TORONTO--Fairfax Financial Holdings Ltd. reported the largest annual profit in its history for 2002 while rebutting an analyst's report that its U.S. insurance units are vastly underreserved.

Aided by a substantial increase in realized investment gains, Fairfax finished the year with net income of $415.7 million Canadian ($273.3 million) compared with a net loss of $346.0 million Canadian ($227.5 million) in 2001. The 2002 gain came despite fourth-quarter 2002 reserve strengthening of $314.3 million Canadian ($206.7 million) and $99.9 million Canadian ($65.7 million) in restructuring charges related to program business of TIG Insurance Co., which Fairfax discontinued in December.

Fairfax's gross written premium volume jumped 18.9% in 2002 to $8.13 billion Canadian ($5.35 billion) on the strength of improved market conditions, while net written premiums vaulted 25.6% to $6.34 billion Canadian ($4.17 billion).

The volume figures include premiums from Fairfax's runoff operations, including TIG program business.

All of Fairfax's operations reported big improvements in their combined ratios, with the Canadian insurance and Odyssey Re Holdings Corp. units coming in under 100%. Combined ratios for U.S. operations Crum & Forster Corp. and TIG improved to 103.3% and 106.0%, respectively, from the more than 131.0% that each of the units recorded in 2001.

Fairfax also asserted in a statement that a stock analyst's recent reports citing alleged loss reserve deficiencies are "totally wrong" and have "no validity whatsoever."

Memphis, Tenn.-based Morgan Keegan & Co. Inc. concluded in a January report that Fairfax is underreserved by $4.96 billion--mostly for losses at TIG--and that its shareholders equity amounted to a negative $4.43 billion as of Sept. 30, 2002. The investment firm acknowledged limitations in its reserve analysis, though, and later issued a revised report that reduced the alleged reserve shortfall to $2.93 billion while maintaining a negative outlook on Fairfax's stock.

Fairfax shares plunged after the mid-January report but later regained some ground. The shares jumped in early trading Tuesday following the company's 2002 earnings announcement, closing up more than 17% to $73.36.

The Morgan Keegan report is wrong for several reasons, Fairfax asserted, including that it was based on 10-year data for subsidiaries that Fairfax has owned for only between three and six years; that the units' mix of business has changed dramatically since their acquisition by Fairfax; and that the units have large amounts of stop-loss reinsurance that the report does not take into account.

"The result is that the research report's reserve analysis has no validity and provides no basis for concluding that there is any deficiency in the reserves of Fairfax's U.S. insurance companies," the company stated.