Standard & Poor's Ratings Services said today it placed several of the ratings of Toronto-based Fairfax Holdings Ltd. on CreditWatch, with negative implications, following its second-quarter financials delay and restatement announcement.
Meanwhile, A.M. Best said all of Fairfax's ratings and outlooks will remain unchanged due to the company's overall general operating stability and appropriate capital holdings.
The delay was caused by discovery of accounting errors dating back several years. These errors could result in a drop in retained earnings and the refiling of prior financial statements, S&P analyst Damien Magarelli said in a statement.
Fairfax said its current best estimate is that these adjustments will reduce shareholders' equity by about $225-to-$240 million. The company and its auditors have not yet completed their work, however, so the final adjustment could be different.
If the ultimate adjustment is close to the current estimate, S&P expects to affirm the ratings. However, if the ultimate charge is significantly larger or if other issues are raised in the course of the audit review, the ratings could be lowered.
Fairfax also announced it would commute a $1 billion reinsurance contract in the third quarter, resulting in a loss of $415 million. The commutation will eliminate the contractual interest expense associated with the funds held under this treaty, boosting investment income prospectively.
S&P had already factored the balance-sheet impact of this treaty into the ratings. The agency said it expects to resolve the CreditWatch status once the second-quarter financials are filed.
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