Moody’s Investors Service has upgraded its senior unsecured debt rating of Fairfax Financial Holdings Ltd., less than a week after Fairfax announced plans to purchase all of the outstanding common stock of Odyssey Re Holdings Corp.
Moody’s announced on Wednesday that it has upgraded its senior unsecured debt rating of Fairfax Financial Holdings Ltd., along with upgrading its ratings of Fairfax’s subsidiaries, Crum & Forster Holdings Corp. and TIG Capital Trust I, and affirming the ratings of subsidiary Odyssey Re Holdings Corp.
The rating action follows Friday’s announcement from Fairfax that it intends to repurchase the remaining 28% stake in Odyssey Re that it does not own.
“The upgrades of Fairfax and TIG reflect Fairfax’s strengthening financial flexibility and the steady reduction in risk stemming from its run-off operations,” Moody’s said. “The upgrade of Crum & Forster reflects the improved financial profile and upgrade of Fairfax as Crum & Forster’s ratings had previously been lower than their stand-alone credit profile because of the risks at Fairfax.”
“Moody’s based the upgrade of Fairfax’s senior debt on a substantial improvement in its financial flexibility, resulting from large realized gains in its investment portfolio, as well as diminishing losses in its run-off subsidiaries,” said senior vice-president Peter Routledge.
“This rating action marks the second upgrade of Fairfax in the past 18 months, reflective of the substantial gains the company earned on its investments in credit default swaps, equity market hedges, and U.S. treasuries,” he added.
According to Moody’s, there is clear evidence that Fairfax’s run-off operations have stabilized and pose less of a threat to consolidated earnings and holding company cash.
“The principal reason underlying the stabilization of this operation is the relatively successful strategy of aggressively paying insurance claims early, based on the theory that this is a least-cost method of extinguishing latent claims risk. The number of outstanding claims in the run-off operations today is a fraction of what it was five years ago,” the rating agency noted.
“Finally, the proposed Odyssey Re privatization will provide Fairfax with greater upstream dividend potential because it will no longer be subject to Odyssey Re’s limited common share dividend policy,” Moody’s said.
Additionally, Moody’s believes that Fairfax has liquidity and is unlikely to draw material amounts of cash from Odyssey Re in the foreseeable future.
Moody’s noted that the rating action brings Fairfax’s senior unsecured rating to the brink of investment grade, “which prompts the question of what underlying factors could lead to an upgrade to investment grade.”
“At the broadest level, such an upgrade would require a moderation in the volatility of Fairfax’s overall performance and profile,” it said.
Moody’s upgrades Fairfax debt rating
Odyssey Re privatization offers greater upstream dividend potential, firm says
- By: James Langton
- September 9, 2009 September 9, 2009
- 14:15