Fairfax Holdings: Lone Bear Analyst Drops Coverage Under Litigation Concerns

Morgan Keegan analyst John Gwynn, a lone bearish voice on Fairfax Financial Holdings (FFH) dropped coverage today. No big deal, right? Hardly, it's the reason he dropped that should worry investors. "The discontinuation of Fairfax coverage is not a reflection of any change in our relatively negative perspective of the company's fundamental business prospects," he wrote in a report to clients. "Rather, it is the result of a litigation strategy designed by Fairfax to silence negative research coverage."

Gwynn, perhaps best known for his ability to figure out what was at the end of the ball of string at Conseco before its implosion in an accounting fraud several years ago, was sued by Fairfax along with hedge funds and others in an alleged stock-manipulation scheme.

Gwynn did not go quietly into the night, however. He said the much ballyhooed recent sale of shares by Fairfax in its Odyssey Re unit, providing cash to Fairfax, isn't necessarily all it's cracked up to be. "Desptie the immediate liquidity positives associated with the sale....we view the fundamental underwriting prospects for the remaining comments of Fairfax's property and casualty business as distinctly bleak, particuarly given the increased prominence of run-off loss reserves in the residual entity. While the inabiity of the company to post sustained underwriting profitability is the core of our negative assessment of the stock's performance prospects, elevated financial and reinsurance leverage remain additional factors, in our concern."