A.M. Best Co. has affirmed the various financial strength ratings of the operating subsidiaries of Fairfax Financial Holdings Ltd., with the exception of TIG Insurance Group, which was lowered to B+ (Very Good) from B++ (Very Good).

Concurrently, the senior debt rating of Fairfax was lowered to “bb+” from “bbb-“, the senior notes of TIG Holdings were lowered to “bb-” from “bb+” and the capital securities of TIG Capital Trust I were lowered to “b+” from “bb”. The outlook on all ratings is negative.

These rating actions are the result of a comprehensive review of Fairfax and each of its insurance and reinsurance subsidiaries including ORC Re, its Dublin reinsurance subsidiary.

According to the ratings agency, the downgrade of Fairfax’s debt ratings was based on the decreased flexibility in the company’s cash flows, diminished refinancing options and reliance upon the non-public markets for refinancing to maintain holding company liquidity. It says the firm’s reliance upon non-public markets, sale of assets, realized investment gains, along with uncertain future liquidity and the potential for unforeseen financial shocks warrant debt ratings below the investment grade level.

A.M. Best says the current capital levels of each of Fairfax’s operating companies meet or exceed the level commensurate with their financial strength ratings. No additional operating capital requirement is anticipated in 2003 if premium growth projections are maintained.

A.M. Best believes that the respective management teams at each of Fairfax’s ongoing operating subsidiaries have made considerable progress in improving operating fundamentals. The consolidated combined ratio for 2002 was favorable at 100.1%, including 95.8% for the Canadian companies, 106.0% for TIG ongoing operations and 99.1% for Odyssey Re.

In particular, Crum & Forster’s reported results for 2002 at a 103% combined ratio are a noticeable improvement over the 131% reported in 2001. A.M. Best believes that Crum & Forster’s well regarded management team has made significant progress in stabilizing the balance sheet and re-focusing operations on underwriting profitability. A.M. Best’s ratings on these companies are prospective, and it anticipates further improved 2003 combined ratios at or below 100% for ongoing operations.

A.M. Best believes that Fairfax’s long history of positive investment performance may be difficult to duplicate in 2003, since realized capital gains for the most part have been harvested. However, 75% of invested assets are currently invested in Treasuries, providing management the agility to benefit from future investment opportunities. In addition, the retention of interest rate put options can partially protect 2003 investment performance.

The negative outlook on all of Fairfax’s ratings is due to constrained financial flexibility of the holding company to meet any unforeseen capital needs. Fairfax currently maintains a number of private market financing options; however, those options are not unlimited. Should Fairfax utilize its existing private market options to replenish the $500 million of holding company liquidity in 2003, its future financing options to maintain balance sheet quality and financial strength ratings, if required, would be diminished.

Conversely, should Fairfax’s operating subsidiaries meet or exceed 2003 projections and holding company liquidity and financial leverage improves, A. M. Best will reevaluate its current rating outlook.