Fairfax Financial Holdings Ltd., the Toronto-based firm that recently acquired Bermuda and London insurer Sphere Drake, has declared net income after tax of CDN$232.5 million, up 54 percent from the year before.

Fairfax also explained to shareholders in their annual report, their reasoning behind acquiring Sphere Drake, which has been assimilated into their existing subsidiary, Odyssey Re.

Fairfax chairman and CEO, V. Prem Watsa, revealed the US $217-million acquisition last year came after the company was approached by Sphere Drake's London-based president and CEO, Michael Watson.

Sphere Drake at the end of 1996 had a book value of more than $250 million ($13.80 per share) and an investment portfolio of $900 million. Net premiums written were $289 million.

Fairfax said Sphere Drake fills out the global network of Odyssey Re with operations in London and Bermuda. The addition of business and capital puts Odyssey Re among the top 20 reinsurance groups in the world, with in excess of a billion dollars in capital and some $750 million in premiums written.

Sphere Drake's acquisition provides Fairfax with further business and investment diversification and meaningful downside protection, as well as, offices in New York, Paris, London, Bermuda, Toronto, Singapore and Tokyo.

The report continued: "Given Sphere Drake's combined ratio in the 105 percent area and its investment portfolio of $900 million, as well as attractive purchase financing, Fairfax should receive its 20 percent return objective on the purchase price.

Mr. Watsa said there are risks with any purchase. The main ones in this case include the run-off of old books of business in the London market that are exposed to asbestos and environmental long tail liabilities. A ten year contingent note (contingent value right) obtained by Fairfax is hoped to provide sufficient protection.

Sphere Drake has reinsurance recoverables of US$560 million on a reserve base of US$1.246 billion, but is exposed to potential bad debts in its reinsurance recoverables.