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

[Parsad]

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.

 

Yes, a crown jewel, but they received a stupid price for it...over 3 times book!  What I can't believe is that they get to underwrite 25% of MSI's insurance book.  The $1.6B was indecent enough, but that 25% is simply criminal!

 

Take a look at slide 3.  You notice three significant regions where Fairfax does not do as much business as MSI:  Russia, Japan and South America.  FC does about $400M in GPW...MSI does $25B GPW in Japan alone in non-life business.  Then add the Russian market and parts of South America that Fairfax wasn't heavily involved with.

 

Just think it was a really one-sided deal...and fortunately Fairfax is on the right side of it!  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.

 

Yes, a crown jewel, but they received a stupid price for it...over 3 times book!  What I can't believe is that they get to underwrite 25% of MSI's insurance book.  The $1.6B was indecent enough, but that 25% is simply criminal!

 

Take a look at slide 3.  You notice three significant regions where Fairfax does not do as much business as MSI:  Russia, Japan and South America.  FC does about $400M in GPW...MSI does $25B GPW in Japan alone in non-life business.  Then add the Russian market and parts of South America that Fairfax wasn't heavily involved with.

 

Just think it was a really one-sided deal...and fortunately Fairfax is on the right side of it!  Cheers!

 

Yes, I wrote mine before fully appreciating the 25% of FC that they effectively keep. One could argue the p/bv was effectively 4.4x. If they can sell at that price and buy back shares at 1.1x then I see the rationale. But I actually wouldn't describe 3x as a stupid price for a 72%CR insurer. I'm really interested to know why Athappan thought this was such a good deal. Why is he happier at MSI than at FFH?  For me, the real win/lose of this deal will be in the details of the ongoing partnership with MSI.

[Txvestor]

I think the price is amongst the highest I've seen. It's even higher than the 2.8 BV or so multiple MKL recently paid for State National. And that one came with a lot of synergies and float etc. then the quota share is like the icing on the cake.

Prem made it clear that this was a one off and a deal championed by Mr Atthapan who felt like this would help first capital grow their footprint much faster in Asia and beyond than they are currently able to do with Fairfax backing alone. That was I think the impetus for the deal from his perspective. I notice this is for 97.7% of the company, not sure whether Mr Atthapan has a small stake he is retaining or if the 2.3% is part of the employee share ownership or what exactly. If anyone has any insight into it they can share I would appreciate them sharing it.

The $900m after tax gain plus the $700m plus from ICICI Lombard that is yet to hit the books should make a meaningful $57 lift to the BV per share which by my calculation goes from $378 to $435 all other things being equal.

FC is a crown jewel and Prem was at pains to say this was a one off and done with the initiation of Mr Atthapan who is retaining his roles with both Fairfax Asia and FC. The 25% quota share arrangement offers tremendous flexibility to Fairfax allowing them to utilize their insurance capital more effectively while outsourcing the underwriting to one of their best underwriters in Mr Atthapan's team that has a far larger pond in which to now go fishing(underwriting). I think he has decided to take 1/4th of a much larger cake while receiving an excellent price for the business as well. Thats as close as one gets to having your cake and eating it too. LOL. He stated 1B written premium as if that was a foregone conclusion which leads me to believe Mr Atthapan sees strong growth imminent from this deal. Bear in mind FC is already overcapitalized for the premiums it is currently writing! So this ceding of 25% was something phenomenal to get IMHO. The initially seeded capital to FC in 2002 was $35M USD and the sale price represents a 29% PA compound rate over 15yrs, even the legendary Peter Lynch record was just for 13yrs! It just helps puts Mr Atthapan's underwriting and compounding record in perspective!

My one concern as a long term shareholder is that this news will cause a run up in FFH share price and having just significantly diluted ourselves with shares in the $445 range, we may have to pay significantly more to buy them back. Perhaps allied world would turn out to be such a phenomenal home run that my fears are misplaced but I wonder if this couldn't be done in a better way.

[Parsad]

I think the price is amongst the highest I've seen. It's even higher than the 2.8 BV or so multiple MKL recently paid for State Natiinal. And that one came with a lot of synergies and float etc.

then the quota share is like the icing on the cake.

Prem made it clear that this was a one off and a deal championed by Mr Atthapan who felt like this would help first capital grow their footprint must faster in Asia and beyond than they are currently able to do with Fairfax backing. That was I think the impetus for the deal from his perspective. I notice this is for 97.7% of the company, not sure whether Mr Atthapan has a small stake he is retaining or if the 2.3% is part of the employee share ownership or what exactly. If anyone has any insight into it they can share I would appreciate them sharing it.

The $900m after tax gain plus the $700m plus from ICICI Lombard that is yet to hit the books should make a meaningful $57 lift to the BV per share which by my calculation goes from $378 to $435 all other things being equal.

FC is a crown jewel and Prem was at pains to say this was a one off and done with the initiation of Mr Atthapan who is retaining his roles with both Fairfax Asia and FC. The 25% quota share arrangement offers tremendous flexibility to Fairfax allowing them to utilize their insurance capital more effectively while outsourcing the underwriting to one of their best underwriters in Mr Atthapan's team that has a far larger pond in which to now go fishing(underwriting). I think he has decided to take 1/4th of a much larger cake while receiving an excellent price for the business as well. He stated 1B written premium as if that was a foregone conclusion which leads me to believe Mr Atthapan see strong growth imminent from this deal. Bear in mind FC is already overcapitalized for the premiums it is writing! So this ceding of 25% was something phenomenal to get IMHO. The initially seeded capital to FC in 2002 was $35M USD and the sale price represents a 29% PA compound rate over 15yrs, even Peter Lynch record was just for 13yrs! It just puts Mr Atthapan's underwriting and compounding record in perspective!

My one concern as a long term shareholder is that this news will cause a run up in FFH share price and

having just significantly diluted ourselves with shares in the $445 range, we may have to pay significantly more to buy them back. Perhaps allied world would turn out to be such a phenomenal home run that my fears are misplaced but I wonder if this couldn't be done in a better way.

 

Good post Txvestor!  If I were Fairfax, I wouldn't get antsy buying back shares or deploying that money.  We've learned from history that cash is king at certain times, and Fairfax is in the rare position of holding a boatload of it. 

 

Have we solved all of the problems that existed for them to hedge markets and hold deflation hedges?  Not even close!  Governments are just beginning to unwind their bond positions...Europe is still at very real risk of falling apart...sovereign debt loads have rarely been higher on a global basis.  Notice the things that are occurring...Germany repatriating gold...China forcing changes to how state-run sovereign funds are deploying assets...increasing global tension...huge increases in ETF investments...massive algorithmic trading...still historically low global interest rates...consumer leverage still very high...margin of safety in assets prices is quite low...you can go on and on.  The markets are ripe for a correction...it will only take one single event to make things unravel!

 

My opinion...Fairfax just sit on the damn cash and wait for the fat-pitch!  Cheers!