Financial Holdings Ltd. will acquire Sphere Drake Holdings Ltd.

Sphere Drake, through its companies in London and Bermuda, provides traditional and alternative reinsurance and specialty insurance protection, mainly to US-based clients.

Fairfax has committed up to $420 million to the deal as part of the company's bid to expand its insurance and reinsurance subsidiaries into one of the top groups in the industry. Canadian-based Fairfax is a financial services holding company listed on The Toronto Stock Exchange.

Sphere Drake will eventually become part of the Odyssey Re Group, along with Fairfax's two other recent coinsurance acquisitions -- Odyssey Reinsurance Corp. and Compagnie Transcontinentale de Reassurance (CTR). Fairfax's combined reinsurance business would rank it third among the largest broker companies in the US with net premiums of $750 million and surplus of about $900 million.

"This transaction is another significant step in their efforts to be a leading insurance and reinsurance group,'' Sphere Drake's President and Chief Executive Officer Michael Watson said in an interview with The Royal Gazette.

"It really catapults Odyssey Re into the world's top 25 reinsurance companies with a combined net worth of approximately $900 million ... We think it allows us to develop our business and also to contribute to the broader development of the group. We will gain access to new markets and new products.'' Sphere Drake has 250 staff based in the UK, and 30 staff in Bermuda at its subsidiary Sphere Drake Underwriting Management (Bermuda) Ltd. The Bermuda subsidiary specialises in providing reinsurance programmes for captive companies, and for risk retention groups such as mutuals. Odyssey is based in New York and targets the US market. CTR is based in Paris and targets the Continental Europe and Asia markets.

"The acquisition of Sphere Drake rounds out the geographic spread,'' Mr.

Watson said. "Fairfax now has a foothold in two of the most important insurance and reinsurance centres in the world -- Bermuda and London.'' Mr. Watson said the acquisition will not affect staffing at Sphere Drake. Over the past eight months the company has been restructuring itself, selling off unprofitable or poorly performing lines of businesses as the company attempted to halt declines in profits. The company also wanted to improve its ratings.

In April last year Standard & Poor's lowered Sphere Drake's rating to triple B from triple B plus.

During the restructuring Sphere Drake withdrew from the financial institutions and professional indemnity business and reorganised its US excess and surplus lines businesses. It then sold off its Liverpool, England-based yacht and cargo underwriting agency, Groves, John and Westrup. It also transferred its protection and indemnity business to Australian insurer HIH Winterthur Insurance Group.

"The acquisition really represents a combination of efforts to redefine and rebuild Sphere Drake,'' Mr. Watson said. "It enhances the security to our customers.'' After the acquisition announcement yesterday Standard & Poor's said the company's triple B claims-paying ability and counterparty credit ratings would be affected "with positive implications'' contingent upon Fairfax's success in raising equity to finance the transaction.

"Historically, Sphere Drake's insurance operations have been hampered by concerns about the quality of its balance sheet and limited financial flexibility,'' a news release from Standard & Poor's CreditWire stated.

"... Standard & Poor's believes the acquisition by Fairfax helps address these concerns, which is the primary reason for the positive implications because it should stop the erosion of Sphere Drake's business franchise and provide a foundation to regain business momentum.'' According to a press release Fairfax will pay Sphere Drake shareholders $7.50 a share in cash or in shares of Fairfax for a total of $140 million. It will also offer deferred contingent rights of $9.86 per share, payable in 10 years subject to adjustments relating to reserve adequacy, reinsurance recoverables and indemnities. Fairfax will assume Sphere Drake's $100 million debt.

Mr. Watson said the contingency payment is dependent on the outcome of Fairfax's long tail business, the payouts of which are not currently known at the time of the acquisition.

"It's uncertain how that business will develop,'' he said. "Rather than force the issue it lets us wait until the end of 10 years when we will have a settling up at that time.'' In 1996 Sphere Drake had net premiums of $288.6 million and assets of $1.97 billion.