Dominion Bond Rating Service has confirmed its ratings on Fairfax Financial Holdings Inc. and restored the rating trend to Stable from Negative.

The rating trend turned Negative on March 20, after the company delayed its year-end filings, reflecting audit concerns at Odyssey Re, but more significantly to DBRS, it had not reduced the debt ratio in line with its own guidance.

“Subsequently, the company has completed its filings with no financial restatement required. While the company and its subsidiaries are focused on underwriting profitability and superior investment performance, financial results have been burdened by negative reserve development in the Runoff book and recent catastrophic losses,” the rating agency says.

“Given the strengths of the three major operating subsidiaries and the ambient uncertainty in the insurance industry, DBRS is presently somewhat less focused on the company’s inability to reduce leverage, in spite of having raised a total of $600 million in additional equity in 2004 and 2005,” it says.

It explains that positive rating actions, “will hinge on a definitive resolution to the continuing Runoff saga and a more focused effort on reducing leverage.”

Fairfax is focused on achieving and maintaining underwriting profitability in its operating subsidiaries, it says, noting that each of the major subsidiaries has demonstrated improved underwriting results. “The company can also take credit for the reduction in expense ratios in each of its operating subsidiaries over the past five years,” DBRS adds.

“Earnings at Fairfax are exposed to investment performance, approximately half of which reflect discretionary realized gains. While gains may not represent the same quality of earnings as interest and dividends, Fairfax has consistently been able to reproduce them as part of its superior investment management track record,” it says, adding that the investment portfolio is presently 85% weighted in cash and government bonds, which is conservative but also consistent with the company’s cautious outlook for the equity markets.

The company’s liquidity profile is sound, DBRS says, with almost $500 million in cash held at the Fairfax holding company, though much of this cash is earmarked to meet Fairfax’s obligation to fund payments in its European Runoff business over the next few years. “This cash also represents a hedge against impaired financing flexibility in the event of another year of larger than expected catastrophic losses. The liquidity profile is also enhanced by the public listing of the Northbridge Financial and Odyssey Re subsidiaries,” it concludes.