Mitsui Sumitomo to Buy Singapores First Capital From Canadas Fairfax for $1.6 Bi

[dr.malone]

Japanese insurer Mitsui Sumitomo Insurance Co. has struck a deal to buy Singapore-based property and casualty insurer First Capital from Canada's Fairfax Financial Holdings Ltd. for $1.6 billion, according to people familiar with the transaction.

 

Fairfax, a Toronto-based holding company founded in 1985 by one of Canada's most prominent investors, Prem Watsa, will get a 25% stake in First Capital's insurance portfolio.

 

First Capital's CEO, Ramaswamy Athappan, will remain in his role, while continuing to serve as chairman of Fairfax's Asia operations.

 

The deal is part of a global partnership between the two firms that will give Fairfax access to Japan's insurance market, while allowing Mitsui greater access to the United States, said the people.

 

Japanese insurance firms have been branching out into higher-return investments elsewhere because of Japan's low interest rates, which have hurt returns.

 

Fairfax has also been trying for a foothold in Japanese markets for several years, and the partnership gives it a chance to take part in underwritings from one of Japan's largest nonlife insurers, according to the people close to the deal.

 

Fairfax paid more than $4 billion in July to acquire Allied World Assurance Co., marking the largest expansion into the U.S. in Fairfax's 30-year history.

 

In October, it agreed to buy some of American International Group Inc.'s Latin American and European property and casualty insurance operations.

[ourkid8]

Did Fairfax acquire first capital for C$49 million? If so, that was a serious home run!!!! 

 

http://www.asiapacific.ca/news/fairfax-financial-holdings-buys-singapores-first-capital-ins

[benhacker]

More than 3x book... nice.

[nwoodman]

More than 3x book... nice.

 

Stunning!

[lessthaniv]

After tax realized gain of $900m bumping book by $33/share

 

:o

[Parsad]

Just a great deal for Fairfax in every way!  Cheers!

[Alekbaylee]

Great news!

At this pace, Fairfax should be able to gobble up AIG one day... :)

[StubbleJumper]

I'm not sure that I understand the future relationship, but $1.6b for First Capital seems like a good deal.

[Parsad]

Incidentally, alot of this success should rightfully be attributed to the Athappan's...both father and son!  They've essentially built much of our Fairfax Asia business from scratch.  And Sam Chan who has overseen Fairfax Asia since the beginning!  Cheers!

[petec]

Just a great deal for Fairfax in every way!  Cheers!

 

Parsad, could you elaborate?  They've sold one of the absolute crown jewels.  Yes, they got a high price.  And yes, they surfaced some hidden value, and yes, they can de-lever a bit.  Good for the short term.  But long term the success of this will hinge on how much value the Mitsui partnership delivers, and that seems very vague.

[nwoodman]

Slides

 

http://s1.q4cdn.com/579586326/files/doc_downloads/2017/2017.08-Investor-Presentation.pdf

[ourkid8]

Couldn't agree more!!! We are able to unlock US$900 million (us$33/share) in after tax gains to repurchase our stock while at the same time retaining a 25% quota share in the business. 

 

Fairfax seems to have taken advantage of our MSI friends...

 

Just a great deal for Fairfax in every way!  Cheers!

[TwoCitiesCapital]

Did Fairfax acquire first capital for C$49 million? If so, that was a serious home run!!!! 

 

http://www.asiapacific.ca/news/fairfax-financial-holdings-buys-singapores-first-capital-ins

 

Right?!?! I think I had an appreciation for the value of Indian operations while totally overlooking the value of the small, but quickly growing, asian operations.

 

3x books with 25% retained ownership is incredible!

[nwoodman]

Couldn't agree more!!! We are able to unlock US$900 million (us$33/share) in after tax gains to repurchase our stock while at the same time retaining a 25% quota share in the business. 

 

Fairfax seems to have taken advantage of our MSI friends...

 

Just a great deal for Fairfax in every way!  Cheers!

 

That was my take too. It seems like it was too good a deal to pass on and at 3.3xbook and 25% of future business they grudgingly accepted. Prem was adamant that proceeds from the sale of First Capital and ICICI Lombard would be used to repurchase shares. Prem indicated that they can only pay out OMERS et al after 3 years or so and that the short term priority was buy backs.

Details of the Mitsui "partnership" are to be fleshed out over the next few weeks but he sounded excited about it

[ourkid8]

Let me correct you as it gets even better, Fairfax is retaining 25% of current and future business!

 

Couldn't agree more!!! We are able to unlock US$900 million (us$33/share) in after tax gains to repurchase our stock while at the same time retaining a 25% quota share in the business. 

 

Fairfax seems to have taken advantage of our MSI friends...

 

Just a great deal for Fairfax in every way!  Cheers!

 

That was my take too. It seems like it was too good a deal to pass on and at 3.3xbook and 25% of future business they grudgingly accepted. Prem was adamant that proceeds from the sale of First Capital and ICICI Lombard would be used to repurchase shares. Prem indicated that they can only pay out OMERS et al after 3 years or so and that the short term priority was buy backs.

Details of the Mitsui "partnership" are to be fleshed out over the next few weeks but he sounded excited about it

[petec]

Let me correct you as it gets even better, Fairfax is retaining 25% of current and future business!

 

...Which should grow from $400m to $1bn.

 

What intrigues me is why Athappan championed this?  Why is MSI a better home for FC than Fairfax is?  And how good, really, will the Mitsui partnership with wider FFH turn out to be?

 

EDIT: shares up 2.8%.  Efficient markets my a**.

[Crip1]

Wondering what other FFH assets have open-market values far in excess of carrying value...

 

 

I'm not advocating selling one or more, just acknowledging that the value of FFH's assets may be far in excess of current share price.

 

 

 

-Crip

[petec]

Prem was clear on the call that the 25% quota share of FC's premiums basically meant Fairfax keeps 25% of the profits and 25% of the growth.  Whichever Fairfax company gets that has to have capital to back it, but doesn't have to inject equity into FC.  Do Fairfax also get to invest the float thus created, or are they just sharing 25% of the underwriting profit?

[petec]

Wondering what other FFH assets have open-market values far in excess of carrying value...

 

I'm not advocating selling one or more, just acknowledging that the value of FFH's assets may be far in excess of current share price.

 

-Crip

 

With the exception of Crum, the biggest bits of FFH have either been acquired in the recent past (Zenith, Brit, AW) or public in the recent past (Odyssey, Northbridge), so I doubt there are big surprises there.  On the investment side, we know the unrealised gains.  FC is the biggest and best bit of Fairfax Asia - there may be more unrealised value in there but not on the same scale.  I would say this sale and the ICICI transaction surface the majority of the unseen value.

I doubt it.  This is the biggest and best bit of Fairfax Asia.

[flesh]

It seems most of the investors I respect are stacking up an unusual amount of cash relative to their historical allocations as a % of assets right now.........

[Shane]

I am not sure I totally understand:

 

"Fairfax will guarantee loss and LAE reserves of First Capital as of December 31, 2016"

 

does this mean that fairfax gets 25% of the underwriting profit of the business while being 100% liable for underwriting losses in the future?

 

[racemize]

I am not sure I totally understand:

 

"Fairfax will guarantee loss and LAE reserves of First Capital as of December 31, 2016"

 

does this mean that fairfax gets 25% of the underwriting profit of the business while being 100% liable for underwriting losses in the future?

 

I took that to mean on previous underwriting.

[Shane]

Thanks racemize - this seems like an unbelievable deal.

 

If we remove First Capital - what is left of the Asian Insurance business?  How involved was Athappan in running these operations?

[marija]

I think we have enough losses to offset the gains from this sale.

[StubbleJumper]

I am not sure I totally understand:

 

"Fairfax will guarantee loss and LAE reserves of First Capital as of December 31, 2016"

 

does this mean that fairfax gets 25% of the underwriting profit of the business while being 100% liable for underwriting losses in the future?

 

 

My take is that it's a guarantee that there won't be some sort of adverse development.  But when was the last time that FFH have meaningful adverse development?  Mostly we've seen large reserve releases (favourable development) over the past 5 or 6 years.

 

 

SJ