Prem Watsa’s Fairfax Financial, which owns Brit Insurance and is in the process of acquiring re/insurer Allied World, is entering the New Zealand insurance market with the acquisition of Tower Insurance.
Announced today, Fairfax Financial has made an all cash offer at $1.17 per share, so valuing the insurer at $197 million, which is a 48% premium to the Tower share price of yesterday.
That’s quite a premium for a company which has faced issues with claims and is in the process of splitting itself to run-off certain old business.
However the planned creation of RunOff Co, a separate entity which would essentially be funded with reinsurance type capital to allow Tower to separate itself from old liabilities is expected to release value and since that announcement Fairfax approached the company’s Board about an acquisition.
The deal has been approved by the board and Tower’s two major shareholders, Salt Funds Management and ACC (who collectively hold 18.1% of Tower shares) have pledged to support the deal as well. The M&A will be put to a vote but at the premium valuation this is unlikely to face much opposition, we’d imagine.
Tower Chairman Michael Stiassny commented; “Given the substantial premium to Tower’s share price, the certainty provided by the Fairfax Proposal and the support it has received from Salt Funds Management and ACC, the Board determined to unanimously recommend the Fairfax Proposal to all shareholders, in the absence of a superior proposal. Tower’s separation strategy will be pursued in the event that the Fairfax Proposal is not successful.”
“Tower is one of the largest insurers in New Zealand and the Pacific Islands, with a long-standing history, good brand recognition and a strong market position,” explained Prem Watsa, Chairman and CEO of Fairfax. “The acquisition of Tower will provide us with an immediate significant presence, with a strong management team, which will continue to be led by Richard Harding, in a market where Fairfax currently has limited exposure.”
“The key factors in Fairfax’s ability to present an attractive proposal to Tower were the speed at which the transaction could be conducted, the reputation of Fairfax for closing transactions and treating stakeholders fairly,” said Prem Watsa.
Fairfax can command significant capital to back Tower for future growth and with the RunOff Co separating the insurer becomes a more attractive business with future growth potential.
Insurance and reinsurance firms are increasingly seeking out diversifying M&A opportunities and New Zealand is a market where this can be achieved. Tower does have exposure to the New Zealand earthquakes, where losses continue to develop, but Fairfax can likely make that more efficient through the use of its own reinsurance capital anyway.