OLDWICK, N.J.--(BUSINESS WIRE)--A.M. Best has commented that the Long-Term Issuer Credit Rating of “bbb” and the Long-Term Issue Credit Ratings on the debt and preferred equity of Fairfax Financial Holdings Limited (Fairfax) [TSX: FFH and FFH.U] (Toronto, Canada) are unchanged following an announcement that it has entered into a merger agreement under which Fairfax will acquire Allied World Assurance Company Holdings AG (Allied World) [NYSE: AWH] for a total equity value of approximately USD 4.9 billion. The closing is expected to take place during the first half of 2017, and is subject to regulatory and shareholder approvals and other customary closing conditions. All other ratings of Fairfax’s insurance subsidiaries are expected to remain unchanged.
The acquisition of Allied World is the largest by Fairfax to date and will be financed using a combination of cash and Fairfax shares. Based on the deal structure as announced, Fairfax’s financial leverage position and the group’s risk-adjusted capital position are expected to remain in-line with current ratios and within A.M. Best’s expectations for the current ratings following the close of the transaction.
The inherent execution risks of the transaction are mitigated by Fairfax’s demonstrated capital market access and decentralized operating strategy. The proposed deal structure affords Fairfax flexibility in terms of financing and management of downside risk. In keeping with its practice of maintaining operating autonomy at its subsidiaries, Fairfax does not intend to integrate Allied World’s operations, other than investment management. As a result, A.M. Best expects minimal impact on Allied World’s historically strong underwriting performance. Additionally, Fairfax should benefit from further diversification of its business, reinsurance opportunities, and the advantages that may ultimately be derived from Allied World’s rating profile.
A.M. Best will continue to analyze the group’s financial position as the details of the transaction are finalized. While financial leverage is expected to remain within guidelines, the transaction does add a significant amount of goodwill to the group’s balance sheet and, depending on the deal structure, minority interest levels could increase. The potential effect of these items on quality of capital will be monitored closely.
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