Fairfax sells remainder stake in ICICI Lombard ending 18 year run

[Viking]

In the past 3 weeks Fairfax has made 2 large sales in ICICI Lombard divesting the last of its holdings. If my math is correct both sales = $730 million. Am i calculating this right? Surprising that FFH did not issue a press release given the sizes of the transactions.

 

What to do with the proceeds? In the Q2 conference call Paul Rivett was asked by the RBC analyst what the plan was about use of cash (low share price, large cash balance, why such low share buybacks?). The answer was the priority today was to support growth of insurance companies in current hard market; and Fairfax is obligated to take out minority partners in Brit and Eurolife in next 12 months.

 

I think one of the overhangs right now for FFH is lack of share buybacks. And until their partners in Brit and Eurolife are taken out stock buybacks will remain low.

 

From page 51 of Fairfax Q2 report: “The company's 9.9% equity interest in ICICI Lombard is classified as a common stock portfolio investment and included in holding company cash and investments in the Fairfax Asia reporting segment with a fair value at June 30, 2019 of $649.8 (December 31, 2018 - $497.1).”

 

Sale 1 Sept 27 (hat tip wisdom and Jeast): sold 4.99 per cent equity stake in ICICI Lombard general insurance for Rs 2,562 crore ($36x10,000,000 = US $360 million)

 

https://www.business-standard.com/article/companies/fairfax-financial-holdings-sells-5-in-icici-lombard-for-rs-2-562-crore-119092700048_1.html

 

Sale 2 Oct 17: sold its entire remaining stake in ICICI Lombard General Insurance Co. Ltd shares worth Rs2,626.5 crore ($37x10,000,000= US $370 million)

 

https://www.livemint.com/companies/news/prem-watsa-s-fairfax-sells-remainder-stake-in-icici-lombard-ending-18-year-run-11571239694267.html

 

 

[Viking]

For posterity sake, here is a summary of Fairfax investment in ICICI (from page 5 of 2017 Fairfax Annual Report). An example of when they are right the result can be quite spectacular. As i start getting back up to speed with Fairfax i am surprised at their focus on ‘harvesting’ gains sitting in their investment portfolio.

 

“ICICI Lombard is an Indian insurance company that we began in 2001 from scratch as a minority partner with ICICI Bank. Over the following 16 years, ICICI Lombard went on to become the largest non-government-owned property and casualty insurance company in India. Until fairly recently, our ownership interest was limited to 26% by government mandate. About three years ago, the government allowed the foreign ownership to go to 49%, which resulted in our going to 35% by buying 9% from ICICI Bank. Since then, given ICICI Lombard’s intent to go public, ICICI Bank wanting to control ICICI Lombard with at least 55% ownership, and Indian law requiring that the public own at least 25% of a public company, our ownership would be reduced to a mere 20%. As property and casualty insurance is our core business and we are very optimistic about the growth prospects in India, and as Indian law does not permit an ownership of 10% or more in more than one insurance company, we agreed with ICICI Bank that we would reduce our interest in ICICI Lombard to below 10% so that we could start our own property and casualty company in India, Digit. ICICI Lombard is a great company led by an exceptional leader, Bhargav Dasgupta, and we wish them much success in the years to come. We have thoroughly enjoyed our partnership with ICICI Bank and its CEO Chanda Kochhar and we wish them also much success in the future.

 

The reduction in our equity interest in ICICI Lombard from 35% to 9.9% resulted in cash proceeds of $909 million plus our continuing to own 45 million shares of ICICI Lombard worth $450 million at the IPO (now worth about $550 million) resulting in an after-tax gain of $930 million.”

[Cigarbutt]

For posterity sake, here is a summary of Fairfax investment in ICICI (from page 5 of 2017 Fairfax Annual Report). An example of when they are right the result can be quite spectacular. As i start getting back up to speed with Fairfax i am surprised at their focus on ‘harvesting’ gains sitting in their investment portfolio.

...

To complete the picture, here's a quote from their 2000 annual report when the ICICI-Lombard 'venture' was first mentioned:

"After about five years of watching the developments in the state owned property and casualty industry in India, Fairfax was able to announce a joint venture with ICICI, a dynamic Indian commercial bank, as the Indian government decided to open up the industry to foreign investment for the first time since 1972. The joint venture, called ICICI-Lombard, gives us a maximum equity interest of 26% (under current law) for a capital investment of $10 million. This project required a significant commitment from a Fairfax-wide team to complete. Congratulations to Chandran Ratnaswami, Paul Fink, Jim Dowd, Jim Migliorini, Byron Messier, Kim Tan and many others for providing this long term opportunity to Fairfax. We expect to be writing policies this year."

 

So a spectacular result built from scratch and sold in waves. I've heard that there is a statue of Sir John Templeton in their head office and, given their historical investment style associated with marginal to spectacular successes and failures, Sir Templeton apparently has said, at some point, that an investment manager will do well if he or she is right at least 65% of the times. I've come to the conclusion that this benchmark needs to be met again in order to warrant a capital commitment and I'm still looking to be convinced. But thanks for the update and will look forward to your inputs.

 

[Spekulatius]

While a great return, it seems like they sell a great business, but can’t get rid of the dogs with fleas. RFP, Stelco, BB etc. is what they need to sell.

 

Rebuilding an  insurance business in India will take a lot of time.

[Sombunall]

Agree... what's the over/under on how long it takes them to sell any one of those dogs - RFP, Stelco and BB?

 

A year?

 

Two years?

 

Never?

 

I wonder...

[petec]

Agree... what's the over/under on how long it takes them to sell any one of those dogs - RFP, Stelco and BB?

 

A year?

 

Two years?

 

Never?

 

I wonder...

 

Probably not for this thread, but I'd be really interested to hear a well reasoned sell thesis for any of these stocks at current levels, if you have the time. Preferably one that goes beyond "I believe in investing in high quality businesses and these are junk", which is reasonable but has been aired before.

 

 

[petec]

It's worth bearing in mind they didn't want to sell. If anything they wanted a higher stake, but ICICI wanted an IPO and control and the remaining % was too small for Fairfax so they decided to build Digit. I strongly suspect that, had the law allowed, FFH would have had a higher % of ICICI from day 1, and possibly control. The law now allows them control and they have it at Digit. I'll be interested to see what they do with that.

 

Separately, are mine eyes deceiving me or did they sell this at 10x book?!

[Viking]

On 10/21/2019 at 1:14 AM, petec said:

It's worth bearing in mind they didn't want to sell. If anything they wanted a higher stake, but ICICI wanted an IPO and control and the remaining % was too small for Fairfax so they decided to build Digit. I strongly suspect that, had the law allowed, FFH would have had a higher % of ICICI from day 1, and possibly control. The law now allows them control and they have it at Digit. I'll be interested to see what they do with that.

 

Separately, are mine eyes deceiving me or did they sell this at 10x book?!

 

I am doing an update of Fairfax's investment in ICICI Lombard. In doing my research, I came across this old thread. What have we learned over the past 5 years? Back in 2017, Fairfax nailed the pivot of their P/C insurance business in India - in hindsight, the move was exceptional. It has generated billions in shareholder value. Probably more importantly, it secured a bright future for Fairfax's P/C insurance business in India for the coming decades. When Fairfax reports Q2 results we should get an update on what their stake in Digit is worth. Digit is trading up nicely since successfully completing their IPO.  

 

@petec you were spot of with your comments back in 2019. Well done.

Edited July 5 by Viking