A.M. Best Co. has affirmed the issuer credit rating (ICR) of “bbb” and the unsecured debt and preferred equity ratings of Fairfax Financial Holdings Limited (Fairfax) [TSX: FFH and FFH.U] (Toronto, Canada). Concurrently, A.M. Best has affirmed the financial strength rating (FSR) of A (Excellent) and ICRs of “a” of the members of the Northbridge Companies (Toronto, Ontario), which represent Fairfax’s Canadian operations. A.M. Best also has upgraded the FSR to A (Excellent) from A- (Excellent) and ICR to “a” from “a-“ of Northbridge Personal Insurance Corporation (Toronto, Ontario) due to its status as a member of the Northbridge Companies, which provides it with operating efficiencies, underwriting expertise and other implicit benefits such as marketing and common management. In addition, A.M. Best has affirmed the FSR of A- (Excellent) and ICRs of “a-” of Commonwealth Insurance Company of America (CICA) (Seattle, WA), CRC Reinsurance Limited (CRC) and Wentworth Insurance Company Limited (Wentworth) (both domiciled in Barbados). CICA was a wholly owned subsidiary of Northbridge Indemnity Insurance Corporation before its January 2013 sale to an affiliate and its placement into run off. Concurrently, A.M. Best has withdrawn the ratings of CICA and CRC as Fairfax has requested that both companies no longer participate in A.M. Best’s interactive rating process. Additionally, A.M. Best has affirmed the FSRs of A (Excellent) and ICRs of “a” of the members of the Crum & Forster Insurance Group (C&F) (Morristown, NJ) and the Zenith National Insurance Group (Zenith Group) (Woodland Hills, CA), as well as the FSR of A (Excellent) and ICRs of “a+” of the members of the Seneca Insurance Group (New York, NY). At the same time, A.M. Best has affirmed the ICRs of “bbb” and the unsecured debt ratings of Zenith National Insurance Corp. (Woodland Hills, CA), an indirect wholly owned downstream holding company of Fairfax. The outlook for all ratings is stable. (See link below for a detailed listing of the companies and ratings.) The ratings of Fairfax reflect its historically favorable, albeit variable, levels of pre-tax operating and net income and its financial leverage and cash coverage levels, which are within A.M. Best’s requirements for its rating level. At December 31, 2012, Fairfax’s adjusted debt-to-total-capital level was 27.2% (excluding accumulated other comprehensive income), which includes the debt of its subsidiaries that are capable of supporting their own debt. In addition, Fairfax maintained holding company cash and investments of approximately $1.2 billion at year-end 2012, which provides additional liquidity and flexibility for the group.
The ratings of the members of the Northbridge Companies acknowledge their supportive level of risk-adjusted capitalization, highly specialized product orientation, the strength of their respective franchises in the property/casualty market in Canada and the broad geographic scope of their operations. The ratings also recognize the implicit support and financial flexibility these companies are afforded through Fairfax.Offsetting these positive rating factors are Northbridge Companies’ members’ unfavorable underwriting performance in recent years as a result of ongoing competitive market conditions, higher than average expense structure and difficult personal lines operating environment, given the high level of fraudulent claims and punitive legislation. Additionally a decline in net investment gains in recent years and extremely liquid invested asset base has led to lower than average returns. The ratings of C&F acknowledge its diversified product offering, supportive risk-adjusted capitalization that benefits from its significantly diminished asbestos and environmental exposure (via a recently completed inter-company transaction with an affiliate), and the implicit support and financial flexibility C&F is afforded as part of the Fairfax enterprise. Offsetting these positive rating factors are C&F’s elevated underwriting expense levels and adverse development on new and older accident years, which has resulted in generally poor underwriting results in recent years. Furthermore, ongoing competitive pressures in its key markets and overall weak macroeconomic conditions continue to depress operating results. The ratings of the Zenith Group recognize its supportive level of risk-adjusted capitalization, historically strong operating performance, management’s commitment to maintaining underwriting discipline through market cycles and the implicit support and financial flexibility it is afforded as part of the Fairfax enterprise. Offsetting these positive rating factors are Zenith Group’s poor underwriting and operating results in recent years, which were driven by competitive market conditions and rate reductions in its largest states (although rate increases have been noted more recently), and areas of prior year adverse reserve development. The concentration of Zenith Group’s business in two states, California and Florida, exposes it to a heightened level of regulatory and legislative changes.
The rating affirmations of Wentworth reflect its improved underwriting and operating performance, which have returned to the historical levels that followed its 2011 underwriting losses relating to catastrophe losses. In addition, the company benefits from a strong level of risk-adjusted capitalization and the implicit support and financial flexibility it receives through Fairfax.Offsetting these positive rating factors are Wentworth's relatively modest business profile within the highly competitive reinsurance market and the concentration of property catastrophe exposures within its book of business, which subjects it to a substantial degree of volatility, as evidenced over the past few years. Although A.M. Best believes Fairfax and its operating companies are well positioned at their current rating levels, factors that could lead to negative rating actions include operating performance falling short of A.M. Best’s expectations, driven by either underwriting or investment results or a decline in risk-adjusted capitalization that would no longer support their current ratings. For a complete listing of Fairfax Financial Holdings Ltd. and its subsidiaries’ FSRs, ICRs and debt ratings, please visit www.ambest.com/press/032808fairfax.pdf. The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Key criteria utilized include: “Risk Management and the Rating Process for Insurance Companies”; “Understanding Universal BCAR”; “Understanding BCAR for Property/Casualty Insurers”; “Rating Members of Insurance Groups”; “Equity Credit for Hybrid Securities”; and “Insurance Holding Company and Debt Ratings.” Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology. A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com. Copyright © 2013 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.