Fairfax Financial to Acquire First Mercury for $294 Million

Fairfax Financial Holdings Ltd. will acquire First Mercury Financial Corp., the holding company for specialty commercial insurer First Mercury Insurance Co., in a combination the companies valued at $294 million.

Paul Rivett, a spokesman for Fairfax Financial (TSX: FFH), called First Mercury a well-run company with a long track record and great management team, adding Fairfax hopes to leverage First Mercury's expertise in specialty lines.

Fairfax, a Toronto-based financial services holding company with subsidiaries worldwide, agreed to pay $16.50 in cash for each First Mercury common share, a 45.2 % premium to First Mercury's closing price of $11.36 on Oct. 28. Michael Roskiewicz, senior vice president and corporate counsel of First Mercury, called the deal a "compelling opportunity" for First Mercury shareholders.

First Mercury Chairman, President and Chief Executive Officer Richard H. Smith, along with Chairman Emeritus Jerome M. Shaw, who together own about 17% of First Mercury shares, have agreed to vote in favor of the acquisition. Smith will remain with First Mercury.

Fairfax said there is no financing condition related to the acquisition. Fairfax expects to continue to hold more than $1 billion in cash and marketable securities at the holding-company level once the acquisition closes.

Earlier this year, Fairfax Financial acquired Zenith National Insurance Corp., a holding company offering workers' compensation insurance (BestWire, May 24, 2010). Also earlier this year, First Mercury agreed to pay about $55 million to acquire Valiant Insurance Group Inc. from Bermuda reinsurer Ariel Holdings Ltd. (BestWire, July 2, 2010). Roskiewicz said First Mercury still is awaiting approval from the Delaware Insurance Department for that acquisition, which it anticipates will be received soon, and it will complete that acquisition as planned.

Fairfax offers property/casualty insurance and reinsurance. Its insurance and reinsurance operations are controlled by management teams and operate under their own brand name. Each is responsible for its own marketing, underwriting, claims and back-office operations, according to BestLink, which provides online access to A.M. Best Co.'sGlobal Insurance & Banking Database. The group's Canadian insurance operations are carried out through the property/casualty subsidiaries of Northbridge Financial. Crum & Forster Holdings Corp. offers commercial insurance coverage in the United States. The group also has a presence in Asia and the Middle East, according to BestLink.

The First Mercury Group, which went public in 2006, primarily focuses on the underwriting of general liability insurance for the security industry, particularly for security guards and detectives, alarms and safety-equipment manufacturers and installers, and the contractor industry, according to BestLink.

In afternoon trading Oct. 29, shares of First Mercury (NYSE: FMR) were trading at $16.30, up 43.49% from the previous close.

The First Mercury Group currently has a Best's Financial Strength Rating of A- (Excellent). Most subsidiaries of Fairfax currently have a Best's Financial Strength Rating of A (Excellent).

(By Diana Rosenberg, senior associate editor, BestWeek)