Fairfax Cos. Under Review

Fitch Ratings, Standard & Poor’s and A.M. Best initiated rating actions on Fairfax Financial Holdings Inc. (Fairfax) and its subsidiaries, including TIG Insurance Group—Dallas, Ranger Insurance Group, and Commonwealth Insurance Company (Canada) following Fairfax’s announcement that it would restructure TIG and place a portion of the subsidiary’s business into runoff.

A.M. Best Co. placed the financial strength ratings of “B++” (Very Good) of TIG and Ranger under review with developing implications. Concurrently, the financial strength rating of “A-” (Excellent) of Commonwealth Insurance Company were placed under review with developing implications, and the financial strength rating of “B++” (Very Good) from International Insurance Company (IIC) (Illinois) was withdrawn. IIC was merged into TIG effective Dec. 16, 2002. All other A.M. Best financial strength ratings and debt ratings of Fairfax Financial Holdings are unaffected.

Standard & Poor’s changed its outlook on Fairfax from “stable” to “negative,” and its “BB+” counterparty credit rating and its “BBB” counterparty credit and financial strength ratings on Fairfax’s affiliates.

Fitch downgraded the senior debt ratings of both Fairfax and TIG, as well as the insurer financial strength ratings (IFS) of the members of the TIG group, excluding Ranger, which is expected to be removed from the group during 2003. Additionally, Fitch affirmed the IFS ratings of the Fairfax Insurance Group and Odyssey Re Group.

Fairfax announced that as part of the restructuring process it will acquire the remaining 72 percent ownership interest in IIC over time. The structural realignment also includes the removal of Ranger, Commonwealth and a significant portion of OdysseyRe from under the direct ownership of TIG. Fairfax also placed the substantial program business of TIG into voluntary run-off. It is expected that certain books of business within TIG, considered to be ongoing, will be continued in other insurance subsidiaries, which will not be direct subsidiaries of TIG. Furthermore, the combined entity will be adding approximately $200 million to its reserves and taking approximately $35 million in restructuring charges, most of which will be offset by negative goodwill at the Fairfax level embedded in the IIC transaction.

S&P’s analyst Matthew Coyle cited the broad restructuring plan as the reason for S&P’s changes, calling the announcement “a setback for Fairfax and the progress it has made in other areas of the organization in the first nine months of 2002.” It indicated that it considers the “reemergence of reserve issues at TIG (especially after 2001’s gross charge of $210 million) to be disappointing and may be an indication that Fairfax management has not fully identified the extent of reserve issues elsewhere (e.g., Crum & Forster, Ranger Insurance Co., etc.) in the organization.”

Fitch downgraded TIG’s IFS rating two notches to “BB+.” This reflects an expectation of a significant decline in the overall level of surplus of TIG, concerns regarding the loss reserve adequacy at TIG Insurance Co. and IIC, and the reduced financial incentive for Fairfax to support TIG following the completion of the restructuring.