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Allied World rides momentum of $4.9B Fairfax deal to 52-week high

On the heels of Fairfax Financial Holdings Ltd.'s proposed $4.9 billion cash-and-stock acquisition of Allied World Assurance Co. Holdings Ltd., shares in the P&C insurer surged more than 17% for the week ended Dec. 22, reaching their highest level in more than a year.

Pending approval, Allied World shareholders will receive a combination of Fairfax subordinate voting shares and cash equal to $54.00 per Allied World share, based on the Dec. 16 closing price for Fairfax of $460.65 on the Toronto Stock Exchange. The bid represents a healthy premium of 18% to Allied World's closing price of $45.77 per share Dec. 16. Allied World shares closed Dec. 22 at $53.79, up 17.52% on the week.

Insurance stocks slightly outperformed the broader market for the week ended Dec. 22. The SNL Insurance Index increased 0.38% to 865.16, and the S&P 500 rose 0.13% to 2,260.96.

Beset by an increasingly fragmented and overpopulated industry, underwriters such as Allied World have faced an uphill battle in attempts to survive on their own, Keefe Bruyette & Woods analyst Meyer Shields said in an interview. Consequently, P&C insurers may seek out buyers to expand their global territorial reach if underwriting possibilities erode due to a combination of rate increases and an acceleration of loss cost inflation.

"You have difficult conditions and quite a few companies that are sort of [stuck] in the in-between of being a pure niche player and having enough scale to compete on that basis," Shields said.

Fairfax, which had an investment portfolio of $29.7 billion as of Sept. 30, maintains international offices in Sao Paulo, Brazil, and Johannesburg, South Africa, in two regions where Allied World has a limited presence.

"We'll have enhanced size and capabilities in an industry in which scale increasingly confers significant competitive advantage," Allied World President, CEO and Chairman Scott Carmilani said during a Dec. 19 conference call. "Combined capacity, reinsurance opportunities, and global possibilities are endless."

As competition intensifies in the P&C space, an overlap has emerged of insurers in Bermuda increasingly focused on specialty lines insurance, Shields said.

"If you look up and down Bermuda, you can say, 'OK, this is a subset that had a great run for a decade and a half,'" Shields said. "I'm not suggesting that the environment is fatal, but it is much less positive than it had been at any point over the last 15 years."

Validus Holdings Ltd., a Bermuda-based P&C insurer, capitalized on the momentum from Allied World's announcement, closing Dec. 22 at $55.07 per share, up more than 4% on the week. It is not difficult to envision the emergence of a potential bidder for Validus if management is receptive to selling at an appropriate price, Shields said.

Meanwhile, Aetna Inc. shares remained relatively flat in light pre-holiday trading after the managed care company signed a waiver with Humana Inc. extending the right to terminate their pending merger until Feb. 15. Aetna shares closed Dec. 22 at $124.69, down 1.67% on the week, while shares in Humana ended the week at $202.93, down 1.32% for the period.

U.S. District Judge John Bates is not expected to rule on the Justice Department's challenge of the proposed $34 billion merger until mid-January 2017.