Fairfax Financial Holdings Ltd. has received am improved debt rating from Moody’s Investors Service. The rating agency upgraded Fairfax’s senior unsecured debt rating and changed the rating outlook to positive from stable.

Moody’s said the upgrade reflects improvements in several key credit fundamentals at Fairfax. “First, financial flexibility has improved significantly over the past two quarters, mainly the result of significant realized gains on credit default swaps that are referenced to large financial institutions,” Fairfax said in a release. “Second, the underwriting performance at Fairfax’s operating companies has steadily improved over the past several years, leading to more reliable operating profitability. Third, the cash-flow and earnings drain from Fairfax’s run-off businesses has eased, the result of a strategy of rapid claims resolution that has led to a significant drop in aggregate claims outstanding.”

Also contributing to the upgrade, Moody’s said, is the fact that the company has fixed weaknesses in financial reporting identified in 2006. “Although the company remains subject to review by the U.S. Securities and Exchange Commission related to certain finite/non-traditional reinsurance transactions, Moody’s is growing more comfortable that any adverse regulatory developments will be manageable,” Moody’s added.

The positive outlook reflects Moody’s view that Fairfax will continue to improve its financial flexibility, as measured by financial leverage and earnings coverage. It also reflects the rating agency’s opinion that intrinsic financial strength at Fairfax’s operating and run-off subsidiaries will strengthen in aggregate, as indicated by improving underwriting profitability.