Posted on 19 Feb 2010
Fairfax Financial Holdings' agreement to buy Zenith National Insurance may be a sign that prices in the industry will start rising again soon, analysts and investors said Thursday.
Toronto-based Fairfax, run by Prem Watsa, said Thursday that it agreed to acquire Zenith for $38 a share in cash. The deal values the Woodland Hills, Calif.-based workers' compensation insurer at roughly $1.4 billion.
Zenith shares jumped 31% to close at $37.80 on Thursday, while Fairfax shares gained 2% to close at 374.99 Canadian dollars.
Workers' compensation insurance covers the cost of medical care, lost wages and rehabilitation for on-the-job injuries and provides benefits for the family of any employee killed in work-related accidents.
The workers' compensation market has been plagued by intense competition, spiraling medical costs and fraud. Prices have been falling steadily in recent years as the recession and rising unemployment reduces demand for coverage.
Zenith focuses on workers' comp markets in California and Florida, which have been more troubled than markets in other parts of the U.S. However, the company, run for decades by Stanley Zax, has a reputation for pulling back if it can't charge high enough premiums to make money.
Weak premiums have hit Zenith shares, even though the company may be avoiding future losses by rejecting lower-priced business. Before Thursday, Zenith stock had dropped almost 14% in the previous five years, while the Standard & Poor's 500 index declined less than 9%.
Those declines may have made the company more attractive to Fairfax. Watsa, who oversees Fairfax's investments, is known as a value investor. He generated big returns in 2008 betting on the credit meltdown.
This time Watsa may be betting on a rebound in prices for workers' comp insurance.
"Widely followed market surveys indicate property and casualty rates continue to fall. But on an individual company basis -- and especially with smaller insurers -- we're seeing signs that rates are going up," Stewart Johnson, a portfolio manager at insurance-focused investment firm Philo Smith, said in an interview. "Maybe Fairfax believes rates have hit bottom and are headed up again."
Fairfax has had some success timing investments in the California workers' comp market, Mark Hughes, an analyst at SunTrust Robinson Humphrey, wrote in a note to investors on Thursday.
"We view this new foray as a bullish sign that conditions are likely to improve in the new to medium term," Hughes said.
Other companies that focus on workers' comp insurance may be good acquisition candidates in the wake of the Zenith deal, he added, citing Employers Holdings, ProAssurance Corp. and Amerisafe Inc.
Employers Holdings shares climbed 7.6% to $14.02 on Thursday, while ProAssurance gained 2% and Amerisafe rose 3.4% to $18.16.
"This bodes well for future acquisitions, not just in workers' comp but across the industry, because it may signal that valuations have hit bottom," Johnson said.