A.M. Best Rating to Fairfax Financial

[ALLYCAT]

Hello

I seldom post  because I don't  believe  I have the same investing chops as many on this board. I do have a question that I hope someone can help educate me. Moody  seems to consistently give Fairfax  a bbb  rating.  I have just come from the annual meeting and Prem is talking about the cash rich Fairfax  is. What would it take to get Moody's  to give  Fairfax an A rating of some sort? Secondly  do you feel that  rating would open more conservative  investors  to look at buying shares increasing prices?

[Guest Schwab711]

http://www.odysseyre.com/Collateral/Documents/Common/FairfaxSandP.pdf

 

[Tommm50]

"Although its exposure to high risk assets is at 70% of total adjusted capital,"

 

Are they looking at the same company I am?

[ALLYCAT]

Thanks Schwab711. It is nice to see what goes into the rating. How does a normal Joe get to see these reports?

[Guest Schwab711]

Thanks Schwab711. It is nice to see what goes into the rating. How does a normal Joe get to see these reports?

 

I'm not sure if it's a requirement or not but every insurance company should post them on their website. Search the company and risk ratings. One differentiation of insurance companies is their credit rating so they generally share. It is unusual to share the actual report on their website (I imagine most don't want to advertise their weaknesses) so OP got lucky. You can also search S&P, Moody's, and/or AM Best. Sometimes the underlying report is free. Once rated, the report should be "public".

 

Insurance companies also have to file "statutory filings". I'm not sure if they would be in there or not.

[Estimated Profit]

I had the opportunity to speak with Prem a few weeks ago and I asked him about his thoughts on the credit rating of the holdco and he intimated that it is unlikely that upgrades are pending. He said that in order to justify a strong rating a company would need to have a centralized hierarchical structure when it comes to the running of its insurance businesses.

 

In  other words all major decisions would come from the top and be implemented down throughout the company. FFH isn't structured like that. The subs have a fair amount of autonomy when it comes to running their respective businesses and the agencies don't like that. They see it as a risk and not a strength.

 

As a result, all things being equal, i don't believe we should be anticipating an upgrade.

 

That said, if Prem is proven a genius, again, via profits on his portfolio, he may be thought of more like Berkshire, which might bring upgrades, but I wouldn't hold my breath even then.

 

[Guest Schwab711]

I had the opportunity to speak with Prem a few weeks ago and I asked him about his thoughts on the credit rating of the holdco and he intimated that it is unlikely that upgrades are pending. He said that in order to justify a strong rating a company would need to have a centralized hierarchical structure when it comes to the running of its insurance businesses.

 

In  other words all major decisions would come from the top and be implemented down throughout the company. FFH isn't structured like that. The subs have a fair amount of autonomy when it comes to running their respective businesses and the agencies don't like that. They see it as a risk and not a strength.

 

As a result, all things being equal, i don't believe we should be anticipating an upgrade.

 

That said, if Prem is proven a genius, again, via profits on his portfolio, he may be thought of more like Berkshire, which might bring upgrades, but I wouldn't hold my breath even then.

 

The topic of insurance companies being heavily invested in equity securities, wholly-owned operating businesses, or synthetic securities is really interesting. All the argument revolve around better risk/reward, though the long-run PD or LGD of AAA MBS or CMBS is not all that different from [potentially tax-free] A-rated muni bonds.

 

I can understand the relatively low S&P rating because their cash flows are significantly more volatile and their assets are lower on the capital structure hierarchy. However, you would expect to see a couple things more pronounced if S&P wasn't afraid of rating small sample-size securities.

1. Why isn't the gap between CP risk and financial strength wider? I agree that CP < FS, but Fairfax is built for financial strength, not one-day liquidity. I would think there would be one than one step difference.

2. S&P seems to favor corporate credit risk vs. currency risk or sovereign risk. This hits Fairfax particularly hard. Yet, I would argue that corporate credit risk is the least normal of the three and subjective views should have a greater weighting.

3.

We assess Fairfax's capital and earnings as very strong, which we expect to

continue in our base-case economic scenario despite the current low interest

rates. Its capital adequacy according to our proprietary capital model is

currently at the lower end of the 'AA' category, which is somewhat lower than

historically mainly because of the reduction in interest rates used to

discount loss reserves.

I think this summarizes my issue with S&P in particular. They accurately identify FFH's strengths and each individual rating is well into IG territory, yet the "adequate" financial flexibility overrides all else and they rate FFH as a BBB-. Considering the grade is solely based on the PD, FFH should have been 2+ steps higher in the linked review. The grade is especially bad since S&P usually issues ratings 0.5-1.0 steps higher than Moody's.

 

I think S&P (and Moody's to a lesser degree) systematically misrate unique business models or corporate structures. Even Berkshire Hathaway is rated based on WEB more than their clear operational advantage. I think it's useful to point out as a reminder that the market is truly inefficient in well-researched areas. I think the possibility of DIS being mispriced is not materially different from the probability that PACI is mispriced.

[ALLYCAT]

Just curious does anyone know the ratings for the underlying companies. I know Moody's just gave Northbridge A3. I was wondering if most had A3? 

[Guest Schwab711]

Just curious does anyone know the ratings for the underlying companies. I know Moody's just gave Northbridge A3. I was wondering if most had A3?

 

As a heads up, it's free to sign up for a Moody's account.

 

I found these (when signed in) by searching FFH and click on "Family Tree".

FFH_sub_ratings_-_Moodys.docx

[ALLYCAT]

Thanks Schwab711

The members on this board are the best!