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Fairfax acquires Brit PLC


nwoodman
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http://www.fairfax.ca/news/press-releases/press-release-details/2015/Fairfax-to-Acquire-Brit-PLC/default.aspx

 

The Brit Offer Price represents a premium of 11.2% to the closing price of 274.2 pence per Brit Share on February 16, 2015, being the last full business day prior to this announcement. 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. Fairfax has built a strong relationship with the Brit team and an understanding of their business and operations since the acquisition of Brit's runoff business in June, 2012.

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From a brief glace I have given to the 2014 First Half Results of Brit PLC (see attachment), I like what I see:

- Annualized return on net tangible assets of 25%,

- Combined Ratio of 88.3%,

- Premium growth of 4.5%,

- Investment returns (non-annualised) of 2.1%.

 

To be able to purchase such good results for less than 10 times earnings is something I cannot but like very much.

 

Their investment portfolio surely is conservative, but now that they are backed by the Fairfax Balance Sheet, the managing of their investments could be left in the capable hands of HWIC. This would further enhance return on net tangible assets.

 

It reminds me somehow of Lancashire: managing through a difficult environment, while waiting for a market shift to show once again their true capabilities and potential.

This is exactly the time when you want to invest in companies like these.

 

Cheers,

 

Gio

2014_Half_Year_Full_Report.pdf

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Closing adjusted net tangible assets per share at the end of 2014 first half was 179.4 pence. If we use that number, the multiple paid is: 305 / 179.4 = 1.70.

 

If Brit PLC during the second half of 2014 has achieved results in line with the first half, net tangible assets per share might be 10% higher, therefore the right multiple paid might be: 305 / 197.3 = 1.55.

 

Gio

 

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Quite hard to figure out how to normalise annual earnings from the 1H results, given IPO expenses and big changes in investment and fx line items.  But both years suggest 15% RONTA would be do-able, in which case I think the price paid is quite justifiable.

 

FFH have certainly kept their promise to buy higher quality insurers.  And on a side note, when criticising them for hedging their listed equities too early it's worth remembering that if you include the money they've poured into buying this sort of equity, they have been nowhere near 100% hedged.

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Quite hard to figure out how to normalise annual earnings from the 1H results, given IPO expenses and big changes in investment and fx line items.

 

Yes! You are right. But imo the fact this transaction is immediately accretive to Fairfax on the investments per share metric, with underwriting operations that are very much profitable, justifies the multiple paid.

 

If you can make a 12%-15% return on tangible assets through underwriting operations, then send the float to HWIC for investments, I guess you can achieve very interesting overall results!

 

Cheers,

 

Gio

 

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I agree.

 

It's also worth pointing out how big this is: it will be comfortably their 2nd biggest insurer by net premiums written (after Odyssey) and will generate ~20% of net premiums written and closer to 25% of underwriting profit given the below-average combined ratio.

 

 

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They call 1.6x a “rich multiple”… Prem Watsa and “rich multiple” don’t go easily on the same page… We will see! ;)

 

Cheers,

 

Gio

 

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I think you have to say that 1.7x tangible book value is a fairly rich multiple.  The play seems to be that Brit will be able to (1) continue generating sizable underwriting profits and (2) HWIC will be able to do far better than 2% on the investment portfolio, given HWIC's historical return of 9% (albeit much of that record is from when substantially higher interest rates prevailed).  If Fairfax can pull that off, then they could be earning $400 million a year from this $2 billion investment.  But even if they earn half of that, it would still seem to be a good investment.  So seems like a good deal to me.

 

I am curious though why Apollo would sell at this price.  Presumably they also have the investment management skill to earn more than 2% on Brit's investments.

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I am curious though why Apollo would sell at this price.  Presumably they also have the investment management skill to earn more than 2% on Brit's investments.

 

I would guess a) PE is all about maintaining a high CAGR so once you've got the multiple appreciation, maybe the intrinsic returns of the business are less attractive; and b) I wonder if they can invest so well within the restrictions imposed by regulators and ratings agencies - float investing is in large part about outperforming the bond markets within tight balance sheet constraints, which isn't the same skill as PE.  But I am only guessing.

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b) I wonder if they can invest so well within the restrictions imposed by regulators and ratings agencies - float investing is in large part about outperforming the bond markets within tight balance sheet constraints, which isn't the same skill as PE.  But I am only guessing.

 

I think b) might be a very good guess! ;)

 

Gio

 

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From the call: "And all of that just to say, in terms of our common stock, we think our common stock with a book value of $400 a share and a stock price – with a market stock price to book value of about 1.3 times, we think it's expensive."

 

Er...did he actually just say that?!  ;)

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From the call: "And all of that just to say, in terms of our common stock, we think our common stock with a book value of $400 a share and a stock price – with a market stock price to book value of about 1.3 times, we think it's expensive."

 

Er...did he actually just say that?!  ;)

 

Actually it's 1.6x BV and 2x TBV now so I rather hope they do issue equity to buy Brit...

 

Wait.  So PW just said that the stock is expensive?  What question prompted that?

 

Any other interesting tidbits from the CC?  Noticed that FFH is up over 7% at the moment.

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from transcript

 

"We have partners who in the past have been – have suggested that they would like to be partners with us and – in these

insurance operations, and we may consider that, if it's a partner that we're really comfortable with. And all of that just

to say, in terms of our common stock, we think our common stock with a book value of $400 a share and a stock price

– with a market stock price to book value of about 1.3 times, we think is inexpensive. We're selling – we had a very

good year last year. Our earnings are well protected. Our underwriting is – and our insurance operations are very good.

Our investment portfolios are very conservative, as you know. We went through it last week. Our equities are hedged.

We got 25% cash, low corporate bond. We've got deflation swaps. So we just think that we have many ways of

financing this, and one of the last alternatives will be a stock issue."

 

 

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from transcript

 

"We have partners who in the past have been – have suggested that they would like to be partners with us and – in these

insurance operations, and we may consider that, if it's a partner that we're really comfortable with. And all of that just

to say, in terms of our common stock, we think our common stock with a book value of $400 a share and a stock price

– with a market stock price to book value of about 1.3 times, we think is inexpensive. We're selling – we had a very

good year last year. Our earnings are well protected. Our underwriting is – and our insurance operations are very good.

Our investment portfolios are very conservative, as you know. We went through it last week. Our equities are hedged.

We got 25% cash, low corporate bond. We've got deflation swaps. So we just think that we have many ways of

financing this, and one of the last alternatives will be a stock issue."

 

This makes more sense. Once you had adjusted for the fair value of their associates, the stock only traded at 1.1x book from what I could calculate back of the envelope. Hardly an expensive price for a company that seems like it will do moderately well no matter what environment.

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from transcript

 

"We have partners who in the past have been – have suggested that they would like to be partners with us and – in these

insurance operations, and we may consider that, if it's a partner that we're really comfortable with. And all of that just

to say, in terms of our common stock, we think our common stock with a book value of $400 a share and a stock price

– with a market stock price to book value of about 1.3 times, we think is inexpensive. We're selling – we had a very

good year last year. Our earnings are well protected. Our underwriting is – and our insurance operations are very good.

Our investment portfolios are very conservative, as you know. We went through it last week. Our equities are hedged.

We got 25% cash, low corporate bond. We've got deflation swaps. So we just think that we have many ways of

financing this, and one of the last alternatives will be a stock issue."

 

This makes more sense. Once you had adjusted for the fair value of their associates, the stock only traded at 1.1x book from what I could calculate back of the envelope. Hardly an expensive price for a company that seems like it will do moderately well no matter what environment.

 

Yeah, makes a lot more sense.

 

Looks like a very nice acquisition to me.

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I agree.

 

It's also worth pointing out how big this is: it will be comfortably their 2nd biggest insurer by net premiums written (after Odyssey) and will generate ~20% of net premiums written and closer to 25% of underwriting profit given the below-average combined ratio.

 

There is also the experience and synergy that the insurance subs share under the leadership of Andy Bernard.  This will have a positive impact on the other subs.

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from transcript

 

"We have partners who in the past have been – have suggested that they would like to be partners with us and – in these

insurance operations, and we may consider that, if it's a partner that we're really comfortable with. And all of that just

to say, in terms of our common stock, we think our common stock with a book value of $400 a share and a stock price

– with a market stock price to book value of about 1.3 times, we think is inexpensive. We're selling – we had a very

good year last year. Our earnings are well protected. Our underwriting is – and our insurance operations are very good.

Our investment portfolios are very conservative, as you know. We went through it last week. Our equities are hedged.

We got 25% cash, low corporate bond. We've got deflation swaps. So we just think that we have many ways of

financing this, and one of the last alternatives will be a stock issue."

 

This makes more sense. Once you had adjusted for the fair value of their associates, the stock only traded at 1.1x book from what I could calculate back of the envelope. Hardly an expensive price for a company that seems like it will do moderately well no matter what environment.

 

Yeah, makes a lot more sense.

 

Looks like a very nice acquisition to me.

 

Yes he said inexpensive, and that was in response to options to finance the purchase. Implying he does not want to issue shares at these levels to finance this, especially with surplus capital on hand and with unnamed partners who have apparently approached them to get in on the deal as well.

 

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from transcript

 

"We have partners who in the past have been – have suggested that they would like to be partners with us and – in these

insurance operations, and we may consider that, if it's a partner that we're really comfortable with. And all of that just

to say, in terms of our common stock, we think our common stock with a book value of $400 a share and a stock price

– with a market stock price to book value of about 1.3 times, we think is inexpensive. We're selling – we had a very

good year last year. Our earnings are well protected. Our underwriting is – and our insurance operations are very good.

Our investment portfolios are very conservative, as you know. We went through it last week. Our equities are hedged.

We got 25% cash, low corporate bond. We've got deflation swaps. So we just think that we have many ways of

financing this, and one of the last alternatives will be a stock issue."

 

This makes more sense. Once you had adjusted for the fair value of their associates, the stock only traded at 1.1x book from what I could calculate back of the envelope. Hardly an expensive price for a company that seems like it will do moderately well no matter what environment.

 

Yeah, makes a lot more sense.

 

Looks like a very nice acquisition to me.

 

Yeah, sorry about that - I had an early transcript which said "is expensive".  It's been corrected since!

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