S&P Upgrades Fairfax Operating Subs to “A”; Stable outlook

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S&P Global Ratings has raised the financial strength ratings of the main insurance and reinsurance subsidiaries of Fairfax Financial Holdings Ltd. from “A” to “A” with a stable outlook.

The rating agency also raised its long-term issuer credit rating on the holding company to “BBB-“.

S&P said the upgrade reflects a very strong competitive position based on large and diversified insurance and reinsurance operations that are well established in their respective markets.

Fairfax’s insurance and reinsurance operations include Allied World, Brit Limited, Crum & Forster, Northbridge Financial, Odyssey Group and Zenith National, according to the company’s website.

According to S&P, in 2021, Fairfax’s gross written premiums reached $23.8 billion (excluding runoff and life) benefiting from favorable insurance and reinsurance pricing, and supported by $19.3 billion equity (including non-controlling interests).

S&P also said Fairfax had the second-largest Lloyd’s syndicate, the fourth-largest excess and excess insurer in the United States, the fourth-largest commercial insurance insurer in Canada, and was one of 20 leading global reinsurers based on 2021 gross premium figures.

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The group’s momentum continued in the first quarter of 2022, with gross premiums jumping 21.9%, leading S&P to expect annual growth of around 15%, and growth of 10% in 2023- 2024.

Underwriting earnings were also strong, S&P said, citing a 96.0 for 2021, which included the impact of $1.15 billion in natural catastrophe losses (about 7.2 combined ratio points). Additionally, in the first quarter of 2022, Fairfax produced a combined ratio of 93.9 including 2.8 combined ratio points due to catastrophes, with no material effects from the Russian-Ukrainian conflict.

S&P expects Fairfax’s combined ratio to remain in the 93-96 range in 2022-24, including a natural catastrophe charge of about five points.

Also supporting the upgrades, S&P expects Fairfax’s capitalization to further strengthen and remain redundant at an ‘A’ confidence level through 2024, driven by improved earnings and capital management. .

“Fairfax is actively optimizing its capital structure to maximize shareholder value while supporting the financial strength of its holding company and [operating] subsidiaries,” S&P said, noting that, among other actions, Fairfax repurchased $1.2 billion of its subordinate voting stock in 2021, financing the purchase through the sale of a $9.99 minority stake. % in Odyssey for $900 million to two Canadian pension funds (CPPIB and OMERS) in December 2021.

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S&P noted that Fairfax is following a total return investment strategy with a broad allocation to risky assets, but also noted that the company continues to adjust its investment mix to take advantage of a more opportune market during a period of rate hike. Fairfax’s investment earnings could increase as the company repositions its investment portfolio, though the redeployment is subject to the economy and financial markets, S&P said.

Further supporting the holding company’s rating upgrade, S&P noted that Fairfax’s financial leverage has improved in 2021. The company refinanced a few debt issues with lower-coupon debt, and it also repaid the balance of its $700 million credit facility in full in 2021, while raising funds. through several sales. As a result, consolidated financial leverage improved significantly, from 42.4% in 2020 to 34.3% in 2021, S&P said.

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Putting it all together, S&P concluded that the expansion of Fairfax’s insurance and reinsurance operations market presence, disciplined underwriting and rate increases are likely to generate gains in underwriting profits, whether investment income is expected to grow, non-insurance earnings will benefit from reopening economies over the next three years, and Fairfax’s financial leverage will remain around 30%.

The stable outlook reflects Fairfax’s very strong competitive position bolstered by operating profit expansion, improved capitalization supporting robust top line growth and a moderate leverage profile.

Source: S&P Global Ratings

This article first appeared in Insurance Journal’s sister publication, Carrier Management.

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