Author Topic: Fairfax acquires Brit PLC  (Read 20871 times)

nwoodman

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Fairfax acquires Brit PLC
« on: February 16, 2015, 07:32:35 PM »
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.


giofranchi

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Re: Fairfax acquires Brit PLC
« Reply #1 on: February 16, 2015, 11:59:56 PM »
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
« Last Edit: February 17, 2015, 12:07:39 AM by giofranchi »
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Phaceliacapital

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Re: Fairfax acquires Brit PLC
« Reply #2 on: February 17, 2015, 12:33:48 AM »
Other facts:

- PE Owned 73% by CVC & Apollo
- Multiple paid is 1.73x tangible
- Have been on the stock exchange for less than a year..
- Premium paid looks OKish..

Lloyds is an important market to be in and they enter a top 5 position now, not much not to like I think.
The harder you work, the luckier you get.

giofranchi

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Re: Fairfax acquires Brit PLC
« Reply #3 on: February 17, 2015, 01:08:58 AM »
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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petec

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Re: Fairfax acquires Brit PLC
« Reply #4 on: February 17, 2015, 01:39:54 AM »
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.
FFH MSFT BRK BAM ATCO LNG IHG TFG CGT DC/A

giofranchi

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Re: Fairfax acquires Brit PLC
« Reply #5 on: February 17, 2015, 01:57:03 AM »
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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petec

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Re: Fairfax acquires Brit PLC
« Reply #6 on: February 17, 2015, 02:11:55 AM »
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.

FFH MSFT BRK BAM ATCO LNG IHG TFG CGT DC/A

gfp

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giofranchi

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Re: Fairfax acquires Brit PLC
« Reply #8 on: February 17, 2015, 06:38:07 AM »
here's a note from Insurance Insider this morning on the relationship -

http://www.insuranceinsider.com/assets/_files/html/alerts/1_1253471_p.html?utm_source=Insider-Publishing&utm_medium=Email&utm_content=Untitled&utm_campaign=Brit+secures+autonomy+with+%241.9bn+Fairfax+sale%3a+Insider+Analysis&utm_cid=16968

Happy Mardi Gras

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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bluedevil

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Re: Fairfax acquires Brit PLC
« Reply #9 on: February 17, 2015, 07:10:33 AM »
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.