Trump presidency among drivers for Fairfax’s ‘transformative’ acquisition of Allied World

The CEO of Canada-based Fairfax Financial has cited the influence of incoming US president Donald Trump as being one of the drivers for it buying Allied World Assurance Company in a $4.9 billion  deal announced December 19.

Prem Watsa, Fairfax chairman and CEO, said he expects the Trump administration to boost GDP growth in the US allowing Fairfax to benefit from Allied World’s large exposure to the US market.

Allied World generates 79 percent of its $3.1 billion of its 2015 gross written premiums from the North America market. Through the acquisition, Fairfax will become the fifth largest US excess & surplus lines writer by direct premiums written.

“Allied World generates a substantial amount of premium with large US customers,” said Watsa on a conference call following the announcement of the acquisition.

“We believe that the recent election of president elect [Donald] Trump and the Republican control of both the US House [of Representatives] and the Senate has the strong potential to make the business climate for growth in the United States great again, relative to the rest of the world,” Watsa said.

President elect Donald Trump plans to reduce corporate taxes to 15 percent from 35 percent.

“If president elect Trump can move forward policies to reduce taxes, reduce burdensome bureaucracy and regulation and incentivise much needed infrastructure spending, we believe the United States may see significant growth in gross domestic product and businesses in the United States, including Allied World, will benefit from any such positive economic development,” Watsa said.

Allied World operates as a global specialty and property/casualty insurer with a niche casualty focus and complementary and opportunistic reinsurance strategy, according a the presentation following the announcement of the deal.

Its North American insurance business represents 60 percent of its total business, 17 percent are contributed by its global markets insurance segment and 23 percent is reinsurance. Allied World’s combined ratio was 94.9 percent in the first nine months of 2016.

This [transaction] is transformative for Fairfax and will be the largest and best company Fairfax has purchased over 31 years,” Watsa said. He said he also sees Allied World as a good acquisition because of what he called the outstanding track record of the company under CEO and president Scott Carmilani and his team since the company’s inception 15 years ago.

In the 12 months before September-end, Allied World generated a net income of $298 million. This compares to Fairfax’s $443 million.

Another driver for the acquisition is size and scale, which Carmilani said will give the company a competitive advantage.

“We’ll have enhanced size and capabilities in an industry in which scale increasingly confers a competitive advantage,” Carmilani said. “This acquisition creates a combined platform well positioned for continued success in the future. Allied World’s businesses are highly complementary to Fairfax’s franchises and this truly creates a world class specialty insurance and reinsurance franchise with leading positions in North America and Bermuda and having a global territorial reach.”

The companies’ combined gross premium written were $11.7 billion in 2015, of which 57 percent were generated in casualty, 30 percent property and 13 percent specialty. Together with Allied World, Fairfax will become the seventh largest North American insurer by market capitalization excluding Berkshire Hathaway.

The combination of Fairfax’s investment expertise with the Allied World’s demonstrated expertise in underwriting gives us a terrific rate of return going forward, Watsa said.

Allied World also adds a $9.4 billion investment portfolio to Fairfax's operations. The new subsidiary will be run separately to other Fairfax insurance units such as Brit, a Lloyd’s of London member, and Odyssey Re, a global multi-line reinsurer and specialty insurer.

As it does with its other operations, Fairfax will run Allied World in decentralized manner focusing on underwriting profit and reserve redundancies. There will be no cost synergies, Watsa noted.