Fairfax implements radical cuts at TIG

Financial services giant Fairfax Financial Holdings (TSX: FFH) is restructuring its U.S.-based TIG Insurance Group, a move which will see group assets transferred back to the parent company. The move will also impact Fairfax’s subsidiaries Commonwealth Insurance Co. and reinsurer Odyssey Re.

Among the restructuring moves, TIG’s outstanding shares of Odyssey Re, Commonwealth and Ranger Insurance Co. will be transferred to the parent company, Fairfax. This totals about $1.25 billion in assets.

TIG will withdraw much of its business, including discontinuing its Dallas program business – which accounted for about 56% of net written premiums for the first nine months of 2002. The result will see TIG merge with Fairfax’s International Insurance Co. (IIC) subsidiary, a run-off company held by TRG.

Fairfax plans to purchase additional shares of TRG over the next 15 years, totaling US$425 million, making it the sole shareholder in TRG. Fairfax will take a charge of $28 million after tax related to strengthening TIG’s reserves, to a total of US$200 million.

Fairfax says it will also incur a once-off charge of about US$65 million to offset theUS$204 million in negative goodwill from the IIC transactions. TIG’s special risk operation, based in California, will act as a managing general agent for excess property and casualty insurance coverage in the future. This operation had accounted for 20% of TIG’s net written premiums for the first nine months of 2002.

Odyssey Re Holdings will buy the healthcare division of the special risk operation, as well as an excess and surplus lines subsidiary of TIG. TIG’s remaining interests, including its accident & health, Hawaii and Rangers units, are undergoing a review and will become a separate insurance subsidiary independent of TIG. These operations achieved Fairfax’s target of less than a 100% combined ratio, and represented about 24% of TIG’s net written premiums for the first nine months of last year.Rating agency A.M. Best says it has placed the ratings of TIG, Ranger and Commonwealth under review with “developing implications”. A.M. Best says it “expects the balance-sheet and liquidity position of TIG together with the financial flexibility of the above referenced insurance subsidiaries will ultimately benefit from the actions taken”.