Fairfax Financial’s Ratings Unaffected by Move to Buy Gulf Insurance Group: DBRS

Toronto-based Fairfax Financial Holdings Ltd.’s ratings are unaffected following last week’s announcement it has entered into a definitive agreement to acquire an additional 46.32% of Gulf Insurance Group (GIG) from Kuwait Projects Co. (KIPCO), according to DBRS Morningstar, which has rated Fairfax “BBB (high)” with a positive trend.

This transaction will increase Fairfax’s ownership stake to 90.01% from 43.69%, giving the company full control of GIG.

Under the terms of the agreement, Fairfax will pay approximately US$860 million for KIPCO’s shares in GIG, which will be paid in Kuwaiti Dinar to KIPCO at the close. The purchase price is subject to a reduction by the amount of any dividends received by the KIPCO sellers after Jan. 1, 2023.

Immediately following the settlement of the transaction, KIPCO will return to Fairfax the full purchase price, less an amount of Kuwaiti Dinar equal to $200 million, together with a cash payment equal to all dividends received by the KIPCO sellers from GIG after Jan. 1, 2023. Fairfax will then deliver a payment deed requiring Fairfax to make four equal annual payments of $165 million to KIPCO, beginning on the first anniversary of closing of the transaction to KIPCO.

“We consider the terms of the agreement to be favourable for Fairfax. The acquisition cost will be easily absorbed through Fairfax’s current liquidity with a limited impact on its capital,” the DBRS Morningstar ratings agency continued.

The transaction is not expected to have a material impact on leverage; however, GIG does have some debt locally that will be consolidated on Fairfax’s balance sheet once the deal is concluded.

As Fairfax has owned a sizable portion of GIG since 2010 and has had a successful partnership with KIPCO, “we anticipate the positive results reported so far by GIG should continue,” said DBRS. “We believe that the operational and integration risks associated with having a substantial presence within a foreign regulatory environment are manageable for Toronto-based Fairfax given its past record of similar international acquisitions and prior presence in the region.”

In a separate ratings announcement for Gulf Insurance Group, AM Best said the company’s Financial Strength Rating of A (Excellent) and the Long-Term Issuer Credit Rating of “a” (Excellent) also remain unchanged with a stable outlook. The transaction is not anticipated to result in a change in GIG’s business strategy or credit rating, said AM Best.

“We expect that Fairfax will manage the acquired company as a stand-alone entity, providing it with a large degree of independence, in line with how Fairfax manages its other major insurance subsidiaries,” DBRS said in a statement.

DBRS noted that the acquisition will be positive for Fairfax, despite exposures to additional operational and geopolitical risks.

“The acquisition will give Fairfax a leading position in the Middle East and North Africa Region (MENA),” DBRS added.

Established in 1962, GIG is a publicly traded company listed on the Kuwait stock exchange, DBRS said, noting that GIG is a market leader in Kuwait and is currently one of largest and most diversified insurance groups in the MENA region, based on premiums written.

GIG offers both property/casualty and life insurance products. However, there is a concentration in medical insurance, which accounted for 49.1% of premiums in 2022, DBRS continued. “Further diversification of premium generated by lines of business would reduce GIG’s reliance on the medical insurance business and mitigate concentration risk.”

“We are excited to increase our ownership interest in GIG,” said Prem Watsa, chairman and CEO of Fairfax. “GIG is among the largest and most diversified insurance groups in the Middle East and North Africa region, with operations in 13 different countries and a market-leading presence in each of Kuwait, Jordan, Bahrain and Egypt.”

Since Fairfax’s first investment in GIG in 2010, it “has provided stellar results over the long term and is run by an experienced and talented management team led by Khaled Saoud Al Hasan. We are thankful to our partners at KIPCO for giving us this opportunity to expand our insurance operations in the rapidly growing Middle East and North Africa market,” Watsa added.

“With this transaction Fairfax is showing its long-term commitment to the GCC markets and to the GIG Group that has recently posted a net profit of $124.7 million for the financial year 2022,” commented Khaled Saoud al Hasan, group CEO of GIG. “We will continue to work with our decentralized operating model that allows all subsidiaries to operate independently, while benefitting from Fairfax’s knowledge and collective experience in over 40 markets around the world. In the coming months, we will work closely with each of the regulators of the GIG Group entities to make this transaction seamless and beneficial for all parties.”

Source: DBRS Morningstar, Fairfax Financial Holdings and AM Best

Topics Mergers & Acquisitions