DBRS Morningstar Confirms Ratings on Fairfax India at BBB (low), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed Fairfax India Holdings Corporation (Fairfax India or the Company) Issuer Rating at BBB (low). Concurrently, DBRS Morningstar also confirmed the Unsecured Senior Notes rating of the Company at BBB (low). All trends are Stable.

KEY RATING CONSIDERATIONS
Fairfax India’s ratings reflect DBRS Morningstar’s expectation of support for the Company from its parent, Fairfax Financial Holdings Limited (Fairfax), and are notched down from DBRS Morningstar’s rating of the parent at BBB (high) with a Stable trend. Fairfax India is an investment holding company whose objective is to achieve long-term capital appreciation. The level of parental support reflects the extent of ownership and effective control by Fairfax; the Company’s name, which links it to Fairfax; the Company’s use of other Fairfax subsidiaries for investment management and other services; and Fairfax’s extensive international franchise in insurance and other activities. Together, these characteristics indicate the motivation for Fairfax to support the Company, if the need were to arise. The two-notch differential between the ratings of Fairfax India and Fairfax considers that the Company is a noninsurance subsidiary based in Toronto whose underlying assets are predominantly located in India.

RATING DRIVERS
Based on our expectation of support from the ultimate parent, the ratings of Fairfax India would be upgraded if there were an upgrade in the rating of Fairfax, provided the sovereign rating of India remains above investment grade.

Conversely, the rating of Fairfax India would be downgraded, if there were (1) a downgrade of Fairfax, (2) a reduction in the perceived support from Fairfax, or (3) a downgrade of the sovereign rating of India to below investment grade.

RATING RATIONALE
Fairfax India is a publicly traded investment holding company focused on investing in diverse businesses, including public and private equity securities and debt instruments in India. Fairfax India's investments are made indirectly through its wholly owned subsidiaries based in Mauritius (FIH Mauritius Investments Ltd and FIH Private Investments Ltd). Its investments in publicly listed and private companies include businesses with customers, suppliers, and business primarily conducted in or dependent on India. The Company seeks out organizations where the possibility of a long-term business partnership is feasible. The selection criteria are focused on businesses that are expected to benefit from the trends supporting India's economic growth that meet Fairfax India’s criteria for ethics, management continuity, valuation, financial track record, and cash flows.

The rating of Fairfax India reflects DBRS Morningstar's assessment of the potential support that would be expected from the Company's controlling shareholder, Fairfax. With total assets of $86.6 billion as at YE2021, Fairfax is a large global insurance group whose subsidiaries are active in the property and casualty insurance and reinsurance industry operating across various business lines. Subsidiary insurance operating companies are geographically diversified, with footprints in over 40 countries in North America, Europe, Latin America, Asia, and Africa, and managed through a decentralized multibrand strategy. Investment management for all subsidiaries is provided centrally by Hamblin Watsa Investment Counsel Ltd. (HWIC), a wholly owned subsidiary of Fairfax.

Although there is no explicit support from the controlling shareholder, the assessment considers the position of Fairfax India within Fairfax’s overall group structure. Fairfax owns a 41.9% equity interest and a 95.0% voting interest, as of March 04, 2022, which gives it effective control of the Company. Fairfax India maintains an investment advisory agreement with Fairfax and HWIC. The agreement covers the provision of advice for all investment transactions and portfolio administration services. Fairbridge Capital, a wholly owned India-based investment advisor subsidiary of Fairfax, acts as subadvisor in the sourcing and assessment of investment opportunities.

Fairfax India has a diverse portfolio of investments in private and publicly traded companies. As a result of these equity investments, the Company has significant market risk that contributes to earnings volatility through fluctuations in its valuations. Nonetheless, the Company has generated positive and consistent earnings over the past five years.

The Company’s current sources of capital include interest income on holdings of Indian sovereign and corporate bonds, dividends from its Indian investments, sales of assets, and the equity markets through share issuance. Fairfax India also has $500 million senior unsecured seven-year debt outstanding and access to an undrawn $175 million revolving credit facility with a syndicate of banks. The leverage ratio was 14.6% as at YE2021, an improvement from 18.3% as at YE2020, with a three-year weighted-average fixed-charge coverage ratio of 13.0 times.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Insurance Companies and Insurance Organizations (https://www.dbrsmorningstar.com/research/381667; July 16, 2021). Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (https://www.dbrsmorningstar.com/research/373262; February 03, 2021).

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found on the issuer page at www.dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577