Fairfax Financial to Buy Remaining Shares of Zenith National Insurance in $1.4 Billion Deal

Toronto-based Fairfax Financial Holdings Ltd. and Woodland Hills, Calif.-based Zenith National Insurance Corp. have entered into a merger agreement in which Fairfax will acquire all of the outstanding shares of Zenith common stock that it does not currently own, in a deal valued at approximately $1.4 billion.

Zenith stockholders will receive $38 per share in cash, representing a premium of 31.4 percent to the closing price of Zenith common stock on Feb. 17, 2010, the last trading day prior to its merger announcement, and a 34 percent premium to the 30-day average closing price for the period ending on Feb. 17, 2010, the companies said. The merger consideration of $38 per share also represents a premium of 34.5 percent to Zenith’s book value as of Dec. 31, 2009.

The transaction is expected to close in the second quarter of 2010 following regulatory approval. Following the merger, Zenith will continue to operate from its Woodland Hills headquarters and will become a wholly owned subsidiary of Fairfax.

Prem Watsa, Fairfax chairman and CEO, said, “Zenith will continue to operate its business as it always has been run under (Chairman and CEO) Stanley Zax’s excellent leadership, with investment management centralized at Fairfax. All other Fairfax group companies will continue to operate independently on a decentralized basis.”

Fairfax will become the seventh-largest workers’ compensation insurer in the state, based on analysis of SNL’s 2008 statutory market share data. The combined entity’s 5.24 percent market share in the state puts it in front of The Hartford Financial Services Group Inc., which holds 3.51 percent of the state’s workers’ comp market share, and behind Berkshire Hathaway Inc.’s 5.74 percent market share in California. SNL’s rankings include the State Compensation Insurance Fund (SCIF), the largest provider of workers’ comp insurance in California with 22.58 percent of the market. Fairfax ranked 24th in the state in 2008.

Zenith, which is licensed to write policies in more than 40 states and generated a total of $605.6 million of workers’ comp direct premiums written in 2008, has its highest concentration of business in California and Florida. It wrote more than half of its business in California in 2008, with $325.5 million in direct premiums written. In Florida, Zenith wrote $151.8 million in workers’ comp direct premiums.

Fairfax Financial, through its subsidiaries, wrote a total of $75 million in California workers’ comp direct premiums in 2008.

Neither Standard & Poor’s Ratings Services nor A.M. Best are expecting to change their ratings, based on the merger announcement. S&P affirmed its ‘BBB-‘ counterparty credit rating on Zenith and its ‘A-‘ counterparty credit and financial strength ratings on Zenith Insurance Co. and ZNAT Insurance Co., which are the members of the Zenith Insurance Group Intercompany Pool.

Best said the financial strength rating of ‘A’ (Superior) and issuer credit ratings (ICR) of “a” of the operating companies of Zenith National Insurance Corp. and the ICR of “bbb” of Zenith “remain unchanged.”

Both rating agencies also said the outlook on all of Zenith’s ratings also remains stable.

“Zenith has shown very strong underwriting discipline over the past 30 years, and its strong earnings and strong competitive position in the California workers’ compensation market support this belief,” S&P said. “In addition to the company’s conservative and disciplined pricing and underwriting, strong capital adequacy, low financial leverage at the holding company, and strong liquidity play a significant role in the stability of the company’s financial strength. Offsetting these strengths are Zenith’s concentration in the volatile workers’ compensation segment and high geographic concentration in California, which have limited the company’s earnings and revenue growth over the past two years.”

In a separate announcement S&P affirmed its ‘BBB-‘ counterparty credit rating on Fairfax Financial (FFH), as well as its counterparty credit and financial strength ratings on FFH’s ongoing operating insurance subsidiaries. The outlook for the ratings also remains stable.

Best commented that its ratings on Fairfax subsidiaries would remain “unchanged,” as will the stable outlook on the ratings. The rating agency “expects risk-adjusted capital of the operating insurance subsidiaries of Fairfax to remain supportive of their current ratings following the acquisition. No change is expected to the strategic or day-to-day control of Zenith’s operations, with the exception of investment management, which will be centralized at Fairfax.” Best said, “Fairfax has integrated previous acquisitions into its structure in a similar manner.”

Best also listed FFH’s major operating subsidiaries, adding that, “following the completion of all transaction related items, Fairfax’s unadjusted debt-to-total capital ratio will be 29 percent, well within A.M. Best’s guidelines for its current ratings,” as are the individual ratings of the of the subsidiaries.”

In addition S&P said that the $463 million in net premiums earned by Zenith in 2009 along with its total assets of approximately $2.4 billion as of Dec. 31, 2009, are seen as “adding further product diversification, greater underwriting and claims expertise, and increased asset management opportunities to FFH.”

Topics California Mergers & Acquisitions Workers' Compensation