SEC to question Fairfax founder; U.S. regulator subpoenas Watsa

The Toronto Star
March 23, 2006

An embattled Toronto insurance conglomerate saw its share price tumble yesterday on news that U.S. securities investigators have subpoenaed its reclusive founder, Prem Watsa.

Shares of Fairfax Financial Holdings Ltd. - which rose from $3 to $600 in its first 13 years and fell to $75 in 2003 before rebounding - plunged $19.12 or 12.5 per cent to $133.35 yesterday, wiping out $337 million in shareholder value.

The company announced that Watsa, its 55-year-old chief executive and controlling shareholder, has received a subpoena from the U.S. Securities and Exchange Commission.

Watsa has been compared with the legendary U.S. investor Warren Buffett, having used conservative but successful investment strategies to fund the acquisition of a string of U.S. and Canadian property insurers. He writes lengthy reports to investors, but has shied away from press interviews.

The questioning is the latest in a series of requests for information made to 30 different insurers about their accounting for non-traditional or reinsurance policies bought or sold to spread the risk of large financial losses.

Fairfax has been providing documents to the SEC and the U.S. attorney's office for the Southern District of New York since last June, the company said in a news release.

Employees, including top executives, have already been interviewed.

Watsa is to answer questions about a brief statement he made in answer to a question during an investor conference call on Feb 10. He said at the time

"We have done a complete review of all our companies, all our contracts, and across Fairfax and its subsidiaries ... and a few contracts that we have had at the holding company. And I am happy to tell you that the Odyssey Re restatements were the only ones that did come up."

In yesterday's news release, however, the company said it had also made changes in accounting for certain contracts at its nSpire Re subsidiary, and that "there can be no assurance that the SEC's review of documents provided will not give rise to further adjustments."

It went on to say that it is possible other governmental and enforcement agencies will seek to review company information, and have questions for its customers and shareholders. One shareholder has already been subpoenaed.

"At the present time, the company cannot predict the outcome from these continuing inquiries, or the ultimate effect on its business, which effect could be material and adverse," the company acknowledged.

Fairfax and its insurance subsidiaries have been hit hard by hurricane loss claims over the past two years, and the Toronto holding company reported a loss of $496.9 million (U.S.) on revenue of $5.9 billion for 2005. The company reports in U.S. dollars.

Various bond rating agencies have warned they may lower the company's credit rating. Fairfax has a conservative cash reserve, but about double the normal level of debt relative to shareholders' equity, said analyst Jarmo Saari of Dominion Bond Rating Service in Toronto.

Saari said bond raters want to analyze the company's annual report, but its release could be held up for another six months by what could be quite a minor restatement of earnings at subsidiaries as a result of the SEC investigation.

Copyright 2006 Toronto Star Newspapers Ltd.

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