Canadian property & casualty insurer Fairfax Financial is to buy specialty Lloyd’s focused insurance and reinsurance firm Brit plc for $1.88 billion, showing that it’s not just Bermuda property catastrophe specialists seeking scale and diversification.
As part of the reshaping of the currently challenging insurance and reinsurance market, a number of things jump out about this deal.
First, the acquisition of Brit just a year after the firm IPO’d shows the attraction of owning a Lloyd’s specialists insurance and reinsurance business for Prem Watsa’s Fairfax, with the deal set to provide a larger launchpad into the Lloyd’s market and provide additional diversification for an insurer that is likely beginning to feel the pressure of decelerating rates in some areas of its business.
Second, Brit plc’s private equity backers Apollo Global and CVC Capital Partners, who between them own around 73% of Brit’s shares, have taken an opportunity to capitalise on having backed Brit through its IPO at a time when any valuation for the firm may struggle to increase while it remained on its own, as clearly Brit will be feeling market pressures too.
Third, it’s not just the most pressured players in re/insurance that are currently seeking to enter into M&A proceedings. Brit, while exposed to market pressures, alternative reinsurance capital and insurance-linked securities (ILS) through some of its business, is already more diverse than most. Fairfax meanwhile is also less exposed as a primary P&C player with a number of diversifying global insurance businesses under its control already. It’s not just Bermuda property catastrophe specialists that are seeking solace in a deal that provides additional diversification to their underwriting books and that adds new global scale.
Fourth, a well-capitalised insurer like Fairfax needs new platforms to put its capital to work, and specialty business acquired through a large Lloyd’s platform is likely to add significant value to the firm, by bringing a completely new type of underwriting business into the firm. This deal really does underscore the attractiveness of the Lloyd’s re/insurance market to big regional players like Fairfax.
Fifth, this is not, perhaps, so much about adding efficiency as other re/insurance M&A deals. Matching a primary P&C specialist with a Lloyd’s and global specialty insurance and reinsurance business does not create a great deal of overlap between the two, meaning the merger should create a stronger firm with much less need for layoffs and downsizing than in some of the other re/insurance mergers to be announced. Of course that also means that efficiencies may not be realised in the same way as other M&A’s, which on a cost-of-capital basis could see the resulting larger firm no better off than the entities staying single.
In the announcement Fairfax said that it had reached an agreement to acquire all of the outstanding shares of Brit, with Brit shareholders entitled to receive 305 pence per share, inclusive of any final dividend for the year ended December 31, 2014.
Fairfax said that from the key shareholders Apollo and CVC it had “received hard irrevocable undertakings to accept the Offer at the Brit Offer Price, in respect of, in the aggregate, a total of approximately 294 million Brit Shares representing approximately 73% of Brit’s issued share capital.”
The offers represents a premium of 11.2% to the Brit share closing price of 274.2 pence, making the aggregate payable by Fairfax approximately US$1.88 billion (around £1.22 billlion).
For private equity specialists Apollo and CVC there has to be an element of profit taking in this deal and perhaps profit taking now before market conditions get anymore difficult for Brit.
The pair paid roughly $1.3 billion for Brit in 2011 and then sold approximately a quarter of the firm for $365m in the IPO almost a year ago. Now, with Fairfax buying Brit for $1.88 billion the firm’s can very quickly realise a good profit from their investments and step out of what is perhaps a firm that would increasingly feel the competitive pressures on its own over the coming years.
“We welcome Mark Cloutier and his market leading specialty insurance and reinsurance team at Brit to our expanding global specialty platform,” said Prem Watsa, Chairman and CEO of Fairfax.
“Brit has an outstanding track record over the last ten years and will continue to operate on a decentralized basis once owned by Fairfax. With the acquisition of Brit, Fairfax will have a significant top five position at Lloyds of London. We look forward to working with Mark and the entire Brit team to further develop their business over the longer-term,” Watsa continued.
Explaining the rationale for the fit between the two firms, the announcement said;
“Brit’s position as a market-leading global specialty insurer and reinsurer, its major presence in Lloyd’s and its disciplined approach to underwriting make it a natural candidate to join Fairfax’s expanding worldwide specialty operations. Brit’s growing US and international reach are highly complementary to Fairfax’s existing worldwide operations and the acquisition further diversifies Fairfax’s group risk portfolio. In addition, Brit will be able to leverage Fairfax’s expertise in the US and international insurance and reinsurance markets, thus enhancing Brit’s global product offering and providing it with expanded underwriting opportunities and support.”
Dr Richard Ward, Chairman of Brit, commented on the offer and agreement; “Brit’s Board is pleased to recommend the combination with Fairfax, which I believe will bring us significantly closer to realising our strategy of building the leading global speciality (re)insurer. Our two businesses are highly complementary and the proposed deal provides both groups with an exciting opportunity to deliver our respective growth ambitions. Our simple and capital-efficient Lloyd’s focused platform make us an attractive partner for Fairfax and our shared values in underwriting discipline, speciality lines focus, operational rigour and meticulous claims management make this transaction a compelling proposition for all stakeholders. The Offer represents a strong result for all our shareholders and produces attractive financial returns following our successful IPO in April 2014. I am proud of the success we have achieved over the past year as a public company.”
Mark Cloutier, Brit CEO, underlined the lack of overlap between the two firms; “Our business is complementary to their group’s current offering and the deal represents an exciting opportunity to continue our story on an even stronger footing. Our position as a market-leading global specialty insurer and re insurer and our major presence in Lloyd’s make us an attractive addition to Fairfax’s global footprint. There is very little crossover in our respective international operations, thus allowing Fairfax to further diversify its portfolio while enabling Brit to leverage Fairfax’s existing relationships and expertise in the international insurance and reinsurance markets. The combination will enable us to enhance our global product offering and provide us with expanded underwriting opportunities and distribution channels. We believe this is a great fit for both companies, our employees, customers and trading partners.”
The deal creates a very interesting company at Fairfax, which as well as its P&C insurance, has some life business, some reinsurance particularly through Odyssey Re, Thai Re and others, Middle Eastern access through Gulf Insurance, Indian market access through ICICI Lombard. Fairfax already wholly owns Advent, another Lloyd’s specialty insurer and reinsurer, so Brit is increasing the scale there as well as adding greater access to Bermuda.
The end result is a very broadly diversified insurance and reinsurance specialist with global market access. In fact, Fairfax has such a broad platform that after the acquisition of Brit it will be a more diverse player than many of the other firms that have entered into M&A deals, which perhaps puts it in a position to become even more acquisitive in future, as opportunities allow or present themselves in the challenging market.
Finally, buying Brit also gives Fairfax a Bermuda practice that specialises in ILW’s retrocession and catastrophe reinsurance, as well as a third-party capital reinsurance sidecar in the Versutus vehicle that was recently launched and other capital market ambitions.
With a diverse platform by line of business and by geography, becoming even more diverse with the addition of Brit, Fairfax would stand very well positioned to attract third-party capital should it choose. It likely doesn’t need to, but if it wanted to lower its cost-of-capital the option would be there.