Mr. Darian Ryan of A.M. Best reports

A.M. BEST ASSIGNS CREDIT RATINGS TO COLONNADE INSURANCE S.A.; ASSIGNS INDICATIVE ISSUE CREDIT RATINGS TO FAIRFAX FINANCIAL HOLDINGS LIMITED

A.M. Best has assigned a financial strength rating (FSR) of A minus (excellent) and a long-term issuer credit rating (ICR) of a minus to Colonnade Insurance SA (Luxembourg), a member of Fairfax Financial Holdings Ltd.'s group of companies. Additionally, A.M. Best has assigned indicative long-term issue credit ratings (IR) of bbb to senior unsecured debt, bbb minus to subordinated debt and bb plus to preferred stock of the recently filed short-form base shelf prospectus of Fairfax. The outlook assigned to these credit ratings is stable. The existing ratings of Fairfax and its subsidiaries are unchanged. The assigned ratings, for securities that may be issued under the shelf registration statement, are consistent with the current ratings of Fairfax's outstanding securities. The new base shelf prospectus replaces Fairfax's previous shelf registration, which expired Oct. 19, 2017. Consequently, the indicative long-term IRs for the previous shelf registration have been withdrawn. The company's financial leverage and coverage ratios are within A.M. Best's guidelines for Fairfax's current ratings and are expected to remain so over the near term.

The ratings of Colonnade reflect the overall strength of its balance sheet, supported by its ultimate parent, Fairfax, favourable loss performance, the expected improvement in overall operating performance and adequate business profile. Colonnade benefits from explicit and implicit support provided by its ultimate parent, Fairfax, including a legally binding guarantee, record of capital support, technical reserving support, investment management services and enterprise risk management (ERM) expertise. Key offsetting rating factors are Colonnade's current operating performance, which is reflective of its elevated expense ratio and marginal ERM.

Colonnade's adequate balance sheet strength is supported by its strong risk-adjusted capitalization. A.M. Best expects Colonnade's risk-adjusted capitalization to remain reliant on support from Fairfax over the next few years as it implements its growth plans and absorbs start-up costs. Colonnade's premium volume has grown rapidly since 2015, accelerating in 2017, as a result of the rollover of books of business acquired from QBE and AIG. The risk associated with Colonnade's premium growth is moderated by the retention of a high proportion of management, staff and business.

Colonnade's adequate operating performance is driven by its favourable loss performance, which is offset by the initial costs incurred in its developmental stage with expenses outpacing premium by a sizable margin. The company's adequate business profile reflects its concentration in the central and eastern European region, with the two largest countries (the Czech Republic and Poland) representing about 40 per cent of the premium written. Concentration risk is somewhat offset by the dispersion of the remaining 60 per cent of the business in four other central European countries as well as the product offering, with personal and commercial business representing 40 per cent and 60 per cent, respectively.

A.M. Best considers the company's risk management capability to be generally in line with its risk profile, which is supported by its focus on maintaining geographic and by line diversity of its business, conservative reserving and per risk reinsurance limits. However, the company maintains an outsized one-in-500-year all-perils probable maximum loss, which, if incurred, would result in a sharp deterioration of risk-adjusted capital levels. While the current guarantee from Fairfax would cover Colonnade's liabilities in that scenario, the company's risk appetite and current reinsurance structure do not support an overall adequate ERM assessment.