained improvement, leading to stronger operating performance and fixed-charge coverage measures.”

Source: Standard & Poor’s