Fairfax: Thai Re Deal Follows Growth Strategy, Floods

Toronto-based Fairfax Financial Holdings Ltd. said its decision to acquire about 25% of Bangkok-based reinsurer Thai Re reflects a long-standing Fairfax strategy of growth—and an opportunity created by last year's floods in Thailand.

Fairfax, which has agreed to pay about US$70 million for the Thai Re stake, will have the power to nominate two Thai Re board members and participate in the reinsurer's investment strategy.

If the deal wins the approval of regulators and Thai Re's stockholders, it is expected to be completed during the second quarter of this year. Fairfax said the purchase will also depend on the completion of Thai Re's previously announced rights offering.

Paul Rivett, Fairfax's chief legal officer, told Best's News Service that last year's floods in Thailand left Thai Re with "a need for capital."

The floods caused damage throughout Thailand. Reinsurance broker Aon Benfield has estimated that more than 9.4 million people were affected, with more than 10% of the country's rice production lost and damage to more than 14,800 industrial premises (Best's News Service, Jan. 26, 2012).

"Thai Re's a well-respected, very well-run reinsurer, [with] a very good long-term track record," Rivett said.

"Surachai Sirivallop, chief executive officer of Thai Re, has an outstanding track record of underwriting profitability since he began managing the company 22 years ago," said Prem Watsa, chairman and chief executive officer of Fairfax, in a statement.

Fairfax pointed to Thai Re's establishment as a reinsurer in 1979, its role as a consultant, and its presence in such reinsurance lines as property/casualty, life, marine and engineering.

The minority shareholding is in Thai Re is in line with Fairfax's strategic approach, Rivett said. "We don't need to have 100% of a business," he said. "We're happy to partner in the sense of having minority stakes in good business with very good long-term track records."

Asked about other possible moves in the region, Rivett said, "We're continually on the lookout for good, long-term successful managers and businesses."

Fairfax is a holding company with a focus on property/casualty insurers and reinsurers, and a philosophy of decentralization, Rivett said. Managers are put in place and given the authority to run their operations, with Fairfax investing the profits. Rivett compared the approach to that of Warren Buffet. The investments are managed centrally by Fairfax subsidiary Hamblin Watsa Investment Counsel Ltd.

Fairfax (TSX: FFH), which is traded on the Toronto Stock Exchange, was founded in 1985. Since then, Rivett said, "we have grown the company beyond its base in Canada."

Fairfax has interests in the United States, Brazil, India, China, Singapore, Hong Kong and Malaysia. The Thai Re deal was "an expansion of that growth philosophy," Rivett said.

Fairfax is also involved in a joint venture in the Thai nonlife market with Falcon Insurance. That operation is active in such lines as marine, personal accident, fire and motor. Fairfax says its subsidiaries are active in such areas as property/casualty insurance and reinsurance and investment management.

In the third quarter of 2011, Fairfax reported net earnings of US$973.9 million, up from US$388.1 million in the third quarter of 2010. Fairfax attributed the big increase to improved investment performance.

"Our results have always been lumpy, and our third-quarter earnings are a case in point," Watsa said in a statement.

(By Robert O'Connor, London editor: Robert.OConnor@ambest.com)