The Canadian Press

Fairfax Financial Holdings Ltd. (TSX:FFH) will use some of its considerable cash stockpile to buy the rest of Zenith National Insurance Corp. (NYSE:ZNT) in a deal that values the U.S. workers’ compensation specialist at about US$1.4 billion.

Fairfax, the Toronto-based financial services and insurance company headed by Bay Street luminary Prem Watsa, said Thursday it is offering US$38 per share for the stock in California-based Zenith it doesn’t already own.

Fairfax currently holds about 8% of Zenith and is offering to buy out other shareholders with the unanimous support of Zenith’s directors.

“Our agreement to acquire Zenith reflects our strategy of investing in well-managed and well-positioned insurance companies.” Watsa said in a statement.

“Zenith has an outstanding long-term underwriting track record spanning over 30 years” under the leadership of CEO Stanley Zax, Watsa added.

The offer represents a premium of 31.4% above Zenith’s closing price on Wednesday. Shares in Zenith surged US$8.82 to US$37.73 in early trading on the New York Stock Exchange. In Toronto, Fairfax’s thinly-traded shares edged ahead $1.13 to C$368.83.

Zenith operates the Zenith Insurance Company and ZNAT Insurance businesses nationally in the United States, primarily in the field of workers’ compensation insurance. The company will become a subsidiary of Fairfax and continue to operate from its current headquarters in Woodland Hills, Calif.

Zenith reported last month a fourth-quarter profit of US$10.8 million, up from a year-earlier US$8.4 million, though its full-year profit tumbled to US$34.4 million from US$95.3 million in 2008 as increased unemployment and declining payrolls in the U.S. took a 24% bite out of net premiums earned.

At the time, Zax commented that Zenith expects a “recovery from the recession will improve hiring trends and provide improved profit opportunities.”

The deal is expected to close in the second quarter of this year. Directors and officers of Zenith holding about 3.4% of its stock have agreed to tender their shares to the Fairfax offer.

Fairfax said it plans to finance the acquisition with cash and subsidiary dividends, but will also raise $200 million through an equity issue. After it closes, the company said it expects to keep about $1 billion in cash and marketable securities in holding company coffers.

Although remaining very profitable, Fairfax has in the past made a number of major investments in struggling Canadian companies that have fared poorly during the recent economic downturn.

Among the missteps was its investment in Canwest Global Communications Inc. (TSXV:CGS), which put much of its operations under creditor protection as it struggled with a mountain of debt. The media conglomerate has since seen an offer for its broadcast assets from Shaw Communications (TSX:SJR.B) and there has been speculation that Fairfax might be interested in its newspaper division, which is currently up for sale.

Neither the company nor Watsa has commented publicly on that possibility.

Last month, the company invested in troubled toymaker Mega Brands Inc. (TSX:MB) as it announced a recapitalization plan to eliminate nearly $300 million of debt that will see Fairfax take a 20% equity stake.

In its third-quarter financial report, Fairfax, announced it earned US$562.4 million, up from $467.6 million or $25.27 per diluted share a year earlier. Revenue in the quarter totalled $2.21 billion, up from $2.16 billion in the same quarter last year.

Fairfax said its third quarter had been bolstered by its insurance and reinsurance subsidiaries being strict about letting unprofitable businesses go. The company also hedged a quarter of its equity investments in the quarter as a buffer to sudden drop in the stock market and large catastrophic events that could heavily impact its insurance side.

The company reports final quarter 2009 results on Friday.