Canadian Company to Acquire Zenith National

Zenith National Insurance Corp. and Fairfax Financial Holdings Ltd. said Thursday that they have entered into a merger agreement, under which Fairfax will acquire the Woodland Hills workers compensation insurer in a deal valued at $1.4 billion.

Fairfax, a Toronto, Ontario insurance holding company is Zenith’s second largest shareholder with an 8 percent stake as of Jan 25. It said it plans to acquire the remaining outstanding shares for $38 per share in cash, a 31.4 percent premium to the stock’s Wednesday closing price.

Fairfax subsidiaries provide property and casualty insurance, reinsurance and investment management.

“We believe the transaction will benefit our key constituents and enable our shareholders to realize compelling value for their investment in Zenith,” said Zenith Chief Executive Stanley Zax in a press release.

The deal comes as California worker’s comp insurers have struggled against a combination of rising medical costs and lower payrolls among their clients due to the recession. Zenith, considered the state’s third largest worker’s comp provider, has been one of the more successful companies in the market. Its loss ratio, an indicator how much of a premium dollar was paid in claims, has been lower than the industry average for several years.

“There will be no changes in Zenith’s strategic or operating philosophy,” Fairfax Chief Executive Prem Watsa said in a statement. “Zenith will continue to operate its business as it has always been run under Stanley’s excellent leadership, with investment management centralized at Fairfax. All other Fairfax group companies will continue to operate independently on a decentralized basis.”

The announcement did not say whether Zax, who has run the company since 1978, would stay on after the merger closes.

Fairfax said it plans to finance the acquisition with a combination of cash and dividends. It also will also raise $200 million through a stock issue. The transaction is expected to close in the second quarter.

Zenith Insurance primarily operates in California and Florida, with business in 43 additional states and the District of Columbia. Its ZNAT Insurance Co. subsidiary conducts business in Arizona, California, Iowa, Texas and Utah.

Zenith shares were up $8.86, or more than 30 percent, to $37.77 in midday trading on the New York Stock Exchange.