It was a wild January for Torontobased Fairfax Financial Holdings, whose shares on the Toronto Stock Exchange took a roller-coaster ride last month when U.S. brokerage finn Morgan Keegan Inc. predicted that the insurance giant could lack $5 billion in reserves to cover future claims.
"In recent years, the company's operating results, excluding capital gains and losses, have suffered as a result of persistent reserving issues at many of its operating subsidiaries," stated the report, which was released on January 16. It also gave Fairfax an "underperform" rating and forecasted that the continued reserve strengthening--combined with the high degree of financial leverage used by Fairfax-would stress the company's financial flexibility and liquidity in the next couple of years.
To be sure, John D. Gwynn, the lead analyst of the report by Memphis, Tenn.based Morgan Keegan, acknowledged the difficulty in analyzing Fairfax, which has traditionally been known for its media-- shy ways and offering limited information about its operations.
In the United States, Fairfax's subsidiaries include Houston-based Ranger Insurance and Crum & Forster in Morristown, N.J., as well as OdysseyRe in Stamford, Conn., and TIG Specialty Insurance in Dallas.
"We have not been accorded access to management to verify the general accuracy of our findings and conclusions. This is a clear corporate policy," he stated.
Despite Mr. Gwynn's assertion, however, Fairfax shares began to fall the following day and went into a sharp decline after the weekend when news of the report spread. On Monday, Jan. 20, the company stock fell more than 40 percent to a sevenyear low of $57 per share before recovering to close down some 15 percent.
Fairfax has also been listed on the New York Stock Exchange since last December, but its shares in the United States were spared the price volatility on January 20 since the market was closed for Martin Luther King Day.
The stock's late recovery on the Toronto Stock Exchange that day came after Fairfax chairman and chief executive officer Prem Watsa assured investors and characterized Morgan Keegan's findings on loss reserve deficiencies as "totally wrong" and having "no validity whatsoever."
"From the beginning, our reserves have been reviewed by company actuaries, by an actuary at Fairfax and by one or more independent actuaries, and have been subject to regulatory review," Mr. Watsa stated.
Fairfax shares gained more ground when on January 30, Morgan Keegan lowered its estimate of the reserve deficiency for Fairfax's TIG Insurance Group to $1.0 billion from a previous estimate of $3.1 billion, while keeping its assessment of $1.9 billion in reserve deficiencies for other areas of the company.
Commenting on the revised estimate, Jim Auden, senior director at New Yorkbased Fitch Ratings, noted that it remains difficult to estimate reserve deficiencies at Fairfax.
"Looking at the numbers, you can come up with a lot of different estimates. We stated in the past that one of our conceres for Fairfax is the reserve adequacy of its U.S. commercial lines. It reported a lot of reserve increases in the last few years, and I think the company obviously has the best information on reserves. Only time will tell what the true number is," Mr. Auden told National Underwiter.
But even if analysts' estimates for reserve deficiencies are overblown, the company is hardly out of hot water yet. Its stock has been on a downward path in the last few years after reaching $600 a share in 1999. It is also being scrutinized by rating agencies after announcing last December that it is restructuring TIG, its money-- losing U.S. subsidiary.
"In terms of the summary, T