Increased international competition and emerging risks such as cyberthreats and climate change are poised to reshape the insurance industry, and Fairfax Financial Holdings Ltd. is acquiring a company that boosts its exposure to these trends.
The Toronto-based insurance and investments company has made an offer to acquire the outstanding shares of London-based Brit PLC in a deal valued at about $2.3-billion. Brit is a specialty insurer that underwrites unique policies to protect against risks such as war and terrorism, satellite launch failures and the cancellations of sporting events.
For Fairfax, acquiring Brit boosts its profile in the Lloyd's of London marketplace, which helps connect clients with insurance for complex risks all over the world. Lloyd's operates a network of 93 different member insurers as well as individuals and groups backing insurance policies with private capital. Each member has a different risk appetite and some have specific insurance specialties.
When a client wants to take out insurance, that risk is shopped around to different members of Lloyd's market, who may divide up the coverage. The system has a 327-year history and Brit is one of the larger members.
The Lloyd's growth strategy is focused on international expansion, which both Brit and Fairfax have also been pursuing.
"Brit's growing U.S. and international reach are highly complementary to Fairfax's existing worldwide operations, and the acquisition further diversifies Fairfax's group risk portfolio," said Fairfax CEO Prem Watsa on a conference call with analysts Tuesday, adding that Brit would also benefit from expanded underwriting opportunities and support.
This expansion comes at a time when the insurance industry is grappling with new demands such as self-driving vehicles, cyberthreats and the increased frequency and severity of natural disasters challenge them to cover changing or unknown risks. Late last year, Brit teamed up with other Loyd's syndicates to launch an insurance product which would insure losses from cyberbreeches in industrial sectors, which are "presenting the global economy with potential catastrophic risk," the company said.
Brit's specialties are varied, with property, marine and energy insurance accounting for the most premiums in its business. Brit also acts as a reinsurer, selling insurance to other insurance companies. The company had about $200-million in earnings in its 2013 fiscal year, it's most recent full year on record.
Fairfax's existing global insurance businesses have more traditional specialties in property and casualty insurance and reinsurance.
The deal is a positive for Fairfax, helping to expand its worldwide specialty operations and build on international expertise, said Tom MacKinnon, analyst with BMO Nesbitt Burns, in a note to clients. He said that Brit is roughly one quarter of Fairfax's size in terms of net premiums earned.
Fairfax is buying Brit with the support of private equity giants Apollo Global Management LLC and CVC Capital Partners Ltd., which took the insurer private in 2010 for about £888-million ($1.7-billion). Brit's new owners proceeded to make changes in the company, including restructuring, curbing expenses and selling off some business lines. They then took the insurer public again in 2014. The initial public offering on the London Stock Exchange raised about £240-million ($460-million).
Less than one year later, Apollo and CVC are looking to exit their investment and have agreed to accept Fairfax's offer and lock up their shares. They own about 73 per cent of the company.
Fairfax already had a good understanding of Brit's business after buying its Brit Insurance Ltd. of London (BIL) business through a subsidiary for about $300-million in 2012. BIL was an insurance and reinsurance company, but it went into runoff, meaning the company stopped writing new policies.
The deal for Brit is subject to customary closing conditions, as well as approval from regulators and Lloyd's. Shares of Fairfax Financial Holdings Ltd. closed up 7.8 per cent on Tuesday.