Source: The Canadian Press

The head of Fairfax Financial Holdings Limited (TSX:FFH) says the insurance company is looking forward to adding a solid specialty business with the US$294-million acquisition of First Mercury Financial Corp. (NYSE:FMR).

First Mercury operates in specialized niches of the insurance industry and Fairfax chief executive Prem Watsa says it’s an opportunistic purchase for the Toronto-based holding company.

“It has been in business a long time, (with a) tremendous track record. So we’re very happy to have them,” Fairfax chief executive Prem Watsa told analysts Friday in a conference call.

“We’ve said to you, broadly speaking, we have $500 million to $1 billion in cash flow … and over time we expect to make acquisitions — but not at the expense of our financial position.”

Watsa said Fairfax is “very, very careful” to keep more than $1 billion in cash and marketable securities.

“But opportunistically, we like the idea of buying companies with a great underwriting track record and looking for the possibility of expansion over the long term.”

First Mercury wrote $344 million in gross premiums in 2009, mainly in specialty lines such as security guards. As of Sept. 30, First Mercury’s investment portfolio was worth $722 million.

Fairfax’s offer of US$16.50 per First Mercury share was 45% above the market price before the deal was announced Thursday. First Mercury shares rose $4.96 to US$16.32 in early trading Friday on the New York Stock Exchange.

The Detroit-area company will be aligned with Crum & Forster, one of Fairfax’s main subsidiaries after the transaction closes in the first quarter of 2011.

“We welcome Richard Smith, president and CEO, an all the employees of First Mercury to the Fairfax family,” Watsa said.

On Thursday, Fairfax also announced a drop in quarterly profit compared with a year ago as the company saw lower investment gains.

It earned US$219 million or $10.24 per diluted share for the quarter ended Sept. 30 compared with a profit of $562.4 million or $30.88 per diluted share a year ago. Revenue totalled $1.68 billion, down from $2.2 billion.

Gains on investments for the quarter totalled $68.1 million compared with $797.8 million a year ago.

The average analyst estimate had been for earnings of $8.25 per share, based on two analysts polled by Thomson Reuters.

Earlier this year, Fairfax bought the remaining 82% of U.S. insurer Zenith National Insurance Corp., workers’ compensation specialist at US$1.4 billion. The offer of US$38 per share valued Zenith at US$1.4 billion, about 31.4% above the market price at the time of the acquisition announcement.

Fairfax also acquired a 19.7% stake in Mega Brands Inc. (TSX:MB) as part of a US$218.1 million recapitalization of the Montreal-based toy company, maker of the Mega Bloks construction sets.

For a time during the spring, Fairfax was working with Torstar Corp. (TSX:TS.B) on a joint bid for the Canwest newspapers but the publications were eventually sold to a group led by Paul Godfrey.

Share in the company, which reported its results after the close of markets Thursday, opened on the Toronto Stock Exchange. Its shares, which are among the most expensive on the Toronto market, opened little-changed — dropping 43 cents to $413.50.