Fairfax results unable to withstand reserve concerns

After a disastrous 2001, Toronto-based financial services giant Fairfax Financial Holdings Ltd. (TSX: FFH) rebounded in 2002 to produce a profit of $415.7 million, the largest in the company’s history. The company’s net earnings for 2002 amounted to $28.78 a share compared with a loss of $28.04 a share posted for the 2001 financial year.

The company’s full 2002 financial results show total revenue of $7.96 billion compared with $6.13 billion for 2001. For the fourth quarter ending December 2002, the company produced total revenue of $2.09 billion, versus the $1.73 billion reported during the last quarter of 2001. Net earnings were $76 million for the latest quarter, against $35.4 million reported for the same period the year prior.

The company notes that its fourth quarter 2002 results were impacted by reserve strengthening of $314.3 million and restructuring charges of $99.9 million relating to its TIG Insurance Co. operation. The company previously announced plans to discontinue parts of TIG’s business and merge existing operations with its International Insurance Co. subsidiary. The company insists its reserves are adequate despite a U.S. investment analyst report that came out toward the beginning of this year speculating that the group could be facing an under-reserved position. Specifically, the report drew attention to the poor capital position of TIG.

While Fairfax enjoyed a brief recovery in its share price following release of its 2002 financial results, the market reacted negatively to a subsequent downgrading by rating agency Standard & Poor’s. On news of the S&P downgrade, the stock dropped by 8.25%. S&P lowered its counter-party credit rating on Fairfax to “BB” from “BB+”, “because of concerns about Fairfax’s ability to maintain adequate liquidity”.