Shareholders attend the Fairfax Financial Holdings annual general meeting in Toronto on Wednesday, April 9, 2014.Nathan Denette/The Canadian Press
Fairfax Financial Holdings Ltd. is preparing a bid to acquire New Zealand-based insurance company Tower Ltd. in a deal valued at about $140-million (U.S.), according to people familiar with the sale process.
The acquisition would give Fairfax a foothold in an insurance market that is evolving in the wake of major earthquakes, and would further the company's reputation as a consolidator on the global stage.
The Toronto-based insurance and investment firm is coming off of a hectic few months peppered by a diverse array of new investments. In December, Fairfax struck its largest-ever deal a $4.9-billion agreement to buy Swiss insurance company Allied World Assurance Company Holdings AG, later bringing in pension fund heavyweight the Ontario Municipal Employees Retirement System as a co-investor.
A deal for Auckland-headquartered Tower would be the latest in Fairfax's effort to identify value in businesses that many others in the market deem risky or overly distressed. It's a strategy showcased in Fairfax's recent $575-million acquisition of Performance Sports Group Ltd., the beleaguered maker of Bauer and Easton sports gear, alongside Sagard Holdings Inc. And on Wednesday Fairfax concluded its initial public offering for investment business Fairfax Africa Holdings Corp., raising $500-million. That amount that fell short of the company's $1-billion ambitions as the region's reputation for volatility weighed on demand.
In New Zealand, Fairfax is again seeing potential in a sector that is changing. Insurers in the region have been shaken by several severe earthquakes in recent years. Tower is an 145-year-old company that insures losses to vehicles, homes and personal possessions, and it is still recovering from the high volume of claims and losses that came after the South-Island earthquakes that began in 2010.
Tower's chairman Michael Stiassny told analysts on a conference call late last year that the "core New Zealand business is in very good shape, and our Pacific business has huge potential which we are yet to fully exploit. However, the legacy of Canterbury continues to cast a shadow," Mr. Stiassny said.
To move back into the light, Tower is in the process of creating a whole separate company to deal with lingering claims, which have been larger and slower to resolve than expected.
Amid all this, Tower's share price has sunk nearly 55 per cent in the past year. That slide wouldn't be completely erased by the premium that Fairfax is reportedly willing to pay.
But Fairfax could potentially come in and provide the capital Tower says it needs to get back on track. Insurers in the country are working with the government to review the New Zealand Earthquake Commission Act and prevent some of the costly mistakes of the previous recovery effort, which could benefit new investors. Tower wrote about $250-million (New Zealand) in net premiums last year.
Fairfax has been highly acquisitive in the insurance industry in recent months. Beyond the deal for Allied World, the company also picked up operations in several countries in Latin America and Eastern Europe in a deal with American International Group Inc. (AIG) last year.
Other investors have also shown recent interest in New Zealand despite the tremors. In late 2016, the Canada Pension Plan Investment Board made its first investment in the country through a $216-million (Canadian) equity stake in office and retail properties in the urban markets of Auckland and Wellington.
While the New Zealand government recently ordered repairs to many older buildings due to earthquake concerns, the the pension fund said at the time that it had considered earthquake risk when it was preparing to make the investment, and was confident in the construction of the properties.