S&P Affirms Odyssey Re and Subs ‘A-‘ FSR Ratings; Off CreditWatch

Standard & Poor’s Ratings Services announced that it has affirmed its “A-” counterparty credit and financial strength ratings on Odyssey America Reinsurance Corp., Clearwater Insurance Co., and Hudson Specialty Insurance Co. and its “BBB-” counterparty credit rating on Odyssey Re Holdings Corp. S&P also said it has removed them from CreditWatch with negative implications. The outlook is stable.

S&P took the same action on Fairfax Financial, who has an 80 percent stake in Odyssey Re (See IJ Website April 4). The ratings were originally placed on S&P’s CreditWatch on March 16, 2006, following the announcement of a delay in Fairfax and Odyssey’ Re’s 2005 10-K filing.

S&P said the “removal of the ratings from CreditWatch reflects the completed 2005 10-K filing and Standard & Poor’s conclusion that the restatements are minimal and do not detract from our view of the rating. The ratings are based on the group’s strong competitive position, improved operating performance, and strong liquidity.”

As “partially offsetting factors,” S&P noted “the group’s capital adequacy (which is considered good but below that of the rating level when potential reserve deficiencies are factored in), overall invested asset risk (which is high relative to that of similarly rated peers), relatively short track record of strong operating earnings since its IPO in 2001, and 80 percent ownership by lower-rated Fairfax Financial Holdings Ltd. (FFH).”

S&P credit analyst Steven Ader observed: “Management’s opportunistically focused underwriting profile, in combination with hardening property rates and stabilized casualty premium rates, will result in a disciplined approach as management continues its focus on pursuing profitable underwriting opportunities.”

S&P said it expects earnings in 2006 “to improve to a strong level (96 percent combined ratio and 9 percent pretax ROR) as strong accident-year results continue to be modestly offset by prior-year reserve additions. Capital adequacy, reflecting the $100 million October 2005 common equity and $100 million preferred equity issuance, is expected to be good at about 120 percent and further improve to a strong level by year-end 2006.

“Although the current rating and outlook are somewhat limited by FFH’s 80 percent ownership of Odyssey Re, the outlook could be revised to positive if Odyssey Re is successful in posting strong operating results in 2006, capital adequacy continues to improve well into the strong range, and Standard & Poor’s becomes more comfortable with Odyssey Re’s reserving on 2001 and prior business.

“Alternatively, if Odyssey Re were to fall short of expectations, particularly regarding profitability in the casualty lines or adverse reserve developments beyond what is incorporated into the rating (4 percent-8 percent), or if FFH’s credit strength diminishes, Standard & Poor’s would consider adverse rating action. Although the current rating reflects the 2005 10-K disclosures regarding finite reinsurance (including the SEC subpoena and the review by the U.S Attorney’s office), any material adverse regulatory developments could result in a negative rating action.”