Fairfax Up For a Potential Moody's Upgrade

[Parsad]

Looks like the credit rating agencies may finally be seeing the light.  Cheers!

 

http://www.theglobeandmail.com/globe-investor/investment-ideas/streetwise/fairfax-up-for-a-potential-moodys-upgrade/article1836281/

[Alekbaylee]

Well, it's about time!

Would be nice if a hard market follows...  ;D

[Munger_Disciple]

In my opinion, Moody's ratings are meaningless especially after how they rated all the subprime CDOs AAA.

[Parsad]

Meaningless, but still pertinent to the interest rates Fairfax pays on their debt, so not entirely unimportant.  Cheers!

[Munger_Disciple]

Parsad,

 

It appears to me that the debt markets by and large do not care about Moody's ratings these days. For example, even though Berkshire's credit rating was downgraded, they have been able to issue debt at very low rates.

[Munger_Disciple]

Meaningless, but still pertinent to the interest rates Fairfax pays on their debt, so not entirely unimportant.

 

It will be indeed interesting to see if Fairfax's future debt costs come down if they get upgraded by Moody's.

[Uccmal]

The ratings are also the guide that Pension and many bond funds use as criteria, like it or not.  So far FFH has no trouble selling debt but if they want to issue 2 Billion as per their shelf prospectus they may have problems.  When a hard market hits that may be exactly what they need to do to ramp business up in a safe manner, just when others are being downgraded.

[Partner24]

Fairfax press release regarding that positive change has been written 4 years ago...

 

Just kidding  ;)

[Guest Bronco]

I don't think credit ratings are completely worthless - maybe not transparent with bond issuances but what about lines of credit and currency hedging?

[Munger_Disciple]

I have a different take on ratings agencies. I think they make cyclical credit problems worse. When things are good, they issue AAA to just about every product concocted by Wall St (eg., subprime junk). This has the effect of prolonging and enlarging the credit bubble. When things inevitably turn around, they make matters worse by downgrading everyone including very credit worthy institutions (eg., Berkshire). This has the effect of worsening the credit deflation.

 

I have no idea why large institutional investors pay attention to credit ratings from Moody's or S&P. They certainly have the means to do their own credit analysis. It comes back to the institutional imperative that Keynes and Buffett talked about.

[Myth465]

Einhorn says the same things. I dont think anyone takes the ratings agencies seriously, but some institutions dont have a choice. They have to hold a certain type of paper or used to at least.

[A_Hamilton]

In case anyone missed it:

 

Moody's upgrades Fairfax Financial (senior to Baa3); outlook stable

2011-03-15 21:36:06.115 GMT

 

 

 

New York                      New York

Enrico Leo                    Robert Riegel

Asst Vice President - Analyst MD - Insurance Financial Institutions Group  Financial Institutions Group

Moody's Investors Service    Moody's Investors Service

JOURNALISTS: 212-553-0376    JOURNALISTS: 212-553-0376

SUBSCRIBERS: 212-553-1653    SUBSCRIBERS: 212-553-1653

 

 

 

Moody's upgrades Fairfax Financial (senior to Baa3); outlook stable

 

Approximately $1.5 billion of rated debt impacted.

 

 

New York, March 15, 2011 -- Moody's Investors Service has upgraded the senior unsecured debt rating of Fairfax Financial Holdings Limited (Fairfax; TSE: FFH) to Baa3 from Ba1. Moody's also upgraded the preferred stock rating of Fairfax to Ba2 (hyb) from Ba3 (hyb) and the trust preferred stock rating of Fairfax's affiliate, TIG Capital Trust, to Ba2

(hyb) from Ba3 (hyb). These actions conclude a review for possible upgrade that was initiated on December 13, 2010. The outlook for the ratings is stable.

 

RATING RATIONALE

 

"The upgrade of Fairfax's ratings reflects a continuation of favorable trends in terms of the group's financial flexibility including:

significant dividend capacity from its insurance subsidiaries (approximately $750 million in 2011 without regulatory approval); abated risk at its run-off insurance operations; the ongoing commitment to maintain approximately $1 billion in cash at the holding company as well as the overall improved diversification across the Fairfax group of companies," explained Moody's Assistant Vice President, Enrico Leo.

Moody's also expects that adjusted financial leverage will remain at or near current levels (31% as of 12/31/10), and that any future acquisitions will be managed to maintain the group's financial flexibility.

 

Fairfax maintains a diversified revenue stream by product and geography, particularly as it now owns 100% of Odyssey Re (A3 IFS, positive), Northbridge (Canadian insurance operations, unrated), Crum & Forster

(Baa1 IFS, stable), Zenith National (A3 IFS, stable) and First Mercury

(Baa2 IFS, positive); and has about 20% of its operations outside of North America. Several challenges remain significant to Fairfax's credit profile including historically weak operating earnings (excluding realized gains) at its insurance operations, exposure to catastrophe risk, the high level of common stock investments (though a substantial portion of equities are currently hedged), and historically volatile loss reserves particularly at its run-off operations.

 

In determining the Baa3 senior debt rating, Moody's considered the collective insurance financial strength ratings of the Fairfax group of companies and the debt outstanding at intermediate holding companies, which results in structural subordination at the ultimate holding company. The structural subordination at the ultimate holding company is mitigated by both the diversification of businesses and by the commitment to maintain significant levels of cash at the parent company.

 

The outlook for the ratings is stable. The rating agency said the following could lead to an upgrade of Fairfax's rating: (1) stand-alone insurance financial strength ratings of the company's lead operating P&C and/or reinsurance companies are upgraded; (2) adjusted financial leverage consistently below 30% and operating earnings coverage (excluding realized gains/losses) consistently above 4x; and (3) aggregate combined ratios consistently less than 100%.

 

Conversely, the following could lead to a downgrade of the ratings: (1) stand-alone financial strength ratings of the company's lead operating P&C and/or reinsurance companies are downgraded; (2) adjusted financial leverage consistently above 35% and earnings coverage (excluding realized

gains/losses) consistently less than 2x; (3) holding company cash and marketable securities is not maintained above $750 million and above 3x total fixed charges; and/or (4) significant adverse reserve development at Fairfax's run-off or ongoing operating subsidiaries (greater than 1% of gross reserves).

 

The following ratings were upgraded, with a stable outlook:

 

Fairfax Financial Holdings Limited -- senior unsecured debt rating to

Baa3 from Ba1; preferred stock to Ba2 (hyb) from Ba3 (hyb);

 

TIG Capital Trust I -- trust preferred stock to Ba2 (hyb) from Ba3 (hyb).

 

Fairfax is a financial services holding company which engages in property & casualty insurance, reinsurance, and investment management through its operating subsidiaries. As of December 31, 2010, Fairfax reported net premiums written of $4.4 billion and net income of $471 million, and year-end total shareholders' equity of $8.7 billion.

 

The principal methodologies used in these ratings were Moody's Global Rating Methodology for Property and Casualty Insurers published in May 2010 and Moody's Global Rating Methodology for Reinsurers published in July 2008.

 

REGULATORY DISCLOSURES

 

Information sources used to prepare the credit rating are the following:

parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

 

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

 

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

 

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

 

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it.

Please see the ratings disclosure page on our website www.moodys.com for further information.

 

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

 

Moody's Investors Service

250 Greenwich Street

New York, NY 10007

U.S.A.

JOURNALISTS: 212-553-0376

SUBSCRIBERS: 212-553-1653

 

© 2011 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

 

 

 

 

CREDIT RATINGS ARE MOODY'S INVESTORS SERVICE, INC.'S ("MIS") CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES.

MIS DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS DO NOT CONSTITUTE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS ARE NOT RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. CREDIT RATINGS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MIS ISSUES ITS CREDIT RATINGS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

 

 

 

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Provider ID: 00572909

-0- Mar/15/2011 21:36 GMT

 

[Parsad]

They are firmly in investment grade territory now!  But I would like them to go up a couple more notches.  I want Fairfax to be the last company standing when the crap hits the fan, alongside Berkshire Hathaway!  Cheers!

[Guest Bronco]

Prem looked like an idiot with those hedges.  Right?

 

I had my doubts.

 

Will lightning strike again, CDS style?  Good stuff.  We shall see.

 

[Valuebo]

Nice! Stock gets some love too.

 

About the hedge  :

 

http://gregspeicher.com/?p=2262

 

Their hedging activities are misunderstood, and, to your question, they are not “speculations;” they are enabling them to lock in their investment performance and to protect their liabilities with their assets. Fairfax is a unique company, and they have evolved into one of the leading investment groups in the world, overlying a group of much-improved insurance companies. They have evolved with terrific management in the insurance companies that the holding company oversees.

 

The deflation bet is the possible lightning strike, not the hedge. But I am very happy with their edge at this moment, I feel like buying FFH is some kind a safe haven to store cash for the long run when I can't find obvious opportunities, much like BRK.

 

 

 

[link01]

Prem looked like an idiot with those hedges.  Right?

 

I had my doubts.

 

 

 

i had my doubts too. not about the hedges, i never had a problem there. it was (maybe still is, ultimately, unless they're either right about the deflation risk vs inflation, or they're good traders) the large us treasury bond portfolio, particularly the maturities > than 5 year. the muni bonds 65% insured by brk at least are paying them well for risk

[Thrifty3000]

Prem 's 2006 letter does a good job explaining his expectations for the market and treasuries.  According to Prem we haven't finished regressing to the mean:

 

"We continue to be fascinated – morbidly – by the recent Japanese experience. The Nikkei Dow dropped from 39,000 in 1989 to 7,600 15 years later while 10-year Japanese

government bonds collapsed from 8.2% to 0.5%, totally contrary to normal historical investment experience. Japanese market capitalization dropped from 149% of GDP to 53% in 2002. The U.S. market capitalization is still at about 120% of GDP, down from over 170% in 2000 but way above its 80-year average of 58% and even higher than its 1929 high of 87%!! Speaking of 1929, it took the Dow Jones index 25 years to trade again at the 1929 level, even though long treasuries dropped for much of that time period. In last year’s Annual Report, we mentioned Jeremy Grantham of Grantham Mayo, who said in a Barron’s article that of the 28 bubbles that they have studied in all asset categories (including gold, silver, Japanese equities and 1929), this recent bubble in the U.S. stock market is the only one that has not completely reversed itself (just as it was about to in 2003, it turned and rebounded). Given that recent after-tax profit margins in the U.S. have only been experienced rarely in the past 50 years, regression to the mean is the great danger facing the U.S. stock markets."

[link01]

Prem 's 2006 letter does a good job explaining his expectations for the market and treasuries.  According to Prem we haven't finished regressing to the mean:

 

U.S. market capitalization is still at about 120% of GDP, down from over 170% in 2000 but way above its 80-year average of 58% and even higher than its 1929 high of 87%!!

 

yes, i've read studies & analysis along these lines eslewhere too. but one thing i've always had a question about: can you reallly compare markets today as a % of GDP to that of an 80 year avg? isnt there likely to be some difference, maybe a big one, between both the size & number of publically traded co's & their total percent share contribution to GDP vs that of private co's in current time vs long ago times? i've never seen this question addressed.

[Uccmal]

 

 

yes, i've read studies & analysis along these lines eslewhere too. but one thing i've always had a question about: can you reallly compare markets today as a % of GDP to that of an 80 year avg? isnt there likely to be some difference, maybe a big one, between both the size & number of publically traded co's & their total percent share contribution to GDP vs that of private co's in rent time vs long ago times? i've never seen this question addressed.

 

Me neither... Also, the reality is that the largest companies listed on US markets do more and more business overseas every year.  Many of them do the majority of their business offshore now such as KO, GE, GOOG, MSFT, AAPL, XOM, etc. etc. etc.

[rijk]

this would be an excellent question for an annual shareholders meeting, preferably Berkshire's or Fairfax's....

 

regards

rijk

[Thrifty3000]

Here is an article that sheds some light on buffett's perspective ("As pointed by Warren Buffett, the percentage of total market cap (TMC) relative to the US GNP is “probably the best single measure of where valuations stand at any given moment.”):

 

http://www.gurufocus.com/stock-market-valuations.php

[link01]

Here is an article that sheds some light on buffett's perspective ("As pointed by Warren Buffett, the percentage of total market cap (TMC) relative to the US GNP is “probably the best single measure of where valuations stand at any given moment.”):

 

http://www.gurufocus.com/stock-market-valuations.php

 

thx for the article, tho i've seen many similar to that one too. i guess my question stated more simply would be: has the percentage of publcally traded co's & their earnings as a percent of GDP stayed reletively constant compared to its 80 year avg vs that of privately business? if so then i can buy into it unequivicacably. if not, but if (as i expect it probably is) there's a much greater percentage of public co's today than their was a long time ago, then i have a problem with that measure, & tobins Q & others like it. in that case we'd be better advised to simply compare p/e ratios, price to replacement value, & a score of other measures for insight.