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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 of Fairfax Financial Holdings, Limited (Fairfax), Toronto Canada, and a "bb+" senior debt rating to its wholly owned subsidiary, TIG Holdings Corp., New York.

Concurrently, A.M. Best has affirmed the financial strength ratings of Fairfax's principal insurance and reinsurance subsidiaries domiciled in Canada and the United States.

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 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 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 concerns. While the planned IPO of a 25% minority share of Odyssey Re will enhance its stand-alone financial flexibility, its rating outlook is also contingent upon 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 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 and a realized loss 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, Europe and the Far East, with consolidated net premiums totaling C$4.6 billion and total 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

- "bbb-" rating on US$275 million 7.375% unsecured senior notes, due

- "bbb-" rating on US$175 million 6.875% unsecured senior notes, due

- "bbb-" rating on US$100 million 8.25% unsecured senior notes, due

- "bbb-" rating on US$225 million 7.375% unsecured senior notes, due

- "bbb-" rating on US$125 million 8.3% unsecured senior notes, due

- "bbb-" rating on US$125 million 7.75% unsecured senior notes, due

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,

due 2027

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 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
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Publication:Business Wire
Date:May 11, 2001
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