DBRS Morningstar Confirms Fairfax Financial Holdings Limited at BBB (high) and Insurance Affiliates at “A,” Stable TrendsInsurance Organizations
DBRS Limited (DBRS Morningstar) confirmed Fairfax Financial Holdings Limited’s (Fairfax or the Company) Issuer Rating at BBB (high), Senior Unsecured Debt rating at BBB (high), and Preferred Shares rating at Pfd-3 (high). DBRS Morningstar also confirmed the rating of Fairfax (US) Inc.’s Senior Unsecured Notes, which are guaranteed by Fairfax, at BBB (high). In addition, DBRS Morningstar confirmed the Issuer Rating and Financial Strength Rating (FSR) of Northbridge General Insurance Corporation (Northbridge) and the FSR of Federated Insurance Company of Canada, the Canadian operating subsidiaries of Fairfax, at “A.” All trends are Stable.
KEY RATING CONSIDERATIONS
Fairfax’s ratings confirmation reflects the Company’s global presence in the property and casualty insurance and reinsurance market. The confirmed ratings result from the application of DBRS Morningstar’s “Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations.” In DBRS Morningstar’s view, Fairfax has a clearly defined business strategy. The Company has good franchise strength, which is reflective of its international network of operating subsidiaries that successfully compete in selected markets. The Company has excellent/good risk and liquidity profiles, supported by appropriate capitalization. Fairfax’s disciplined underwriting approach is evidenced by its ability to consistently achieve strong combined ratios. Underwriting performance in 2018 was affected by several large catastrophe events, but the Company had an overall combined ratio in line with that of the industry. Due to the treatment of unrealized investment gains and losses, investment results tend to be volatile, which negatively affect coverage ratios and profitability metrics.
The Stable trends on Fairfax’s credit ratings consider the Company’s comprehensive risk management and demonstrated ability to operate in challenging economic environments and mitigate the impact of significant catastrophe losses.
Upward ratings pressure may arise from (1) sustained improvement in profitability, with returns on equity consistently above 10%, accompanied by well-managed risk exposures; (2) significantly improved fixed-charge coverage ratios and a material reduction in investment income volatility; and (3) a material reduction in financial leverage below 25%. Conversely, negative ratings pressure may arise from (1) sustained group combined ratios above 102%, (2) a material decline in the regulatory capital ratios of Fairfax’s operating subsidiaries and significant reduction in holding company liquidity levels, and (3) large debt-financed acquisitions, reducing Fairfax’s financial flexibility.
Fairfax has developed an extensive portfolio of global insurance and reinsurance subsidiaries over time, which the Company continues to expand through strategic acquisitions. The Company reported approximately $15.5 billion in gross premiums written for YE2018, in which premiums written was roughly 80% insurance and 20% reinsurance. The Company ranks among the top 20 largest global non-life reinsurers and owns several key insurance organizations, including Northbridge Financial Corporation; Brit Limited; Odyssey Group Holdings, Inc.; Crum & Forster Holdings Corporation; Zenith National Insurance Corp.; and Allied World Assurance Company, which was acquired in 2017. Fairfax operates with a decentralized structure in more than 40 countries and offers property and casualty insurance cover for a broad range of risks.
The Company maintains a lean head-office structure based on its approach of providing a high degree of autonomy to its business units and maintaining a multi-brand strategy. Fairfax’s excellent/good risk profile reflects its corporate risk management infrastructure, which uses the risk management functions of each of the business operations to identify, collect, and monitor information regarding aggregate and emerging risks.
Fairfax has a strong focus on underwriting profitability and is willing to avoid writing new business when it deems market pricing as inadequate. Management incentives are in place to align the performance of the operating subsidiaries and are tied to combined ratios. The Company has successfully achieved combined ratios in the low 90s in the past few years, except for 2017 and 2018. The results for these latter years were affected by large catastrophe losses following the North American hurricane season and the wildfires in California. Indicative of its ability to maintain its performance, Fairfax’s combined ratio was 97.1% for the nine months ended 2019 and three-year weighted-average combined ratio was 99.1% for the period 2016 to 2018.
The investment management function for all subsidiaries is administered centrally by Hamblin Watsa Investment Counsel Ltd., a wholly owned subsidiary of Fairfax. The Company utilizes a value investment approach and has been able to generate investment returns above the peer average, although those were somewhat more volatile due, in part, to the accounting treatment of unrealized investment gains and losses.
Fairfax’s credit ratings benefit from a sizable holding of liquid assets at the parent holding company level. The Company maintains a strong financial position at the holding company level that included $1.7 billion in cash and short-term investments as of September 30, 2019. The Company maintains a committed credit facility of $2.0 billion, which is available to support liquidity needs. Fairfax utilized $500 million of credit facility as at September 30, 2019 and has since repaid $250 million of the balance. The Company has stated that it will repay the remaining $250 million balance in Q4 2019. Fairfax has a policy of maintaining a minimum $1.0 billion balance in cash and marketable securities at the holding company level.
DBRS Morningstar considers the Company to have good/adequate capitalization. Fairfax’s insurance and reinsurance subsidiaries are well capitalized. However, its fixed-charge coverage ratios and profitability metrics have been volatile over time. The Company had a relatively high financial leverage at 35.9% as at Q3 2019 (33.9% excluding the $500 million of credit facility which was drawn). The elevated leverage is partly mitigated by the strong liquidity position at the holding company level.
The Grid Summary Grades for Fairfax are as follows: Franchise Strength–Good; Risk Profile–Excellent/Good; Earnings Ability–Good/Adequate; Liquidity–Excellent/Good; and Capitalization–Good/Adequate.
All figures are in U.S. dollars unless otherwise noted.
The principal methodologies are the Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations (September 2019) and DBRS Criteria: Guarantees and Other Forms of Support (January 2019), which can be found on our website under Methodologies & Criteria.
The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found on the issuer page at www.dbrs.com
The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
This rating is endorsed by DBRS Ratings Limited for use in the European Union. The following additional regulatory disclosures apply to endorsed ratings:
The last rating action on this issuer took place on December 21, 2018, when the ratings and Stable trend were confirmed.
For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.
Lead Analyst: Victor Adesanya, Vice President
Rating Committee Chair: Roger Lister, Managing Director
Initial Rating Date: November 8, 1993
For more information on this credit or on this industry, visit www.dbrs.com.
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