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S&P Lowers Fairfax Financial and Sub Rtgs; Otlk Neg.

Business Editors

NEW YORK--(BUSINESS WIRE)--Standard & Poor's

Feb. 12, 2003--Standard & Poor's Ratings Services said today that it lowered its counterparty credit rating on Fairfax Financial Holdings Ltd. (Fairfax) to 'BB' from 'BB+' because of concerns about Fairfax's ability to maintain adequate liquidity at the holding company.

Standard & Poor's also said that it lowered its counterparty credit rating on TIG Holdings Inc., which is Fairfax's subsidiary, to 'BB-' from 'BB'. The outlook on both of these companies is negative.

These rating actions follow Fairfax's earnings announcement for the fourth quarter of 2002. The results for the quarter were mixed: underwriting results (excluding runoff operations) improved significantly, but there is the potential for liquidity strain in 2003.

Historically, the counterparty credit and senior debt ratings on Fairfax enjoyed nonstandard notching because of the significant cash balances held at the holding company. In the case of Fairfax, the nonstandard notching resulted in a two-notch differential between the ratings on the insurance operations and the holding company. Standard & Poor's has a negative view on yesterday's announcement that the company will repay, using the internal cash resources of the holding company, the C$207 million of redeemable hybrid income overnight shares (RHINOS) maturing Feb. 24, 2003. The subsequent reduction in holding company liquidity in a year when the company has more than C$400 million of maturing obligations (excluding the RHINOS) is a concern, especially because access to the public capital markets appears to be limited for Fairfax at this time.

Fairfax's underwriting results (excluding the runoff business) for the quarter and full year improved considerably in each of its core businesses, which should favorably affect the future earnings, dividend capacity, and capitalization of the insurance operations--assuming reserves for the continuing operations develop favorably and underwriting discipline is maintained. In the earnings call, the company mentioned it had close to $670 million of dividend capacity, the bulk of which was related to ORC Re and Fairfax's offshore operations. Although the company does have significant dividend capacity, management's ability to have full access to those funds is likely to be constrained by the capital considerations of those operations.

"Standard & Poor's will continue to monitor the company's progress in underwriting, reserving, and liquidity management," said Standard & Poor's credit analyst Matthew T. Coyle. "To the extent management can demonstrate a sustainable track record of improvement in these areas, Standard & Poor's will maintain its current ratings and possibly reconsider its negative outlook on the organization. Conversely, a material deterioration in any of these areas would likely result in a downgrade."

Complete ratings information is available to subscribers of RatingsDirect, Standard & Poor's Web-based credit analysis system, at All ratings affected by this rating action can be found on Standard & Poor's public Web site at; under Fixed Income in the left navigation bar, select Credit Ratings Actions.

Copyright 2003, Standard & Poor's Ratings Services
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Publication:Business Wire
Geographic Code:1CANA
Date:Feb 12, 2003
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