A couple of major rating agencies are taking different approaches to Fairfax Financial Holdings Ltd. filing its financials.

Fitch Ratings said that Fairfax, Odyssey Re Holdings Corp and TIG Holdings Inc. remain on Rating Watch Negative after Odyssey Re filed its 10-K and Fairfax (which owns 80% of Odyssey Re) filed its annual report this past Friday. Both filings had been delayed due to additional time needed to complete the restatement of Odyssey Re’s financial results.

However, Standard & Poor’s Ratings Services removed Fairfax and Odyssey Re from CreditWatch negative and affirmed the ratings.

Fitch noted that, in addition to the restatements previously announced, Odyssey Re restated one additional reinsurance contract. The result was to increase Odyssey Re’s net loss in 2005 to $105.4 million from $101.8 million, and to reduce shareholder’s equity.

“As a result of the restatements, Odyssey Re identified a material weakness in its internal control over the accurate accounting for its finite reinsurance transactions as of year-end 2005. Odyssey Re will implement a remediation plan to address the material weakness,” Fitch reported. “Fairfax did not restate its financial results due to Odyssey Re’s restatement, concluding that it was not material to Fairfax. In addition, the material weakness at Odyssey did not result in a material weakness at Fairfax.”

Fitch views Odyssey Re’s 10K filing with relatively minor additional restatements as a positive development as it has reduced a significant uncertainty. “However, the ratings remain on Negative Rating Watch due to the substantial uncertainty surrounding the ongoing investigations of Fairfax and Odyssey Re,” it says.

“Fitch’s ratings of Fairfax and its subsidiaries incorporate a certain amount of risk related to the ultimate potential negative effect of issues surrounding the company’s use of finite reinsurance and transactions in Fairfax securities, which have led to various subpoenas received by Fairfax, its subsidiaries, its independent auditors and a shareholder,” the firm explains.

“However, there is the increased risk that the ongoing investigations by the Securities and Exchange Commission and the U.S. Attorney’s office for the Southern District of New York could bring about a civil action against the company,” it says. “Fitch believes that any such action could negatively affect the companies’ franchise, reputation, and competitive position, particularly for Odyssey Re as a reinsurer, in addition to the financial implications of any fines and/or penalties levied. Fitch will continue to monitor events for any additional developments related to these ongoing investigations.”

Over at Standard & Poor’s, credit analyst Damien Magarelli, said “The ratings on FFH are based on its improving competitive position, strong consolidated capitalization (even after adjustments for finite reinsurance), and improved financial flexibility.”

“Offsetting these positive factors are reserves, which though not an immediate concern, have frequently been strengthened and might require some further modest charges; some very poor
acquisitions and sizeable reserve charges for which FFH has utilized finite reinsurance; and debt to support operating company obligations, resulting in high debt leverage,” added Magarelli.

S&P said that the firm may earn a positive outlook, based on year-end 2006 financial statements, should earnings improve and produce a sizeable net profit. “Earnings should also no longer be dependant on realized capital gains, net investment income, or be reduced significantly by runoff segment losses to support a positive outlook,” it said. “The outlook could be changed to negative if earnings do not improve in 2006, if there is significant turnover in management, if there is significant regulatory adverse development, if reserves develop adversely, if there are significant one-off runoff segment charges, or if holding company cash is not maintained near $300 million.”