S&P Affirms Ratings for Zenith, Fairfax Following Merger Announcement
Posted on February 20th, 2010
Following Zenith National Insurance Corp.’s acquisition agreementwith Fairfax Financial Holdings Ltd., Standard & Poor’s Rating Services has affirmed the “BBB-” counterparty credit rating on Woodland Hills, Calif.-based Zenith National and its “A-” counterparty credit and financial strength ratings on Zenith Insurance Co. and ZNAT Insurance Co., which are members of the Zenith insurance Group Intercompany Pool. S&P also affirmed the “BBB-” counterparty credit rating on Toronto-based Fairfax Financial Holdings Inc., and affirmed the counterparty credit and financial strength ratings on FFH’s ongoing operating insurance subsidiaries.
As part of the agreement, Fairfax will acquire all the outstanding shares of Zenith common stock that it does not currently own. 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 the announcement, and a 34 percent premium to the 30-day average closing price for the period ending Feb. 17, 2010. The merger consideration of $38 per share represents a premium of 34.5 percent to Zenith’s book value as of Dec. 31, 2009. “The transaction values Zenith at approximately $1.4 billion. FFH plans to finance the acquisition through existing holding company cash, subsidiary dividends and a $200 million common share issuance,” said S&P credit analyst Michael Gross.
S&P said the outlook on all the companies 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.”
Additionally, S&P said FFH’s historically above-average investment performance, attributable to the leadership of affiliate investment manager Hamblin Watsa, complements the strong and diversified insurance business profile.
“Following the proposed acquisition, we do not expect any significant changes to Zenith’s management or to the organization’s strategic focus,” said S&P credit analyst Tom E. Thun.
Fairfax Chairman and CEO Prem Watsa said there will be no changes in Zenith’s strategic or operating philosophy. “Zenith will continue to operate its business as it always has been run under (Zenith Chairman) 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.”
S&P said Zenith’s concentration in the volatile workers’ comp market and high geographic concentration in California have limited the company’s earnings and revenu growth in the past two years.
S&P expects FFH to complete its acquisition of Zenith National in the second quarter of 2010.
For more information, visit www.standardandpoors.com.
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