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LONDON-Canadian insurance holding company Fairfax Financial Holdings Ltd. is making strides in the world reinsurance market with its latest acquisition, Sphere Drake Holdings Ltd.

Toronto-based Fairfax's announcement last week of the Sphere Drake deal is the latest in a series to build a global reinsurance empire. Bermuda-based Sphere Drake is the third reinsurer Fairfax has acquired since May 1996.

Analysts think Fairfax's purchase of Sphere Drake for about $420 million, which is expected to be completed in the fall, is a wise move for both companies. The deal not only will quickly make Fairfax one of the world's major reinsurance groups but also will strengthen Sphere Drake's financial security.

Sphere Drake will be merged into Odyssey Re Group, a reinsurance unit that Fairfax formed after the acquisition last May of Skandia America Reinsurance Corp. of New York, which changed its name to Odyssey Reinsurance Corp. in September. Also last September, Fairfax purchased Paris-based Cie. Trans-continentale de Reassurance to be Odyssey's international operation (BI, Sept. 23, 1996).

The purchase of Sphere Drake will enhance Odyssey Re in several areas, said Andrew A. Barnard, president and chief operating officer of Odyssey in New York.

"The benefits for the Odyssey Re group will be the addition of London and Bermuda underwriting outlets; the diversification of product lines; access to a network of relationships that will enhance group activities; and the addition of $300 million in capital that will bring the total reinsurance capital of the Odyssey Re group to $900 million," he said.

With the addition of Sphere Drake's $288.6 million in net premiums, Odyssey Re Group should rank third among the broker-market reinsurance companies in the United States and rank among the 20 largest reinsurers worldwide, with net premiums of more than $750 million and surplus of approximately $900 million.

Fairfax is a financial services holding company whose subsidiaries are engaged in property/casualty and life insurance, reinsurance, investment management and insurance claims management. In 1996, Fairfax's group net premiums totaled more than $700 million, and revenues were about $1.1 billion.

The price Fairfax will pay for Sphere Drake includes $220 million, or $7.50 a share, in cash or Fairfax stock, which has yet to be decided. On Friday, Sphere Drake stock closed at $8.13 a share.

In addition to buying out shareholders, Fairfax will assume about $100 million of Sphere Drake's debt and has committed to making deferred payments of $9.86 per share payable in 10 years to all shareholders, subject to a reduction in Sphere Drake's claims reserves and provisions for unrecoverable insurance.

Sphere Drake underwrites reinsurance for insurers and alternative risk financing vehicles as well as specialty insurance, with an emphasis on U.S.-based clients. The company's results have suffered as a result of increased competition in the global reinsurance market and falling premium levels. Sphere Drake's pretax profit in the first quarter this year fell to $2.6 million from $9.6 million a year earlier.

Michael Watson, Sphere Drake's president and chief executive, said last week that the takeover by Fairfax is "entirely consistent" with an ongoing strategic restructuring of Sphere Drake's operations in Bermuda and London.

This includes a focus on reinsurance, specialty insurance lines and excess and international property, and a withdrawal from marine insurance.

While "economies of scale would be looked for" from the merger, Sphere Drake does not plan any large staff reductions, he added. The company is expected to stick to its target of about 250 staff by the end of the year, compared with 275 employees currently and 400 at the start of 1996. Mr. Watson will become president of Bermuda-based operations.

Mr. Watson also said the acquisition "enhances our franchise in our current markets and offers access to additional markets and products," especially in the United States, continental Europe and Asia.

He also acknowledged that it would "materially improve" Sphere Drake's financial security, "which is what our customers require."

Rating agency Standard & Poor's Corp. in New York agreed, and just after the takeover was announced put its BBB claims-paying ability and counterparty credit ratings of Sphere Drake Insurance P.L.C. and Sphere Drake Insurance (Bermuda) Ltd. under review for a possible upgrade.

S&P said it thinks the acquisition by Fairfax will help address concerns about the quality of Sphere Drake's balance sheet and limited financial flexibility by stopping the erosion of Sphere Drake's business and providing a foundation to regain business momentum.

S&P also affirmed its BBB+ senior debt rating of Fairfax, saying the acquisition "is consistent with Fairfax's strategy of building a global reinsurance business."

The rating agency pointed out that apart from the enhanced position the acquisition of Sphere Drake would give Fairfax in the ranks of global reinsurers, it would create a reinsurance group with offices in major markets: New York, Paris, Singapore, London and Bermuda.

New York-based Moody's Investors Service also confirmed its Baa3 rating on Fairfax's senior debt, saying the takeover "should enhance Fairfax Financial's Odyssey Re operations."

Moody's noted that Fairfax's acquisitions since 1992 have increased its group premium volume nearly tenfold, adding that it does have some concerns about the risks associated with such rapid growth through leveraged acquisitions.

However, S&P said it expects financial management at Fairfax to remain strong, as the company intends to keep sufficient cash resources at the parent level to meet holding company expenses.

Although the takeover of Sphere Drake still is subject to regulatory approval, Fairfax already has received support from Sphere Drake's management and from investors Centre Capital Investments, Electra Investment Trust and Dai-Tokyo International, which hold a combined total of 40% of Sphere Drake's stock.