Watsa’s Fairfax Agrees to Buy Insurer Zenith for $1.3 Billion

Fairfax Financial Holdings Ltd., the Canadian insurer run by Prem Watsa, agreed to buy Zenith National Insurance Corp. for about $1.3 billion in cash, adding sales in California.

Fairfax will pay $38 a share, the Toronto-based company said today in a statement. That’s 31 percent more than Woodland Hills, California-based Zenith’s $28.91 closing price on the New York Stock Exchange yesterday. The deal is expected to be completed in the second quarter.

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Watsa, 59, is betting on a rebound in a workers’ compensation market pressured by rising medical costs and falling payrolls. Like Warren Buffett at Berkshire Hathaway Inc. and Loews Corp.’s Tisch family, Watsa built his company by investing the assets of insurance operations, often in out-of- favor securities.

“Workers’ compensation is probably the softest of all lines right now,” Bob Hartwig, president of the Insurance Information Institute, said at a conference in November, using industry parlance for a market where rates are falling. “Rate accounts for the vast majority of premium reduction we have seen in workers’ compensation.”

In 1999, Fairfax agreed to buy a 38.4 percent stake for $28 a share. It divested the stake for a profit between 2004 and 2006. In January, Fairfax disclosed it had built an 8.4 percent stake. A deal at $38 a share would value the company at more than $1.4 billion, including Fairfax’s preexisting stake.

Zenith surged 30 percent to $37.65 in early trading at 8:35 a.m. in New York. The company gained about 14 percent in the past 12 months before today.

Loss Ratios

Zenith, run by Chairman and Chief Executive Officer Stanley Zax since 1978, said in its 2009 annual report that it has “a long-term record of outperforming the industry.” Zenith’s workers’ compensation loss ratio, a measure of how much of each dollar of premium is paid in claims, was lower than the industry average every year from 2002 to 2008, according to Zenith’s annual report.

“There will be no changes in Zenith’s strategic or operating philosophy,” Watsa said in the statement.

Medical costs industrywide climbed at least 5 percent every year since 1994, according to data from the National Council on Compensation Insurance Inc. The U.S. unemployment rate doubled to 10 percent in the 24 months ended December 2009 as the country lost more than 8 million jobs in two years, reducing demand for workers’ compensation coverage.

Douglas Dirks, the chief executive officer of Reno, Nevada- based Employers Holdings Inc., said last year that the recession may reduce the frequency of claims because employers tend to keep their most experienced workers, who are least likely to be injured on the job.

Bank of America Corp. and Dewey & LeBoeuf LLP are advising Zenith on the transaction. Fairfax is using Shearman & Sterling LLP and Torys LLP.

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