A.M. Best Affirms Ratings of Northbridge Financial Corp and Its Subsidiaries

Business Wire, Jan 19, 2009

OLDWICK, N.J. -- A.M. Best Co. has affirmed the financial strength ratings (FSR) of A (Excellent) and issuer credit ratings (ICR) of "a" of Markel Insurance Company of Canada (Markel) (Toronto, Ontario), Federated Insurance Company of Canada (Federated) (Winnipeg, Manitoba), Commonwealth Insurance Company (Commonwealth) (Vancouver, B.C.), Commonwealth Insurance Company of America (Seattle, WA), Lombard General Insurance Company of Canada (Lombard General) and Zenith Insurance Company (both of Toronto, Ontario). Concurrently, A.M. Best has affirmed the FSR of A- (Excellent) and ICR of "a-" of Lombard Insurance Company (Lombard) (Toronto, Ontario) and the ICR of "bbb" of Northbridge Financial Corp (Northbridge). All the above companies are wholly owned subsidiaries of Northbridge. The outlook for all ratings is stable. (See below for a detailed listing of the companies and ratings.)

The rating affirmations of the Northbridge subsidiaries reflect their positive historical underwriting and operating performance, long-term sustainability of financial performance, quality management teams, very favorable reserving trends, niche business focus, solid capitalization and above average long-term investment results, which contributed to a stable consolidated balance sheet. The investment results are directly attributable to Northbridge's relationship with Fairfax Financial Holdings Limited (Fairfax) (Toronto, Canada), which currently holds a majority ownership of Northbridge and provides Northbridge with investment management services.

These rating actions also acknowledge Fairfax's intention to acquire all of the outstanding common shares of Northbridge that it does not currently own. On January 13, 2009, Northbridge and Fairfax announced that the 50.1% minimum deposit condition was met and that deposited shares would be promptly taken up and paid for, raising Fairfax's ownership to 87.8%. A shareholders' meeting has been called to approve a Subsequent Acquisition Transaction, which will enable Fairfax to acquire the remainder of the outstanding shares. Regardless of the level of increased ownership by Fairfax, the ratings of Northbridge and its subsidiaries will remain unchanged.

Offsetting rating factors include the material earnings volatility that resulted from Commonwealth's catastrophe exposure to Hurricane Ike in 2008 and Katrina, Rita and Wilma in 2005 and the significant negative impact these hurricanes had on both Commonwealth and Northbridge's consolidated financial results in these respective years. Notable are the contained losses of Hurricanes Ike and Gustav, which remained within management's loss expectations subsequent to the re-engineering of Commonwealth's catastrophe exposures. The restructuring included a now completed run off of Commonwealth's Energy and International business segments, particularly the wind exposed Gulf marine business, as well as reduced policy limits related to U.S. catastrophe exposures. A.M. Best believes, however, that Commonwealth's business profile and model continue to incorporate an elevated degree of risk in relation to its sister Northbridge companies and maintains a dependence--albeit reduced--on reinsurance. For these reasons, Commonwealth's ratings received an enhancement due to the implicit and explicit support provided by Northbridge.

The ratings of Markel, Federated and Lombard General acknowledge their respective niche profiles, well respected franchises, consistent long-term earnings capability and stable balance sheets based in part on conservative reserve cultures.

Offsetting rating factors include the material negative financial effects in 2008 of the continued soft pricing environment, catastrophe and weather-related losses and foreign exchange translation of U.S. dollar-denominated reserves (which are ultimately offset by the translation of corresponding levels of U.S. dollar-denominated investments).

In 2008, Northbridge consolidated its reinsurance purchasing at the holding company level leading to concentrated purchasing power, which is expected to benefit the bottom line, overall reduction in use of reinsurance and higher retained premium. A.M. Best believes that these positive rating factors collectively have and will continue to result in a sustained positive market reputation and competitive business positioning. Furthermore, the ratings consider the roles of these companies within the Northbridge organization and the implicit and explicit support provided by Northbridge and Fairfax.

Over the years, Markel's strong long-term results have benefited from its positive reputation as Canada's premier transportation insurer, its quality management team, underwriting discipline, contained average policy limits and numerous innovative value added products and services.

Federated's excellent results recognize management's knowledge of its customer base, specialized products and services, limited catastrophe exposure, trade association relationships and benefits of a direct sales force, all of which support high retentions.