S&P Affirms Odyssey Re’s Operating Subs ‘A-‘ Ratings, Stable Outlook

Standard & Poor’s Ratings Services announced that it has affirmed its “A-” counterparty credit and financial strength ratings on Odyssey Re Holdings Corp.’s (ORH) operating subsidiaries: Odyssey America Reinsurance Corp., Clearwater Insurance Co. (formerly Odyssey Reinsurance Corp.), and Hudson Specialty Insurance Co. S&P also affirmed its “BBB”counterparty credit rating on ORH. The rating outlook is stable.

“The ratings are based on the operating companies’ (collectively referred to as Odyssey Re) improved business position, improved operating performance, conservative investment portfolio, and good liquidity position, said S&P. “Capital adequacy has remained supportive of the rating level.

“Partially offsetting these positive factors are the group’s potential exposure to further reserve development for prior years, relatively short track record of strong operating earnings since its partial IPO in 2001, and majority ownership by lower-rated Fairfax Financial Holdings Ltd. (FFH; BB/Stable/–).”

S&P said it “expects the premium growth rate to be in the single digits or to flatten in 2004 and 2005, which reflects declining premium rates in property and certain casualty lines and management’s desire to adhere to strict underwriting guidelines.”

It also indicated that it expects “earnings to remain strong, with a combined ratio of 96 percent – 99 percent and an ROR of 6 percent – 9 percent for the remainder of 2004 and into 2005, reflecting expected strong current accident year results partially offset by potential reserve additions for prior years. Capital adequacy is expected to improve modestly through the remainder of 2004 (to the 121 percent range), with further improvements expected in 2005.”

A summary of the “Major Rating Factors” considered by S&P is as follows:
— Improved business position. As the 18th-largest reinsurer in the world and sixth-largest in the U.S., Odyssey Re is realizing the benefits of its opportunistic strategy and improved market conditions, as demonstrated by strong revenue growth and much-improved underwriting results over the last three years.
— Improving operating performance. Odyssey Re’s earnings have improved considerably since 2001, reflective of improved premium rates and terms and conditions in the marketplace as well as management’s focus on underwriting better-quality business.
— Strong investments and liquidity. Odyssey Re’s investment and liquidity characteristics are strong based on management’s conservative allocation and the high quality of the investment portfolio.
— Capital adequacy consistent with the rating. The operating companies’ capital adequacy ratio was 116 percent at year-end 2003, which includes Standard & Poor’s estimate of a potential reserve deficiency of 4 percent-8 percent of Odyssey Re’s reserve base.
— Adequate financial flexibility. Standard & Poor’s believes ORH’s financial flexibility improved substantially following its partial IPO in 2001 but is partially constrained by its majority ownership by FFH.
— Majority ownership by FFH. FFH owns 81 percent of ORH’s outstanding shares. Standard & Poor’s views FFH’s level of ownership as one of the limiting factors of the rating.