A.M. Best Assigns Debt Ratings to Fairfax Financial and Affirms Financial Strength Ratings.Business Editors
OLDWICK, N.J.--(BUSINESS WIRE)--May 11, 2001
A.M. Best Co. has assigned an initial "bbb-" rating to the existing senior unsecured debt Unsecured debt
Debt that does not identify specific assets that the debtholder is entitled to in case of default. of Fairfax Financial Holdings Fairfax Financial Holdings Limited TSX: FFH.SV NYSE: FFH is a Toronto, Ontario based financial services holding company which, through its subsidiaries, is engaged in property, casualty and life insurance and reinsurance, investment management and insurance claims , Limited (Fairfax), Toronto Canada, and a "bb+" senior debt rating to its wholly owned subsidiary Wholly Owned Subsidiary
A subsidiary whose parent company owns 100% of its common stock.
In other words, the parent company owns the company outright and there are no minority owners. , TIG n. 1. A game among children. See Tag.
2. A capacious, flat-bottomed drinking cup, generally with four handles, formerly used for passing around the table at convivial entertainment. Holdings Corp., New York New York, state, United States
New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of .
Concurrently, A.M. Best has affirmed the financial strength ratings of Fairfax's principal insurance and reinsurance The contract made between an insurance company and a third party to protect the insurance company from losses. The contract provides for the third party to pay for the loss sustained by the insurance company when the company makes a payment on the original contract. subsidiaries domiciled dom·i·cile
1. A residence; a home.
2. One's legal residence.
v. dom·i·ciled, dom·i·cil·ing, dom·i·ciles
1. in Canada and the United States The United States and Canada share a unique legal relationship. U.S. law looks northward with a mixture of optimism and cooperation, viewing Canada as an integral part of U.S. economic and environmental policy. .
The ratings reflect Fairfax's adequate capitalization, strong liquidity, diversified business platform and expectation of improved near-term earnings. These ratings are all tempered by the company's recently poor earnings trend, continued potential for adverse loss reserve development, out of recent accident years and the uncertain duration of current price improvements in the company's core businesses.
Significant corrective actions taken by the strengthened management teams at each of Fairfax's largest and recently acquired operating subsidiaries, combined with improving market conditions and strong risk mitigation strategies should contribute to the turnaround in earnings. In addition, the availability of substantial third party reserve indemnifications, and negative goodwill insulate the balance sheet from potential earnings volatility. The ratings also take into account the significant cushion of cash and short-term investments at the holding company, mitigating the short-term volatility in its operating cash flows Operating cash flow
Earnings before depreciation minus taxes. Measures the cash generated from operations, not counting capital spending or working capital requirements. and enhancing the organization's ability to service debt obligations while implementing corrective performance measures.
Despite soft market conditions in the property/casualty insurance sector and an active acquisition strategy--which have collectively curtailed operating earnings Operating Earnings
Profits after subtracting expenses such as marketing, cost of goods sold, administration and general operating costs from revenue.
Tax and interest expenses are not subtracted - operating earnings are synonymous with EBIT (earnings before over the past several years--Fairfax has historically maintained adequate coverage on fixed charges derived largely from unallocated cash and short-term investments averaging $500 million at the holding company. Notwithstanding recent events, the operating subsidiaries have historically provided sufficient availability of dividends to support the holding company's debt servicing requirements. Furthermore, A.M. Best expects Fairfax to limit its active acquisition strategy in the near to medium term to focus on improving the underwriting performance of each of its recent acquisitions while stabilizing its financial leverage around the 30% range, a level which is acceptable at the upper bounds of the rating category.
Through recent acquisitions, namely Crum & Forster and TIG Specialty in 1998 and 1999 respectively, Fairfax has achieved a broad diversification of product and distribution channels, while building on the solid franchise value of each operation within their respective markets and territories. Fairfax has established autonomous management teams for each operation comprised of seasoned insurance executives that possess strong market knowledge, underwriting and risk management expertise and a track record for generating favorable underwriting returns. Fairfax has also overseen the implementation of numerous corrective actions at each company and has developed a business strategy to improve the financial stability and prospective earnings capability for each company.
Nevertheless, recent earnings trends at both Crum & Foster and TIG Specialty have exhibited significant deterioration due to reserve strengthening actions following the acquisitions and management's underestimation of the effects of prolonged soft market conditions. As a result, Odyssey Re, which is recognizing the benefit of earlier corrective actions, has contributed a disproportionate share of the earnings to the overall Fairfax organization. Notwithstanding the available cash at the parent holding company, fixed charge coverage is therefore dependent on the earnings generated by its reinsurance operations. Furthermore, as a subsidiary of TIG, Odyssey Re's strong capitalization serves to bolster its immediate parent's balance sheet minimizing operating leverage Operating Leverage
A measurement of the degree to which a firm or project relies on fixed rather than variable costs.
The higher the degree of operating leverage, the greater the potential danger from forecasting risk. concerns. While the planned IPO (Initial Public Offering) The first time a company offers shares of stock to the public. While not a computer term per se, many founders, employees and insiders of computer companies have found this acronym more exciting than any tech term they ever heard. of a 25% minority share of Odyssey Re will enhance its stand-alone financial flexibility, its rating outlook is also contingent upon Adj. 1. contingent upon - determined by conditions or circumstances that follow; "arms sales contingent on the approval of congress"
contingent on, dependant on, dependant upon, dependent on, dependent upon, depending on, contingent the near-term improvement in operating performance at its U.S. primary company affiliates. As such, this will lessen Fairfax's dependence on Odyssey Re's earnings capacity.
Given the recent deterioration in Fairfax's historical earnings record, A.M. Best is concerned with the potential for adverse loss reserve development emanating from recent accident years in excess of reinsurance protections. Recent pre-tax operating losses operating loss
The excess of operating expenses over revenue. As with operating income, operating losses exclude revenues and expenses from operations that are not considered a regular part of the business. Also called deficit. Compare operating income. for 1999 and 2000 were largely attributable to the inadequate pricing environment prevalent in many of its core commercial property/casualty insurance and reinsurance business segments. Therefore, for these years, Fairfax had weak, accident year underwriting performance which was not protected by Fairfax's corporate stop loss reinsurance program. Underwriting losses were compounded by additional reinsurance costs associated with its corporate stop loss cover, restructuring charges restructuring charge
The expense of reorganizing a company's operations. A restructuring charge is an infrequent expense that generally results from asset writedowns or facility closings. and a realized loss Realized Loss
A loss recognized when assets are sold for a price lower than the original purchase price.
A portion of the realized loss may be applied against a capital gain or realized profit to reduce taxes. on the sale of a Lloyd's managing general agency. Despite these concerns, A.M. Best believes that with the strategic actions taken by management, as well as ongoing restructuring actions and an improved market environment, Fairfax should be able to execute its business plan in the intermediate term. Nevertheless, should anticipated earnings improvement not materialize in line with A.M. Best's expectation, current ratings will be subject to additional downward rating pressure.
Fairfax Financial Holdings Limited is a Toronto-based financial service holding company with operations in Canada, the United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. , Europe and the Far East, with consolidated net premiums totaling C$4.6 billion and total capitalization Total capitalization
The total long-term debt and all types of equity of a company that constitutes its capital structure.
See capitalization. of C$3.4 billion.
The following existing debt ratings were assigned:
Fairfax Financial Holdings, Limited
- "bbb-" rating on US$100 million 7.75% unsecured senior notes, due 2003 - "bbb-" rating on US$275 million 7.375% unsecured senior notes, due 2006 - "bbb-" rating on US$175 million 6.875% unsecured senior notes, due 2008 - "bbb-" rating on US$100 million 8.25% unsecured senior notes, due 2015 - "bbb-" rating on US$225 million 7.375% unsecured senior notes, due 2018 - "bbb-" rating on US$125 million 8.3% unsecured senior notes, due 2026 - "bbb-" rating on US$125 million 7.75% unsecured senior notes, due 2037
TIG Holdings Corporation:
- "bb+" rating on US$100 million 8.125% unsecured senior
notes, due 2005
TIG Capital Trust I:
- "bb" rating on US$125 million 8.597% capital securities,
The following financial strength ratings were affirmed based on the operating performance and stand-alone capitalization of each operating group, with consideration given to the financial position of Fairfax Financial Holdings, Limited:
- Crum & Forster Insurance Group (US) A-
- International Insurance Company (US) B++
- Odyssey America Reinsurance Group (US) A
- Ranger Insurance Group (US) B++
- Seneca Insurance Group (US) A-
- TIG Insurance Group (US) A-
- Commonwealth Insurance Group (Canada) A-
- Federated Connected and treated as one. See federated database and federated directories. Insurance Company of Canada A-
- Lombard General Insurance Company of Canada A-
- Markel Insurance Company of Canada A-
A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source. For more information, visit A.M. Best's Web site at www.ambest.com.