DBRS has changed the trend of Fairfax Financial Holdings to ‘positive’ from ‘stable’ and confirmed the company’s senior debt rating.

The trend change follows DBRS’s annual review of Fairfax, and the rating agency indicates that it reflects the recent progress the company has made in addressing its runoff liabilities and financial leverage.

“In recent years, the company’s earnings have been depressed by continuing negative reserve development, notably in the runoff book. This negative development relates to long-tailed casualty exposures such as asbestos, worker compensation and assorted general liability which is covered under insurance and reinsurance policies which were written before Fairfax placed certain acquired companies into runoff,” DBRS explains.

“Since runoff liabilities have been assumed by Fairfax and secured by certain company assets held in trust with regulators, addressing the earnings drag of the runoff segment has been critical to the credit outlook of Fairfax,” it notes.

“A significant reduction in the number of outstanding claims and a corresponding reduction in runoff headcount since 2003 suggests just how much progress has been made,” DBRS says. “Assets formerly held in trust have now been released. It is expected that the existing reserves and the associated investment income will be adequate to cover the outstanding runoff claims with only relatively small cash requirements to be met by Fairfax.”

DBRS says that with the runoff issue having been satisfactorily addressed, the company has been able to focus on reducing its leverage and increasing its unencumbered cash and marketable securities position at the holding company level to $712 million at mid-year 2007.

“Following two years of extraordinary catastrophic property claims in its operating subsidiaries, strong earnings in 2006 and the first half of 2007 have strengthened the equity base, while free cash flow has been used to reduce holding company debt by over $300 million since the end of 2005, allowing the unconsolidated net debt plus preferred share ratio to fall to 18.1% from over 31.2%,” DBRS reports. “Improved underwriting profitability and expense controls at the company’s operating subsidiaries in addition to continuing strong investment returns have resulted in a corresponding increase in debt service coverage ratios.”

DBRS adds that it is encouraged by the efforts that the company has made to address its longstanding concerns over runoff and net debt levels.