According to Zachary R. Mider and Sean B. Pasternak of Bloomberg, Fairfax Financial Holding’s has agreed to purchase Zenith National Insurance Corp., betting on a revival in the workers’ compensation insurance market:
“Fairfax Financial Holdings Ltd., the Canadian insurer run by Prem Watsa, agreed to buy Zenith National Insurance Corp. for about $1.3 billion in cash, adding sales in California. The deal is the biggest in Fairfax’s two decades under Watsa.
Fairfax will pay $38 a share, the Toronto-based company said today in a statement. That’s 31 percent more than Woodland Hills, California-based Zenith’s $28.91 closing price on the New York Stock Exchange yesterday. The deal is expected to be completed in the second quarter.
Watsa, 59, is betting on a rebound in a workers’ compensation market pressured by rising medical costs and falling payrolls. Like Warren Buffett at Berkshire Hathaway Inc. and Loews Corp.’s Tisch family, the native of Hyderabad, India, built his company by investing the assets of insurance operations, often in out-of-favor securities.
“Workers’ compensation is probably the softest of all lines right now,” Bob Hartwig, president of the Insurance Information Institute, said at a conference in November, using industry parlance for a market where rates are falling. “Rate accounts for the vast majority of premium reduction we have seen in workers’ compensation.”
In 1999, Fairfax agreed to buy a 38.4 percent stake in Zenith for $28 a share. It divested the holdings for a profit between 2004 and 2006. In January, Fairfax disclosed it had built an 8.4 percent stake. A deal at $38 a share values the company at more than $1.4 billion, including Fairfax’s preexisting stake.
Fairfax, which is scheduled to report fourth-quarter earnings late today, has taken stakes in insurers including Stamford, Connecticut-based Odyssey Re Holdings Corp. and Polskie Towarzystwo Reasekuracji SA of Poland. The Zenith deal is the largest since Watsa took over in 1985, according to Bloomberg data.
Watsa, referred to as the “Buffett of the North” by publications such as Forbes, will take over Zenith’s assets, valued at $2.4 billion at Dec. 31, and add them to the $29.8 billion Fairfax already manages.
“This is a great underwriting company, and marrying it with our investment capability will be great for us,” Paul Rivett, Fairfax’s chief legal officer, said today in a telephone interview.
Zenith surged $8.96, or 31 percent, to $37.87 at 4:15 p.m. in New York Stock Exchange composite trading. The company gained about 14 percent in the past 12 months before today. Fairfax rose C$7.29, or 2 percent, to C$374.99 ($360.08) in trading on the Toronto Stock Exchange. Last month, Farifax raised its annual dividend for the fourth year in a row, boosting the payout by 25 percent to $10 a share.
Zenith, run by Chairman and CEO Stanley Zax since 1978, said in its 2009 annual report that it has “a long-term record of outperforming the industry.” Zenith’s workers’ compensation loss ratio, a measure of how much of each dollar of premium is paid in claims, was lower than the industry average every year from 2002 to 2008, according to Zenith’s annual report.
“There will be no changes in Zenith’s strategic or operating philosophy,” Watsa said in the statement. The board and management of Zenith, who collectively own 3.4 percent of the insurer’s shares, agreed to vote their stock in favor of the merger, the statement said.
Zax said in a note to employees today that he has known Watsa for 20 years, and that the current management structure “will remain in place after the closing and continue to run Zenith.”
Zenith shareholders of record on April 30 are still eligible for the 50-cent a share dividend the company announced last week, the company said in a question-and-answer sheet it sent to employees today.
Medical costs industrywide climbed at least 5 percent every year since 1994, according to data from the National Council on Compensation Insurance Inc. The U.S. unemployment rate doubled to 10 percent in the 24 months ended December 2009 as the country lost more than 8 million jobs in two years, reducing demand for workers’ compensation coverage.
Douglas Dirks, the chief executive officer of Reno, Nevada- based Employers Holdings Inc., said last year that the recession may reduce the frequency of claims because employers tend to keep their most experienced workers, who are least likely to be injured on the job. Employers rose 7.6 percent to $14.02 in New York, the most in eight months.
Bank of America Corp. and Dewey & LeBoeuf LLP are advising Zenith on the transaction. Fairfax is using Shearman & Sterling LLP and Torys LLP.”
~Sourced by I.S.