This action largely reflects Fitch's concerns as to increasing liquidity pressures at Fairfax, as well as a continued decline in transparency of management's public disclosures, which make it increasingly difficult for third parties to judge Fairfax's creditworthiness.
Fitch intends to resolve its Rating Watch within several weeks, following additional analysis of publicly available information. Barring an increase in our comfort level, Fitch expects to downgrade and/or withdraw Fairfax's ratings. A withdrawal will occur if Fitch determines that the company's disclosures do not allow for a reasonable assessment of the financial health of Fairfax as a whole. This would relate primarily to the myriad of evolving intercompany transactions and ownership relationships, both on- and off-shore, as well as a lack of adequate disclosures regarding certain entities and transactions that could effect parent company liquidity.
While Fairfax's financial disclosures have become more voluminous over the years, Fitch has been concerned by an increasing lack of specific and readily available disclosures. Specifically, Fitch's heightened concern largely stems from: an inability to reconcile second quarter holding company cash based on public disclosures; the complex series of transactions related to the Kingsmead run-off syndicates that appears to have been the catalyst for movement of the Advent collateral to Odyssey Re as provider; and a number of ownership changes and preferred stock issuances among significant subsidiaries, the rationale of which is unclear.
Fitch believes that Fairfax may have averted a liquidity squeeze in the second quarter of 2004 resulting from its need to support the collateralization of the Kingsmead run-off. Per disclosures in its second quarter 2004 10-Q, it appears that majority-owned Odyssey Re provided US$200 million in collateral balances via an 'arm's length' fee-based transaction. If such an 'arm's length' transaction could not have been arranged, Fitch is concerned whether Fairfax's cash balances would have been largely depleted if it had to cover the $200 million funding requirement. Furthermore, given the potential magnitude of the collateral requirements on Fairfax's liquidity, Fitch is concerned that the possible need for such funding was not disclosed specifically by Fairfax other than through the SEC disclosure made by Odyssey Re.
Additionally, Fitch is concerned that such a potential cash squeeze occurred after Fairfax's operating subsidiaries had been experiencing their most favorable market conditions in years. Fitch believes that Fairfax requires a return to profitability and strong operating cash flows from its core operating subsidiaries to truly turn around its fortunes. However, many market observers have indicated a softening of rates has begun in Fairfax's key markets.
Finally, Fitch also remains concerned by the adequacy of Fairfax's reserves for its growing runoff operations, uncertainty as to the true financial position of nSpire Re Limited and its abilities to perform on intercompany reinsurance transactions, the significant use of finite reinsurance within the organization, and Fairfax's highly leveraged balance sheet and low levels of tangible equity.
Fitch's ratings of Fairfax are based primarily on public information.
Fairfax Financial Holdings Limited
-- Long-term issuer 'B+'/Rating Watch Negative;
-- Senior debt 'B+'/Rating Watch Negative.
Crum & Forster Holdings Corp.
-- Senior debt 'B'/Rating Watch Negative.
TIG Holdings, Inc.
-- Senior debt 'B'/Rating Watch Negative;
-- Trus