S&P Global Ratings has upgraded its ratings for Fairfax Financial Holdings and its core re/insurance subsidiaries based on their strong competitive position and improved results.
The rating agency raised the holding company’s long-term issuer credit rating from ‘BBB-‘ to ‘BBB’ and the long-term issuer credit and financial strength ratings on its subsidiaries from ‘A-‘ to ‘A’, and assigned a stable outlook to all entities.
S&P explained that 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.”
In 2021 Fairfax’s gross premiums written (GPW) increased to $23.8 benefiting from favourable re/insurance pricing, supported by $19.3 billion of shareholders’ equity.
And in Q1 2022, GPW rose 21.9% year-over-year, building on last year’s strong price increases in most major business segments and new business writings, with analysts predicting premium growth of around 15% in 2022 overall, and 10% in 2023-2024.
Additionally, Fairfax generated a strong combined ratio of 96.0% last year, despite $1.15 billion of natural catastrophe losses or 7.2 combined ratio points.
Similarly, in the first quarter of 2022, Fairfax produced strong underwriting results with a combined ratio of 93.9% including modest natural catastrophe losses of $130 million or 2.8 combined ratio points, with no significant effects from the Russia-Ukraine conflict.
Looking ahead, S&P expects Fairfax’s combined ratio to improve to 93%-96% in 2022-2024, helped by re/insurance rate increases, including a natural catastrophe load of about five points.
The rating agency also observed that Fairfax is actively optimizing its capital structure to maximize shareholders’ value while supporting the financial strength of its holding company and re/insurance subsidiaries, having repurchased $1.19 billion of its subordinate voting shares in 2021.
And the company continues to adjust its investment mix to take advantage of a more opportune market during rising rates, and deploy its cash and short-term investments of $22.8 billion as of Dec. 31, 2021.
In addition, the expanding market presence of Fairfax’s re/insurance operations, it’s thought that disciplined underwriting, and re/insurance rate increases are likely to drive gains in underwriting earnings, along with an anticipated increase in investment income, and higher non-insurance profits benefitting from the reopening economies over the next three years.
