A.M. Best Upgrades Ratings of Fairfax Financial Holdings Limited, Assigns Positive Outlook to Crum & Forster Group and Assigns Debt Rating to Crum & Forster's Notes

Business Wire, May 4, 2007

OLDWICK, N.J. -- A.M. Best Co. has upgraded the senior debt rating to "bbb-" from "bb " of Fairfax Financial Holdings Limited (Fairfax) (Toronto, Canada) [NYSE: FFH; TSX: FFH]. The rating outlook is stable.

In addition, A.M. Best has affirmed the financial strength ratings (FSR) of A- (Excellent) and issuer credit ratings (ICR) of "a-" of Crum & Forster Group (Crum & Forster) (New Jersey) and Seneca Insurance Group (New York). The outlook for these ratings has been revised to positive from stable.

Concurrently, A.M. Best has assigned a debt rating of "bbb-" to Crum & Forster Holdings Corp.'s (Morristown, NJ) forthcoming $330 million 7.75% senior unsecured notes, due 2017, which were issued under Rule 144a in the United States and outside the United States pursuant to Regulation S under the Securities Act of 1933. A.M. Best has also affirmed the FSR of B (Good) and the ICR of "bbb-"and the FSR of B (Good) and the ICR of "bbb" for TIG Insurance Group and Fairmont Insurance Group (both of Texas), respectively. The outlook for both ratings is stable. (See link below for a detailed list of ratings.)

The net proceeds from Crum & Forster Holdings Corp.'s debt will be used to purchase its 10.375% senior notes, due 2013, which is pursuant to the previously announced tender offer to purchase these existing notes.

The ratings of Northbridge Financial Corp. (Toronto, Canada) are unchanged and will undergo their annual review in the coming weeks.

A.M. Best's rating actions are based on numerous qualitative and quantitative factors at both Fairfax and Crum & Forster. The upgraded debt ratings are attributable to the stabilization of Fairfax's run-off entities and the liquidity maintained at Fairfax. In addition, Fairfax maintains a somewhat unique structure in that it holds majority ownership of two publicly-traded organizations that are collectively valued at approximately $2.5 billion and that provide a source of income and/or cash. Fairfax's ongoing operating subsidiaries/investments are well managed, profitable, sufficiently capitalized and self sustaining. Fairfax's leadership has proven its conservatism in the management of its investment portfolio (despite significant paper losses on the stock portfolio hedges and credit default swaps). However, more notably, Fairfax's ability to generate earnings and accumulate capital over the long term through its total return investment philosophy is a positive qualitative rating factor.

Somewhat offsetting these positive rating factors are Fairfax's financial restatements and identified material weaknesses. However careful review concluded that the financial stability of Fairfax's operating subsidiaries and its financial flexibility were not unduly impacted to cause any rating action. Going forward, A.M. Best expects Fairfax to strengthen its Enterprise Risk Management.

Fairfax's run-off operations have historically created a significant drag on earnings and cash, specifically its European run-off. The U.S. run-off is proceeding in an orderly fashion currently requiring no material support. Infrastructure has been greatly streamlined, which should create less of an earnings drag on Fairfax's bottom line results going forward. The reserve levels of the European run-off have declined to around $1.1 billion, supported with $800 million of liquid assets assisted by the commutation of the Swiss Re reinsurance cover in 2006. Capital essentially consists of nSpire's investment in Fairfax's U.S. holding company. Any potential shortfall in liquidity will be assumed by Fairfax as has been the case for the past several years and is incorporated in A.M. Best's analysis of Fairfax. A.M. Best believes the run-off operations have achieved a level of stability as reserves' deficiencies have declined to a manageable level, and more modest reserve adjustments are expected in the future.

The ratings reflect significant holding company cash, which amounted to $767 million at year-end 2006 and is expected to remain fairly level over the next several years as annual cash inflows are expected to evenly cover cash expenses (including the needs of run-off). Liquidity is at a level that should allow Fairfax the ability to cover any unforeseen negativity and freedom from reliance on the capital markets. This comfort causes a trade-off in that repayment of debt and reduction of leverage will be at a slower than anticipated pace. Fairfax's financial leverage while still somewhat high, has declined to more reasonable levels at December 31, 2006, with debt-to-capital at 35% (US GAAP)--excluding the debt of Odyssey Re, which is capable of servicing its own debt obligations. Fairfax will continue to reduce its debt through open market purchases but has structured its debt maturities such that only $62 million is required prior to 2012.

Crum & Forster's rating actions are reflective of management's proven underwriting capability; diversified product portfolio; well executed controls on underwriting and catastrophe management; conservative recent accident year loss ratio picks; competitive expense ratio; ability to generate capital; reduced reliance on finite reinsurance; and robust capital levels. Crum & Forster has generated a five-year average accident year combined ratio of 97.2%, which is significantly lower than many of its peers. The company's five-year calendar year combined ratio of 103.3% is lower than the industry, although in recent years the company's combined ratio has been much lower due to significant favorable prior year reserve development.