AM Best Upgrades Credit Ratings of Fairfax Financial Holdings Limited, Its Subsidiaries and Allied World Assurance Company Holdings, Ltd.

AM Best upgraded Fairfax Financial Holdings' Long-Term Issuer Credit Rating to 'a-' from 'bbb+' due to improved earnings driven by higher-yielding fixed-income investments and record underwriting profits, leading to capital growth and expanded operating earnings; additionally, the Financial Strength Rating of Allied World Assurance Company Holdings' operating affiliates was upgraded to A+ from A, reflecting their balance sheet strength, strong operating performance, and favorable business profile, with improved underwriting ratios and increased dividend and interest income contributing to the upgrade.

Analysis

AM Best has upgraded Fairfax Financial Holdings Limited's (Fairfax) Long-Term Issuer Credit Rating (Long-Term ICR) to 'a-' (Excellent) from 'bbb+' (Good), and similarly upgraded its Long-Term Issue Credit Ratings (Long-Term IR) on unsecured debt and preferred equity. This upgrade extends to Fairfax (US) Inc. and Zenith National Insurance Corp. The primary drivers for this positive revision are Fairfax's improved earnings profile, demonstrated in recent years and projected to continue. Notably, in 2022, Fairfax strategically reallocated significant cash assets into higher-yielding fixed-income instruments, thereby bolstering its dividend and interest income streams. Concurrently, the group achieved record underwriting profits, even amidst elevated catastrophe activity. These combined factors have strengthened Fairfax's capital base and expanded its projected run-rate for future operating earnings. The outlook for these ratings has been revised to stable from positive, reflecting the crystallisation of previous positive momentum. Furthermore, Allied World Assurance Company Holdings, Ltd.’s (Allied World) operating affiliates saw their Financial Strength Rating (FSR) upgraded to A+ (Superior) from A (Excellent) and Long-Term ICRs to 'aa-' (Superior) from 'a+' (Excellent), with outlooks also moving to stable from positive. Allied World's upgrades are attributed to its 'strongest' balance sheet assessment, a revised 'strong' operating performance (up from 'adequate'), a favorable business profile, and appropriate enterprise risk management. Allied World has demonstrated improved underwriting ratios and stronger investment income, indicative of effective cycle management that has reduced earnings volatility while steadily increasing underwriting income. The sentiment surrounding these upgrades is strongly positive, with a specific sentiment score of 0.9 for FFH, underscoring the significance of these credit improvements.

Key Decisions for Investors

• Investors holding Fairfax Financial Holdings (FFH) debt should recognize the enhanced creditworthiness and reduced default risk implied by the upgrade to 'a-' and stable outlook, potentially leading to tighter credit spreads and increased demand for these securities.
• Equity investors in FFH may view the improved earnings capacity, driven by both successful investment strategy and strong underwriting performance, as supportive of future dividend sustainability and potential capital appreciation, though the shift to a stable outlook suggests the near-term catalysts for further upgrades are now priced in.
• Prospective investors should consider the strengthened financial profile and improved operating performance of both Fairfax and Allied World, but also note the stable outlook, which implies AM Best sees current ratings as appropriate for the foreseeable future, warranting a focus on sustained execution of their strategies.
• Investors should continue to monitor Fairfax's underwriting discipline, especially given catastrophe exposures, and the performance of its fixed-income portfolio in the prevailing interest rate environment to validate the sustainability of the improved earnings.