Fairfax Financial Holdings Ltd. is selling its stake in Singaporean insurer First Capital Insurance Ltd. for US$1.6 billion as part of a broader partnership agreement that will ensure the Canadian insurance and investment company receives 25% of the subsidiary’s profits.
The Toronto-based firm said on a conference call Thursday that the all-cash deal to sell its 97.7% stake in the business to Japan’s Mitsui Sumitomo Insurance Co. is part of a “strategic alliance” with MSI, under which the companies will pursue global partnership opportunities.
The agreement gives Fairfax potential to gain exposure in other regions of the world. Canadian insurance companies such as Sun Life and Manulife have targeted Asia for growth as burgeoning middle classes in the region mean increased demand for protections and benefits that insurers offer.
“This partnership with MSI is truly a game changer for Fairfax, a real win-win opportunity with a long-term, like-minded partner,” CEO Prem Watsa told shareholders on a conference call.
Watsa also said the agreement with MSI gives Fairfax a foothold in Japan. A partnership with a local company will help Fairfax become more diverse and appeal to the growing numbers of affluent people in Asia, said Dylan Gordon of Idea Couture, a firm that helps companies adapt to changes in the market.
“It’s trying to figure out how do we change who we are and how we operate to be more diverse and global in what we can offer people … and that takes partnerships,” Gordon said, explaining that on-the-ground knowledge is crucial.
Norma Nielson, co-chair of insurance at the University of Calgary, said Asia is particularly attractive to businesses because of high population numbers in the region.
“As you acquire middle-class lifestyle you tend to acquire mortgages and cars, and you need life insurance and car insurance and house insurance,” she said.
“If there are a billion people in China it’s kind of hard to ignore that as a reasonable market to work on.”
Fairfax said the sale of First Capital will net US$900 million of after-tax profit, or US$33 per share. The company will take a 25% quota share, and it expects its ongoing vested interest in First Capital’s existing and future business will see significant returns.
“If First Capital writes $100 million worth of business, we’ll take a quota share of 25% which will be $25 million, and that $25 million will be going into one of our companies,” Watsa explained.
“You’ll get 25% of the earnings and you’ll get 25% of the growth. That made it a very unusual and attractive transaction.”
Watsa praised the deal, saying First Capital is the “undisputed leader” in Singapore. The company provides a wide range of insurance products, including home, accident, travel and car insurance, as well as coverage for theft, industrial, civil engineering projects and marine cargo businesses.
Fairfax estimates First Capital will grow from $400 million in gross premiums today to over $1 billion over time. The insurer’s current CEO Ramaswamy Athappan will continue as head of the Singaporean provider as well as in his role a chairman of Fairfax Asia.
The deal is expected to close late this year or early next year.
Fairfax is primarily invested in North American property and casualty insurance businesses but has diversified to other regions and industries. It has operations in growing markets such as Southeast Asia, Eastern Europe, the Middle East, South Africa and Brazil.