Fairfax Financial buying Allied World for $4.9bn

Prem Watsa’s Canadian property & casualty insurance and reinsurance group Fairfax Financial Holdings Limited is set to acquire Allied World Assurance Company Holdings, AG for $4.9 billion after the pair entered into a merger agreement.

It’s the latest example of consolidation involving specialty or commercial insurance and reinsurance assets, as the industry continues to face ongoing pressure, due to lower rates, greater volumes of capital in the industry, ramping up competition and sluggish opportunity growth.

The two companies make an interesting pairing, with Watsa’s Fairfax Financial often likened to a mini-Berkshire Hathaway and Allied World having a diverse range of finance and re/insurance interests, including a long-standing relationship with and stake in reinsurance linked investment and insurance linked securities (ILS) asset manager Aeolus Capital Management Ltd.

The merger is being effected with a cash and share offer with dividend, which sees Allied World shares valued at $54.00, to be reached with $10.00 in cash and $44.00 in Fairfax shares. That’s an 18% premium to the latest close of Allied World’s shares.

Fairfax also has an option to up the offer significantly, taking the cash contribution to $40 per Allied World share if necessary, which could be sufficient to attempt to head off a counter-bid from another party.

Combining the two firms will create a global property and casualty insurance, reinsurance and investments group, and deepens the group’s access into key U.S. markets. The deal will also bring $9.4 billion of assets to Fairfax, which will add significant scale to Prem Watsa’s Warren Buffett style investment strategy.

Fairfax already owns Odyssey Re, Crum & Forster and Brit, among other re/insurance interests, so adding the additional specialty P&C re/insurance operations of Allied World brings diversity, new global reach and scale to the organisation.

The combined underwriting operations will be 75% U.S. focused, with 57% based on casualty lines, 30% property and 13% specialty risks.

“We are excited to have Allied World join the Fairfax group,” explained Prem Watsa, Chairman and CEO of Fairfax. “Allied World is a high-quality company with an excellent long-term track record and an outstanding management team led by Scott Carmilani. Allied World will operate within the Fairfax group on a decentralized basis after closing, and we are looking forward to supporting Scott and the entire team at Allied World in growing their business over the long- term.”

“This is a tremendous opportunity for Allied World,” commented Scott Carmilani, President, CEO and Chairman of Allied World. “Our shareholders are being rewarded for the strong performance of Allied World over the last 10 years since going public. We are strategically aligning ourselves with Fairfax, one of the premier companies in the insurance industry which has a great track record of supporting their operating companies and creating value for shareholders. We are excited to be joining the Fairfax organization – we share their passion for underwriting excellence and their entrepreneurial approach to growing the business with a long-term orientation.

“Our shareholders will benefit from Fairfax’s tremendous investment capabilities as demonstrated by its superior long-term investment track record. The success of Fairfax’s decentralized approach in empowering their management teams to drive profitable underwriting and combining Fairfax’s investment philosophy will position us to create long-term value for shareholders. Fairfax provides a great home for Allied World to continue to build a strong business for our customers, business partners and employees.”

Based on underwriting the combined group would have somewhere north of $12.5 billion of gross written premiums, which certainly takes both to a new level of scale within the industry, in terms of global reach, diversification and influence at renewal time.

In terms of the asset portfolio, the combined entity will command $39 billion of investment assets which gives Watsa a significant amount of firepower should other merger or acquisition deals be on the cards.

The Aeolus arrangement is small in the context of this deal, but this could make for an interesting opportunity for the relationship to be deepened and diversified in the future.

Insurance and reinsurance M&A looks set to continue and with no sign of the pressure on profitability easing there are bound to be further deals announced in the coming months. The search for synergies and scale is set to continue.

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