On Monday, S&P Global Ratings said it raised the financial strength ratings on the core insurance and reinsurance subsidiaries of Fairfax Financial Holdings Ltd. to “A” from “A-” with a stable outlook.
The rating agency also raised its long-term issuer credit rating on the holding company to “BBB” from “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.
Among Fairfax’s insurance and reinsurance operations are 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 premiums written grew to $23.8 billion (excluding runoff and life), benefiting from favorable insurance and reinsurance pricing and supported by $19.3 billion of shareholders’ equity (including insurance non-controlling interests).
S&P also said that Fairfax had the second largest Lloyd’s syndicate, the fourth largest U.S. excess and surplus writer, the fourth largest Canadian commercial lines writer, and was one of the top 20 global reinsurers based on 2021 gross premium figures.
The group’s momentum continued in first-quarter 2022, with gross premiums jumping 21.9 percent, leading S&P to expect full-year growth of around 15 percent, and 10 percent growth in 2023-2024.
Underwriting profit has been strong as well, S&P said, citing a 96.0 combined ratio for 2021, which included the impact of $1.15 billion of natural catastrophe losses (roughly 7.2 combined ratio points). In addition, in the first quarter of 2022, Fairfax produced a combined ratio of 93.9 including 2.8 combined ratio points from catastrophes, with no significant effects from the Russia-Ukraine conflict.
S&P expects Fairfax’s combined ratio to stay in the 93-96 range in 2022-2024, including a natural catastrophe load 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 improving earnings and capital management. “Fairfax is actively optimizing its capital structure to maximize shareholders’ 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 shares in 2021, funding the purchase through the sale of a 9.99 percent minority stake in Odyssey for $900 million to two Canadian pension funds (CPPIB and OMERS) in December 2021.
S&P noted that Fairfax follows a total return investment strategy with a large allocation to risky assets but also noted the company continues to adjust its investment mix to take advantage of a more opportune market during a period of rising rates. Fairfax’s investment earnings could expand as the company repositions its investment portfolio, although the redeployment is subject to the economy and financial markets, S&P said.
Further supporting the rating boost for the holding company, S&P noted that Fairfax’s financial leverage improved in 2021. The company refinanced a few debt issuances with lower coupon debt, and it has also fully repaid its $700 million credit facility balance in 2021 while raising funds through several sales. As a result, the consolidated financial leverage significantly improved to 34.3 percent in 2021 from 42.4 percent in 2020, S&P said.
Putting everything together, S&P concluded that the expanding market presence of Fairfax’s insurance and reinsurance operations, disciplined underwriting and rate increases are likely to drive gains in underwriting earnings, that investment income is expected to increase, that non-insurance profits will benefit from the reopening economies over the next three years, and that Fairfax’s financial leverage will remain around 30 percent.
The stable outlook reflects Fairfax’s very strong competitive position reinforced by operating earnings expansion, improving capitalization supporting robust top-line growth and a moderating financial leverage profile.
Source: S&P Global Ratings