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On February 16 Fairfax Financial Holdings announced:

that it has reached an agreement with Brit PLC (“Brit” or the “company”) to acquire all of the outstanding shares of Brit (the “Brit Shares”). Brit is a market-leading global Lloyd’s of London specialty insurer and reinsurer. The full announcement (the “Announcement”) is available for viewing on Fairfax’s website at www.fairfax.ca/britoffer.
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The aggregate purchase price payable by Fairfax for the Offer is approximately US$1.88 billion. On February 12, 2015, Fairfax announced 2014 earnings of approximately US$1.6 billion. Excluding the final dividend expected to be declared by the board of directors of Brit for the year ended December 31, 2014 in an amount of 25 pence per Brit Share , Fairfax’s purchase price of 280 pence per Brit Share is less than ten times the company’s earnings based on the company’s annualized net earnings for the six months ended June 30, 2014. The acquisition is accretive to Fairfax on several metrics including gross revenue per share and investments per share.

I love the bit about how the acquisition is accretive to Fairfax on several metrics including gross revenue per share and investments per share. The Public Relations team must have been scratching their heads for a while before coming up with that one! I can’t even tell you just exactly what “investments per share” means, since the phrase was not mentioned in FFH’s last quarterly statements or MD&A. The assertion was repeated by Prem Watsa in the conference call, but was left unchallenged – there were only softball questions from equity salesmen hoping to line up a financing deal for their firms.

In response to all this Standard & Poor’s has announced:

• •Fairfax Financial Holdings Ltd. announced on Feb. 16 that it had reached an agreement to acquire Brit PLC for about $1.88 billion.
• •We are affirming the issuer credit rating on Fairfax Financial Holdings Ltd. at ‘BBB-‘ and the issuer credit and financial strength ratings of its core insurance affiliates at ‘A-‘.
• •We are revising the outlook to negative from stable, considering the potentially significant reduction in the group’s capital adequacy, as measured by our proprietary capital model.

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The company has several options for restoring capital adequacy to a level that Standard & Poor’s views as more supportive of the existing ratings. However, the company is still finalizing the capital enhancement strategy, and there is execution risk with regard to any capital management plan that it adopts.
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The negative outlook on Fairfax reflects the significant potential decline in the group’s capital adequacy following the completion of the Brit PLC acquisition. The time horizon for our outlook is six to 12 months.

Fairfax has several preferred share issues outstanding, FFH.PR.C, FFH.PR.D, FFH.PR.E, FFH.PR.G, FFH.PR.I and FFH.PR.K; FFH.PR.D is a FloatingReset paired with FFH.PR.C;, all the others are FixedResets.

Update, 2015-02-23: DBRS has confirmed Fairfax with a Stable Trend:

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Debt of Fairfax Financial Holdings Limited (Fairfax) at BBB and the Company’s Preferred Shares at Pfd-3. The trends on all ratings remain Stable. The Senior Unsecured Notes of Fairfax (US) Inc. are guaranteed by Fairfax Financial Holdings Limited. This rating action follows the announcement that Fairfax has agreed to purchase Brit PLC (Brit) for $1.88 billion, a premium of 11.2% per share. Fairfax has obtained a sales agreement with approximately 73% of the voting shares of Brit. The transaction is expected to close in Q2 2015, subject to customary conditions, including regulatory approvals. As a Lloyd’s of London (Lloyd’s) insurer, Brit focuses on global specialty insurance and reinsurance and is the eighth-largest Lloyd’s insurer with a written premium capacity of GBP 1.0 billion as of July 2014.

The rating action reflects DBRS’s view that the purchase is consistent with Fairfax’s strategy of extending its franchise globally through opportunistic investments whereby it acquires businesses with demonstrated underwriting discipline that add to its existing franchise. Fairfax engages in property and casualty insurance, reinsurance and investment management. Brit focuses on property casualty (62% of premium) combined with complex specialty insurance lines such as marine, energy and terrorism risks. DBRS anticipates that the acquisition will help both Fairfax and Brit to expand globally. Fairfax is expected to benefit from the significant expansion in the specialty insurance markets, an enhanced distribution network and Brit’s underwriting skills in specialty insurance. Brit is expected to benefit from the greater scale of the combined companies in the Lloyd’s market, Fairfax’s franchise network presence and Fairfax’s resources, including Fairfax’s strong investment record. Pro forma, the purchase would result in Fairfax strengthening its position in the Lloyd’s market as it is expected to become the fifth-largest insurer with a premium capacity exceeding GBP 1.3 billion as of 2015, which is likely to enhance Fairfax’s ability to manage pricing and to facilitate greater lead opportunities in arranging deal terms.

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