Fairfax Financial Holdings Ltd.’s (TSX:FFH) proposed acquisition of 100% of Zenith National Insurance Corp. does not affect the company’s credit ratings, rating agency say.

Fairfax is set to pay approximately $1.3 billion for the firm, funded from holding company cash, subsidiary dividends and a $200 million equity offering to be completed prior to the closing of the transaction. The deal is expected to close in the second quarter.

Moody’s Investors Service affirmed its’ ratings on Fairfax following the deal’s announcement, and it maintains a positive outlook on Fairfax’s holding company debt ratings.

“Moody’s based its decision to affirm Fairfax on our assessment that the Zenith transaction will not materially alter Fairfax’s capital structure because the transaction is funded with a combination of equity and excess cash at the holding company,” explained senior vice president, Peter Routledge.

It estimates that Fairfax’s financial leverage will remain in the low-30% range, and the rating agency said that Zenith’s insurance financial strength rating is comparable to the ratings of Fairfax’s other insurance subsidiaries, indicating that the aggregate credit profile of Fairfax’s operations will not materially change.

“Fairfax’s positive outlook is based on its strengthening financial flexibility, including our expectation that the holding company will maintain substantial liquidity, and on the steady reduction in risk stemming from its run-off operations. This transaction does not materially impact those longer-term trends,” Routledge added.

A.M. Best Co. also left its ratings of Fairfax Financial unchanged, and said the outlook for all ratings is stable and unchanged. It expects risk-adjusted capital of the operating insurance subsidiaries of Fairfax to remain supportive of their current ratings following the acquisition. No change is expected to the strategic or day-to-day control of Zenith’s operations, with the exception of investment management, which will be centralized at Fairfax, it added.

Fitch Ratings will also leave its ratings unchanged, it said, noting that the proposed acquisition is consistent with Fitch’s view of Fairfax as a ‘true’ holding company, “whereby it acquires and oversees subsidiary insurance and reinsurance company operations under a decentralized management approach, while it seeks to add value through centralized investment management skills.”

IE