‘No change’ planned at Allied World
Allied World Assurance Company operations will not be changed as a result of Fairfax Financial Holdings proposed $4.9 billion acquisition.
Prem Watsa, the chief executive officer of Fairfax Financial, has praised the performance of the insurer and reinsurer since its formation 15 years ago, and the guidance of CEO Scott Carmilani.
During a conference call featuring executives from both companies, Mr Watsa said: “AWAC will be run by Scott on a decentralised basis with no cost synergies. I emphasise no cost synergies.
“No change in operations other than what Scott sees fit to do. AWAC will continue to be built under Scott’s vision.”
There are about 125 staff at Allied World’s offices in Richmond Road, Pembroke. The company was formed in Bermuda in 2001, in the wake of the 9/11 attacks in the US. It moved its headquarters to Switzerland in 2010, and globally has about 1,040 employees.
Fairfax Financial, a Canadian investment and insurance company, has a track record of buying companies and allowing them to continue to operate in the manner that made them prized acquisitions in the first place.
This was highlighted by Andy Barnard, president of the Fairfax Insurance Group, during the conference call with analysts.
He listed insurers and reinsurers that have previously been acquired by Fairfax, including OdysseyRe, Crum & Forster and Brit Plc, and said: “The point is in Fairfax all of these companies are run by their CEOs. They all enjoy the autonomy that comes with our decentralised operating philosophy. We have a fantastic group of CEOs running all of these companies.”
Mr Barnard pointed to strong results achieved by the individual companies as a result of “that system of operating”.
Meanwhile, Mr Carmilani noted: “Allied World’s business is highly complementary to the Fairfax franchises, and truly creates a world-class specialty insurance and reinsurance franchise, with leading positions in North America and Bermuda, and having a global territorial reach.”
It was announced on Monday that Fairfax Financial is to acquire Allied World in a cash-and-stock deal. The transaction is subject to regulatory and shareholders’ approval, and is expected to conclude in the second quarter of 2017.
The move is in line with a trend by smaller insurers to seek merger partners, due to the preference of commercial coverage clients and their brokers to place business with larger insurers and reinsurers.
As a combined entity, Fairfax Financial and Allied World will become the seventh largest North American insurer, excluding Berkshire Hathaway. It will have a market capitalisation of $15 billion.
Mr Carmilani said: “We’ll have enhanced size and capabilities in an industry in which scale increasingly confers significant competitive advantage.”
S&P Global Ratings yesterday placed all its ratings for Allied World and its operating companies on credit watch with negative implications.
One of S&P’s concerns is the potential departure of Allied World key executives following the transaction, as they have not entered into any long-term contracts to remain employed with the company after the deal.
This topic was mentioned during the conference call on Monday, when Mr Watsa said: “Because of our decentralised operations, we have had many presidents who’ve retired in the past, but no president has ever left our company for another job in the industry.
“They retired and that’s happened over the years, we’ve been in business now for 31 years but we’ve never lost a president.”
He later expanded: “None of our companies have contracts, and we haven’t had anyone leave. One of the reasons is we have 35 people in our head office, and we’ve got 22,000 people in our companies, and we really do believe in a decentralised operation, and that’s been a major plus for our company over the years.”
S&P also has concerns about possible implications to Allied World’s enterprise risk management, which it presently states as “strong”, once the company comes under Fairfax’s ownership. The agency views Fairfax’s enterprise risk management as “adequate” and has concerns that Allied World will likely shift its investment strategy to align with Fairfax’s.
The ratings agency said its credit watch action will be resolved and updated within the next three months after it has discussed the transaction with the management teams of Fairfax Financial and Allied World.
This year has been a busy one for mergers and acquisitions in the insurance sector.
In October, Fairfax Financial bought a number of American International Group’s commercial and consumer operations, including those in Argentina, Chile and Turkey.
Deals with a Bermuda connection have included the $3 billion sale of Bermudian-based Ironshore to Liberty Mutual Holding Company, a transaction announced earlier this month.
Meanwhile, Endurance Specialty Holdings Ltd is being taken over by Tokyo-based Sompo in a $6.34 billion deal expected to close by the end of March next year.