Fitch Removes Fairfax from Negative Watch; Affirms Ratings.

CHICAGO -- Fitch Ratings has affirmed the ratings of Fairfax Financial Holdings, Ltd. (Fairfax) and removed the ratings from Rating Watch Negative. The Rating Outlook is Stable. The rating action reflects perceived improvements in Fairfax's overall financial profile, and Fitch's belief that the company has likely 'turned the corner' in its recovery following a sharp decline in credit fundamentals beginning in the late 1990s.

In addition, Fitch has affirmed and/or upgraded the ratings of Fairfax's wholly and partially owned subsidiaries. Upgraded ratings include the Insurer Financial Strength (IFS) ratings of members of the Northbridge Group, and the debt ratings of Crum & Forster Holdings and TIG Holdings Inc. (TIG). Fitch also assigned debt ratings to Odyssey Re Holdings Corp. The Rating Outlook for all affiliated ratings is Stable. A full list of all ratings can be found below. Approximately $2.6 billion of debt is affected by these actions.

The rating actions announced today follow Fitch's completion of its regular ratings review cycle for Fairfax. Fitch recognizes possible losses facing the industry in the near term due to Hurricane Rita. Fitch will react to losses from Rita for the industry and Fairfax as necessary, after the event occurs.

Fitch believes that Fairfax's ratings profile is driven by the following key issues:

--Cash flow and liquidity: Operational cash flows and holding company liquidity have improved, but future cash needs remain hard to predict. Cash requirements at Fairfax have been significantly higher than for most insurance holding companies due to the need to fund troubled runoff businesses. Runoff businesses face the risk of reserve shortfalls that have required capital or finite reinsurance premium funding, as well as timing issues in paying claims and collecting on large reinsurance balances. Over the past several years Fairfax has needed to fill significant cash flow shortages via capital markets and other activities. Signs of recent improvement include Fairfax's ability to unlock over $600 million of funds previously held in trust at the request of the California Insurance Department at runoff company TIG, the ability to upstream dividends from Crum & Forster beginning in 2004, a restructuring of debt to reduce maturities over the next five years, and the need to no longer fund premiums on existing finite reinsurance contracts. Fitch also believes the risk of further major reserving shortfalls is lower than in the recent past.

--Financial flexibility: Despite its non-investment-grade ratings and weak earnings, Fairfax has demonstrated superior financial flexibility over the past several years, especially for a company at its ratings level. Financial flexibility has been demonstrated by successful capital market activities, including equity raising at the Fairfax level and debt issuance at the subsidiary level, the successful partial IPOs of subsidiaries Odyssey Re and Northbridge, the sale of shares in strategic investments such as Zenith Insurance, and tapping subsidiaries for cash via 'arm's length' transactions. An example of the latter includes Odyssey Re funding a $211 million Lloyds deposit on behalf of Fairfax for a fee in 2004. While the partial IPOs have reduced future consolidated earnings and upstream dividend capacity, they proved highly opportunistic in allowing Fairfax to work through its near-term cash flow issues. Fitch believes Fairfax will likely be able to find additional sources of financial flexibility, if needed, and views financial flexibility as a key source of strength for the company.

--Earnings: Fairfax's earnings are bi-polar in nature, and thus hard to predict, though Fitch believes consolidated earnings trends will likely continue to improve. However, despite improvements, operating earnings remain very weak, and Fitch believes it will take Fairfax several more years to show reasonable consolidated operating margins. On one hand, Fairfax produces strong earnings from its ongoing operations, primarily Odyssey Re, Crum & Forster, and Northbridge, with combined ratios below 100% the last couple years. However, strong ongoing earnings have been overwhelmed by runoff losses, together with the reversal of earnings from minority interests in Odyssey Re and Northbridge. In addition, positive net earnings are heavily reliant on realized investment gains, as investment yields have been quite modest and have trended downward. Fully consolidated operating earnings, before realized capital gains, were at a large loss in each year in 2000-2003, with small operating profits produced in 2004 and first-half 2005. Including realized gains, average earnings are stronger, but have shown period-to-period volatility.

--Financial leverage: While the risk embedded in Fairfax's capital structure improved greatly in 2004 due to a debt restructuring that greatly pushed out maturities, financial leverage remains very high. Debt-to-earnings before interest and taxes (Debt/EBIT), even including realized gains, has averaged over 5 times (x) since 2002, and remained very high at 4.8x in first-half 2005. Such high leverage ratios are consistent with the current 'B minus' level senior debt rating assigned to Fairfax. While debt-to-capital ratios, which stand at approximately 40%, fall on the cusp between low investment grade and high non-investment-grade standards, Fitch believes earnings-based leverage ratios provide a much truer picture of the risks related to Fairfax's capital structure and debt servicing abilities, and are thus weighed heavily in our analysis. Fitch believes management's focus on debt/capital ratios instead of ratios such as debt/EBIT may be a key reason the company has not de-leveraged its balance sheet despite its recent challenges. Fitch believes Fairfax's financial profile would benefit greatly from a material de-leveraging until earnings and cash flows are stronger.

--Turning the corner: Fitch believes the most critical question driving Fairfax's ratings, and Rating Outlook, is if the company has indeed 'turned the corner.' On balance, Fitch's comfort has increased that Fairfax will continue to show signs of improvement. In addition to favorable developments previously noted, positive signs include management's stated commitment to maintain underwriting discipline as markets soften, Crum & Forster reporting a combined ratio below 100% for the first time in the recent past during first-half 2005, Fairfax's ability to free up cash in the second quarter of 2005 from the commutation of a finite reinsurance contract with Chubb, reductions in still high levels of reinsurance recoverables, and reduced levels of adverse reserve development. Lingering concerns include the risk of reserve development or reinsurer bad debts, uncertainty as to ultimate loss levels from Hurricane Katrina, and the uncertain nature of runoff cash flow requirements.

The upgrade for Northbridge's IFS ratings reflects the group's very strong underwriting performance over the past several years which is partially offset by above-average operating leverage. The upgrade of Crum & Forster's debt ratings reflects the subsidiaries' resumption of upstream dividends in 2004. The upgrade of TIG's ratings reflects alignment of TIG's and Fairfax's debt ratings recognizing significant reductions in TIG's standalone leverage.

Though our near-term Rating Outlook is Stable, in the medium term Fitch would expect Fairfax to experience positive momentum in its ratings should debt/EBIT move closer to 3x, earnings show less reliance on realized gains and become viewed as sustainable, and Fairfax demonstrate an ability to continue to maintain material holding company cash (management target is $500 million) -- especially without reliance on financing activities. Negative ratings momentum could return should Fairfax experience major adverse reserve developments, material new finite reinsurance usage, a reversal of positive trends in underwriting performance within its ongoing operations, a widening of cash flow shortfalls, or signs that financial flexibility is waning.

Fitch affirms Fairfax Financial Holdings Ltd's long-term issuer and senior debt ratings at 'B+' and removes the ratings from Rating Watch Negative. The Rating Outlook is Stable.

--$61 million unsecured due 3/15/06;

--$62 million unsecured due 4/15/08;

--$467 million unsecured due 4/15/12;

--$100 million unsecured due 10/1/15;

--$190 million unsecured due 4/15/18;

--$92 million unsecured due 7/15/37;

--$96 million convertible due 7/15/23.

Fitch affirms Fairfax, Inc.'s long-term issuer and senior debt rating at 'B+' and removes the ratings from Rating Watch Negative. The Rating Outlook is Stable.

--$101 million exchangeable due 11/19/09.

Fitch assigns Odyssey Re Holdings Corp. long-term issuer and senior debt ratings at 'BB+'. The Rating Outlook is Stable.

--$40 million unsecured due 11/30/06;

--$92 million convertible due 6/22/22;

--$225 million unsecured due 11/1/13;

--$125 million unsecured due 2015.

Fitch upgrades Crum & Forster Holdings' long-term issuer and senior debt ratings to 'B+' from 'B' and removes the ratings from Rating Watch Negative. The Rating Outlook is Stable.

--$300 million unsecured due 6/15/13.

Fitch upgrades TIG Holdings Inc.'s long-term issuer rating to 'B+' from 'B'. Fitch upgrades the following trust preferred stock rating for TIG Capital Trust I to 'B-' from 'CCC+'. All noted ratings were removed from Rating Watch Negative. The Rating Outlook is Stable.

--$52 million due 2027.

Fitch affirms and removes from Rating Watch Negative the following IFS ratings at 'BBB+' for members of the Odyssey Re Group. The Rating Outlook is Stable.

--Odyssey American Reinsurance Corp.

--Clearwater Insurance Co.

Fitch affirms and removes from Rating Watch Negative the following IFS ratings at 'BBB-' for members of the Crum & Forster Group. The Rating Outlook is Stable.

--Crum & Forster Insurance Co.

--Crum & Forster Underwriters of Ohio

--Crum & Forster Indemnity Co.

--Industrial County Mutual Insurance Co.

--The North River Insurance Co.

--United States Fire Insurance Co.

--Zenith Insurance Co. (Canada)

Fitch upgrades to 'BBB' from 'BBB-' and removes from Rating Watch Negative the following IFS ratings for members of the Northbridge Group. The Rating Outlook is Stable.

--Commonwealth Insurance Co.

--Commonwealth Insurance Co. of America

--Federated Insurance Co. of Canada

--Lombard General Insurance Co. of Canada

--Lombard Insurance Co.

--Markel Insurance Co. of Canada

Fitch affirms and removes from Rating Watch Negative the following IFS ratings at 'BB+' for members of the TIG Insurance Group. The Rating Outlook is Stable.

--Fairmont Insurance Co.

--TIG American Specialty Ins. Co.

--TIG Indemnity Co.

--TIG Insurance Co.

--TIG Insurance Co. of Colorado

--TIG Insurance Co. of New York 

--TIG Insurance Co. of Texas

--TIG Insurance Corporation of America

--TIG Lloyds Insurance Co.

--TIG Specialty Insurance Co.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site. The issuer did not participate in the rating process other than through the medium of its public disclosure.