acquisition of Bermuda-based Sphere Drake.

The closing caused Standard & Poor's (S&P) to raise the claims paying ability and counterparty credit ratings on Sphere Drake Insurance Plc and Sphere Drake Insurance (Bermuda) Ltd. to single-`A'-minus from triple-`B' and remove the ratings from creditWatch, where they were placed in July.

But it come with a warning.

S&P said: "Standard & Poor's believes that Sphere Drake Holdings' business position is adequate but has been eroded over the last two years. Sphere Drake Holdings has been a prominent London market company for many years.

"Gross premiums in 1995 were $724.3 million and fell to $553.3 million in 1996 (a reduction of 23.6 percent); Standard & Poor's expects a further decline of 28 percent for 1997, to $400 million.

"The reductions reflect the reduction on premium rates, nonacceptance of uncompetitively rated business, and the withdrawal from certain lines of business over this period following the strategic review.

"Results were also impacted by the perceptions of some brokers and clients that the group's long term security had been tainted by recent events (in particular the group's reported losses in 1995 arising from loss reserve inadequacy).

"Standard & Poor's believes this erosion of the group's business franchise would have continued gradually but for the acquisition by Fairfax, which should now provide a platform for future development.'' Sphere Drake's reinsurance and insurance businesses will now operate as part of Fairfax's Odyssey Re Group, which includes the Odyssey Re Corporation of New York and the Paris-based Compagnie Transcontinental de Reassurance.

At the end of 1996, the three companies had a combined surplus in excess of $900 million and net premiums written of $750 million.

Sphere Drake president and CEO, Michael Watson, said: "The completion of this transaction is one of the most significant events in the history of Sphere Drake.

"The financial strength, global reach and collective experience of the three companies that form the Odyssey Re Group will put us among the world's leading reinsurance businesses.

"With $900 million of capital backing and the improved CPA ratings which have resulted from the transaction, Sphere Drake's competitive position in both the London and Bermudian markets will be enhanced substantially.'' As part of the Odyssey Re Group, Sphere Drake's focus will remain the provision of traditional and alternative reinsurance and specialty insurance protection to its clients.

The Sphere Drake companies will also continue to enjoy considerable underwriting autonomy while benefiting from the group's combined financial and administrative resources and underwriting expertise.

Meanwhile, S&P said the higher rating was due to the implied support derived from Fairfax and also based on the premise that Sphere Drake was strategically important to Fairfax and the two companies were core to the Sphere Drake Holdings group.

S&P said that on a stand alone basis, Sphere Drake Holdings has an adequate rating profile based on its solid capital adequacy and a strong and disciplined senior management team.

That, they said, is partially offset by a business position that has weakened in recent years and poor recent earnings performance.

The rating agency said Sphere Drake is likely to benefit from access to the Fairfax resources, and when combined with the other reinsurance units, makes for a significant presence in key markets.

Sphere Drake's capital adequacy is strong, about 181 percent of S&P's risk adjusted capital requirement at the end of 1996 (136 percent in 1995). It is expected to exceed 200 percent at the end of this year.

S&P said: "This dramatic improvement has been brought about by the much lower levels of premiums following a strategic review carried out during 1996 and a disciplined response to soft market conditions.

"Following the completion of the acquisition by Fairfax, the Sphere Drake Holdings group's debt of $100 million will be repaid with new equity, further improving its stand-alone capitalisation profile.'' Sphere Drake began at the end of 1995 addressing years of under-reserving, by strengthening reserves by $88.5 million, leading to a post-tax loss of $17.9 million.

And now it has greater "top-down'' disciplines covering pricing, underwriting guidelines and reinsurance placement.

The group placed a whole account stop-loss reinsurance treaty covering the underwriting years 1996-1998, and announced a re-focusing to concentrate increasingly on reinsurance lines of business, and withdraw from all direct marine insurance lines.