The thinking behind the latest OMERS P&C insurer deal

By selling a good chunk of its runoff business to one of Canada’s largest pension plans, Fairfax Financial Holdings Ltd. is allowing that business to buy discontinued Lloyd’s books while still allowing Fairfax to invest in its other insurers, CEO Prem Watsa suggests.

During the first quarter, Toronto-based Fairfax closed the sale of 40% of Riverstone Group to the Ontario Municipal Employees Retirement System (OMERS), Watsa said last month during Fairfax Financial’s annual general meeting. The AGM this year was webcast and not in person due to the COVID-19 pandemic.

Based in Britain, The RiverStone Group runs legacy and run-off insurance businesses and portfolios; among them, several asbestos liability risks. For example, it might take over a book of business if an insurer stops writing new business or if an insurer exits a line of business. Riverstone is one of many carriers (besides Northbridge, Allied World, Odyssey Group and Brit PLC) in which Fairfax has an ownership stake.

A Fairfax investor asked company officials during the AGM why Fairifax sold 40% of Riverstone.

“The reason we sold that 40% was the opportunity in Lloyd’s,” said Watsa.

The Corporation of Lloyd’s earlier asked its syndicates – the groups that provide the capital and ultimately pay out on claims –  to conduct in-depth reviews of the worst performing 10% of their portfolios and of all lines that are losing money. Worldwide, the Lloyd’s market lost £2 billion in 2017 and £1 billion in 2018, returning to profitability in 2019.

Fairfax’s Advent Underwriting was one of the eight Lloyd’s syndicates that shut down in 2018. At the time, Advent’s profitable books of business were renewed with Fairfax’s three other Lloyd’s syndicates, which are Brit, Odyssey Group’s Newline and Allied World UK.

“Lloyds had gone through a restructuring, where they said they wanted syndicates that were non-performing to close, so there was a lot of opportunity for Riverstone to buy books of business,” Watsa said April 16 during the AGM.

So the OMERS deal was a way to let Fairfax invest money in its own insurers while letting Riverstone expand by buying books of business.

When the deal was initially announced this past December, it was valued at more than US$560 million, subject to certain book value adjustments at closing.

“OMERS is a terrific partner,” said Watsa, alluding to earlier deals OMERS made to buy a minority of both Brit PLC and Allied World. Fairfax bought the majority of Brit and Allied World in 2015 and 2017 respectively.

“We have had many many deals with [OMERS] and it’s really a pleasure to deal with them and we have a really close relationship,” said Watsa.

Riverstone group includes TIG Insurance Company, RiverStone Insurance (UK) Limited, RiverStone Managing Agency Limited and RiverStone Management Limited, TIG Insurance (Barbados) Limited, Resolution Group Reinsurance (Barbados) Limited, St. John’s Insurance Company Limited and Bluestone Surety, Ltd.