Corner of Berkshire & Fairfax Message Board

General Category => Fairfax Financial => Topic started by: nwoodman on February 16, 2015, 07:32:35 PM

Title: Fairfax acquires Brit PLC
Post by: nwoodman 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.
Title: Re: Fairfax acquires Brit PLC
Post by: giofranchi 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
Title: Re: Fairfax acquires Brit PLC
Post by: Phaceliacapital 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.
Title: Re: Fairfax acquires Brit PLC
Post by: giofranchi 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
Title: Re: Fairfax acquires Brit PLC
Post by: petec 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.
Title: Re: Fairfax acquires Brit PLC
Post by: giofranchi 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
Title: Re: Fairfax acquires Brit PLC
Post by: petec 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.

Title: Re: Fairfax acquires Brit PLC
Post by: gfp on February 17, 2015, 06:29:31 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
Title: Re: Fairfax acquires Brit PLC
Post by: giofranchi 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
Title: Re: Fairfax acquires Brit PLC
Post by: bluedevil 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.
Title: Re: Fairfax acquires Brit PLC
Post by: petec on February 17, 2015, 07:19:44 AM

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.
Title: Re: Fairfax acquires Brit PLC
Post by: Cageyone on February 17, 2015, 07:26:57 AM
Mr Market seems to like this transaction - FFH up about 4 per cent at the moment.
Title: Re: Fairfax acquires Brit PLC
Post by: giofranchi on February 17, 2015, 07:42:36 AM
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
Title: Re: Fairfax acquires Brit PLC
Post by: fareastwarriors on February 17, 2015, 09:00:29 AM
Brit Insurance Policy Should Pay Out for Fairfax

Canadian group’s all-cash agreed takeover offer for Lloyd’s of London group Brit Insurance should give all involved a healthy return


http://www.wsj.com/articles/brit-insurance-policy-should-pay-out-for-fairfax-heard-on-the-street-1424182126 (http://www.wsj.com/articles/brit-insurance-policy-should-pay-out-for-fairfax-heard-on-the-street-1424182126)
Title: Re: Fairfax acquires Brit PLC
Post by: petec on February 17, 2015, 09:08:31 AM
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?!  ;)
Title: Re: Fairfax acquires Brit PLC
Post by: txlaw on February 17, 2015, 10:16:48 AM
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.
Title: Re: Fairfax acquires Brit PLC
Post by: LakesideB on February 17, 2015, 10:26:50 AM
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."

Title: Re: Fairfax acquires Brit PLC
Post by: TwoCitiesCapital on February 17, 2015, 10:31:44 AM
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.
Title: Re: Fairfax acquires Brit PLC
Post by: txlaw on February 17, 2015, 10:34:54 AM
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.
Title: Re: Fairfax acquires Brit PLC
Post by: Partner24 on February 17, 2015, 01:05:09 PM
Sanjeev, do you went to lunch?   ;)

Title: Re: Fairfax acquires Brit PLC
Post by: Phoenix01 on February 17, 2015, 04:18:32 PM
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.
Title: Re: Fairfax acquires Brit PLC
Post by: Txvestor on February 17, 2015, 04:38:41 PM
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.
Title: Re: Fairfax acquires Brit PLC
Post by: giofranchi on February 18, 2015, 12:37:38 AM
from transcript

Could anyone post a pdf file of the transcript?

Thank you! :)

Gio
Title: Re: Fairfax acquires Brit PLC
Post by: petec on February 18, 2015, 12:53:40 AM
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!
Title: Re: Fairfax acquires Brit PLC
Post by: cwericb on February 18, 2015, 04:51:36 AM
"Yeah, sorry about that - I had an early transcript which said "is expensive".   It's been corrected since!"

Well thanks for clarifying that. Jeez, I was wondering what he was thinking.
Title: Re: Fairfax acquires Brit PLC
Post by: Jurgis on February 18, 2015, 06:19:39 AM
The stock price is over $500 per share. Of course it's expensive! Duh, what are you guys thinking...





Just kidding  8)
Title: Re: Fairfax acquires Brit PLC
Post by: LakesideB on February 18, 2015, 06:58:10 AM
from transcript

Could anyone post a pdf file of the transcript?

Thank you! :)

Gio
Title: Re: Fairfax acquires Brit PLC
Post by: giofranchi on February 18, 2015, 07:05:18 AM
Thank you, LakesideB! :)

Gio
Title: Re: Fairfax acquires Brit PLC
Post by: Txvestor on February 18, 2015, 07:52:31 AM
The stock price is over $500 per share. Of course it's expensive! Duh, what are you guys thinking...





Just kidding  8)

As value investors say, Price is what you pay, value is what you get.
I agree the price is expensive! As long as value builds, i want it to get even more pricey!
Title: Re: Fairfax acquires Brit PLC
Post by: Phoenix01 on February 18, 2015, 01:11:57 PM
from transcript

Could anyone post a pdf file of the transcript?

Thank you! :)

Gio
Thanks again for the transcript.  Prem mentioned last year that the US bond rally was coming to an end.  This could be really good time for FFH to dump them for productive assets.
Title: Re: Fairfax acquires Brit PLC
Post by: giofranchi on February 19, 2015, 03:09:57 AM
So FFH agreed to pay £3.05 per share in cash, consisting of £2.80 in cash and the expected 2014 final dividend, payable by Brit, of £0.25 in cash to Brit shareholders.

… I am not sure I understand this clearly: so, FFH has paid £3.05 or £2.80 per share?... After all, FFH was not a Brit shareholder in 2014, right?... Therefore, no 2014 final dividend should be paid by Brit to FFH…

What am I missing here?

Gio
Title: Re: Fairfax acquires Brit PLC
Post by: petec on February 19, 2015, 03:26:22 AM
So FFH agreed to pay £3.05 per share in cash, consisting of £2.80 in cash and the expected 2014 final dividend, payable by Brit, of £0.25 in cash to Brit shareholders.

… I am not sure I understand this clearly: so, FFH has paid £3.05 or £2.80 per share?... After all, FFH was not a Brit shareholder in 2014, right?... Therefore, no 2014 final dividend should be paid by Brit to FFH…

What am I missing here?

Gio

My understanding is that the 25p will be paid in 2015 and will all go to FFH as the 100% shareholder on the record date.   So they pay 305 and get 25p back, rather than paying 305 after the 25p has gone to the previous owners.
Title: Re: Fairfax acquires Brit PLC
Post by: WhoIsWarren on February 19, 2015, 04:14:49 AM
From the press release:

"Under the terms of Fairfax’s offer for the Brit Shares (the “Offer”), Brit shareholders will be entitled to receive 305 pence in cash per Brit Share (the “Brit Offer Price”), inclusive of any final dividend for the year ended December 31, 2014."

petec, my understanding is that FFH will be paying 305p (not a net 280p, as you suggest).  Shareholders as at the record date are the ones who will receive the dividend and, while the record date hasn't been determined yet, it would be highly unusual in my experience for the acquirer to receive the dividend.  So as I see it, the current shareholders of Brit -- i.e. Apollo, CVC et al -- will receive 25p per share as a dividend, in addition to the 280p per share "ex-div".

Title: Re: Fairfax acquires Brit PLC
Post by: giofranchi on February 19, 2015, 04:16:40 AM
My understanding is that the 25p will be paid in 2015 and will all go to FFH as the 100% shareholder on the record date.   So they pay 305 and get 25p back, rather than paying 305 after the 25p has gone to the previous owners.

Ok! But it seems to me that FFH gets the dividend from money earned by Brit during 2014, a year in which FFH’s capital was invested somewhere else, not in Brit.

In other words what I mean is the following: for £3.05 per share FFH is buying not only Brit’s future earnings from 2015 onward, but also Brit’s 2014 final dividend paid out from Brit's 2014 earnings.

Am I wrong?

Gio
Title: Re: Fairfax acquires Brit PLC
Post by: giofranchi on February 19, 2015, 04:59:13 AM
Let’s suppose Brit pays out 100% of 2014 earnings. In June Brit declared an interim dividend of £0.0625 and now a final dividend of £0.25. This means that 2014 full year earnings have been: £0.0625 + £0.25 = £0.3125, which would be consistent with the statement that FFH is paying less than 10x 2014 earnings.

Now, given the fact Brit has earned £0.142 during the first half of 2014, the second half earnings should be: £0.3125 - £0.142 = £0.1705. Which added to net tangible assets at the end of June 2014 give us a net tangible assets at the end of 2014: £1.794 + £0.1705 = £1.9645.

Then, if we subtract the £0.25 final dividend, we get: £1.9645 - £0.25 = £1.7145.

And the multiple paid by FFH should be: £2.80 / £1.7145 = 1.63.

Is this almost right?

Now let’s look at it this way: if Brit keeps declaring dividends in 2015 which are in line with those declared for 2014, FFH will receive a £0.3125 / £2.80 = 11.16% dividend yield on the cash it has used to purchase Brit + Brit’s float to invest.
Am I looking at this in the right way? If so, not bad! What do you think?

Gio
Title: Re: Fairfax acquires Brit PLC
Post by: petec on February 19, 2015, 05:16:50 AM
Let’s suppose Brit pays out 100% of 2014 earnings. In June Brit declared an interim dividend of £0.0625 and now a final dividend of £0.25. This means that 2014 full year earnings have been: £0.0625 + £0.25 = £0.3125, which would be consistent with the statement that FFH is paying less than 10x 2014 earnings.

Now, given the fact Brit has earned £0.142 during the first half of 2014, the second half earnings should be: £0.3125 - £0.142 = £0.1705. Which added to net tangible assets at the end of June 2014 give us a net tangible assets at the end of 2014: £1.794 + £0.1705 = £1.9645.

Then, if we subtract the £0.25 final dividend, we get: £1.9645 - £0.25 = £1.7145.

And the multiple paid by FFH should be: £2.80 / £1.7145 = 1.63.

Is this almost right?

Now let’s look at it this way: if Brit keeps declaring dividends in 2015 which are in line with those declared for 2014, FFH will receive a £0.3125 / £2.80 = 11.16% dividend yield on the cash it has used to purchase Brit + Brit’s float to invest.
Am I looking at this in the right way? If so, not bad! What do you think?

Gio

I think your maths is correct if the earnings are sustainable - probably why the market liked the deal so much.

For me it is mildly transformative in that it swings the mix of insurance businesses significantly towards the quality end (Odyssey, Zenith, Fairfax Asia, Brit) and away from the parts that aren't necessarily bad but have struggled more (Crum, Northbridge).   That's the impact for me.
Title: Re: Fairfax acquires Brit PLC
Post by: petec on February 19, 2015, 05:21:26 AM
From the press release:

"Under the terms of Fairfax’s offer for the Brit Shares (the “Offer”), Brit shareholders will be entitled to receive 305 pence in cash per Brit Share (the “Brit Offer Price”), inclusive of any final dividend for the year ended December 31, 2014."

petec, my understanding is that FFH will be paying 305p (not a net 280p, as you suggest).  Shareholders as at the record date are the ones who will receive the dividend and, while the record date hasn't been determined yet, it would be highly unusual in my experience for the acquirer to receive the dividend.  So as I see it, the current shareholders of Brit -- i.e. Apollo, CVC et al -- will receive 25p per share as a dividend, in addition to the 280p per share "ex-div".

I think the effect is the same: either way, FFH are paying 2.80 for the ex-div book value of the company.   
Title: Re: Fairfax acquires Brit PLC
Post by: WhoIsWarren on February 19, 2015, 05:27:30 AM
Yep. Mountain out of molehill and all that. I should sit back down and be quiet  ;)
Title: Re: Fairfax acquires Brit PLC
Post by: giofranchi on February 19, 2015, 05:50:46 AM
If you think that Brit investments in June 2014 were worth £2,564.2 million and FFH is using (£1,220 / 305) x 280 = £1,120 million of its cash, and you assume HWIC could earn their historical 9% return on investments, FFH in addition to Brit’s dividend could achieve another £2,564.2 x 0.09 = £231 / £1,120 = 20.6% return on the cash employed.

Furthermore, £505 million in Brit’s portfolio are cash and equivalent. Therefore, the true cash used by FFH is: £1,120 - £505 = £615 million.

Imo the market hasn't appreciated this deal highly enough! ;)

Gio
Title: Re: Fairfax acquires Brit PLC
Post by: petec on February 19, 2015, 06:26:36 AM
Yep. Mountain out of molehill and all that. I should sit back down and be quiet  ;)

Ha ha!   I'm a little hungover today and you certainly had me scratching my head!   Along with a friend who is making my head hurt by trying to persuade me of the benefits of a full-reserve banking system, it's been a taxing day ;)
Title: Re: Fairfax acquires Brit PLC
Post by: petec on February 19, 2015, 06:32:21 AM
If you think that Brit investments in June 2014 were worth £2,564.2 million and FFH is using (£1,220 / 305) x 280 = £1,120 million of its cash, and you assume HWIC could earn their historical 9% return on investments, FFH in addition to Brit’s dividend could achieve another £2,564.2 x 0.09 = £231 / £1,120 = 20.6% return on the cash employed.

Furthermore, £505 million in Brit’s portfolio are cash and equivalent. Therefore, the true cash used by FFH is: £1,120 - £505 = £615 million.

Imo the market hasn't appreciated this deal highly enough! ;)

Gio

Personally I think 9% is way too high and was boosted by the greatest bond bull run in history (unless the deflation swaps pay out big in which case 9% is not too high!).

Also, I don't think you should subtract the full £505m but only the part that is excess reserves and can be dividended to the holdco.   They don't actually own the rest.   I know you can make an argument about float being permanent capital but I think you're heading towards what I might politely call "Italian fiscal accounting standards" with that argument  ;)

Still a good deal though.
Title: Re: Fairfax acquires Brit PLC
Post by: giofranchi on February 19, 2015, 07:03:48 AM
I know you can make an argument about float being permanent capital but I think you're heading towards what I might politely call "Italian fiscal accounting standards" with that argument  ;)

Ahahah!! ;)
No, well… When Watsa says 25% of FFH portfolio is in cash, he is thinking about float as well, either be it permanent capital or not! Right?
If you use part of that cash to buy other float held in cash, where is the difference?

Gio
Title: Re: Fairfax acquires Brit PLC
Post by: petec on February 19, 2015, 08:14:01 AM
I know you can make an argument about float being permanent capital but I think you're heading towards what I might politely call "Italian fiscal accounting standards" with that argument  ;)

Ahahah!! ;)
No, well… When Watsa says 25% of FFH portfolio is in cash, he is thinking about float as well, either be it permanent capital or not! Right?
If you use part of that cash to buy other float held in cash, where is the difference?

Gio

I think float is best regarded as a permanent loan.   In other words, if you use float to buy Brit, what you're actually doing is borrowing to buy Brit.   That doesn't increase your net worth, it merely reallocates the loan from funding a cash position to funding a position in Brit.

Over time, as Brit pays out dividends, that repays the loan, and your net worth rises that way.
Title: Re: Fairfax acquires Brit PLC
Post by: giofranchi on February 19, 2015, 08:28:26 AM
What I meant to say is this: FFH is giving £1,120 million in cash and among the things it will receive there are £505 million in cash…

Probably I don’t understand what I am missing! ;)

Gio
Title: Re: Fairfax acquires Brit PLC
Post by: gfp on February 23, 2015, 10:43:43 AM
my apologies if this has already been posted/discussed, but I saw this blurb from Insurance Insider in my inbox a few moments ago and found it interesting.  I have not received the entire article yet - but it sounds like Prem pulled a Warren on this negotiation -

"Watsa forestalls Brit process with snap take-it-or-leave-it bid

Fairfax Financial founder Prem Watsa prevented a potential bidding war for Brit Insurance by offering a $1.88bn binding all-cash offer just 10 days after entering into serious negotiations, and threatened to walk away if the proposal was not accepted in short order.

Sources said that the ingredients were in place for a semi-formal auction process, with at least two other parties in discussions with Brit, including an Asian strategic interest.

It is understood that one of the other parties involved was Japanese big three member Mitsui Sumitomo - the business that came closest to consummating a deal with Brit before its IPO last spring."
Title: Re: Fairfax acquires Brit PLC
Post by: TwoCitiesCapital on February 23, 2015, 10:58:10 AM
my apologies if this has already been posted/discussed, but I saw this blurb from Insurance Insider in my inbox a few moments ago and found it interesting.  I have not received the entire article yet - but it sounds like Prem pulled a Warren on this negotiation -

"Fairfax Financial founder Prem Watsa prevented a potential bidding war for Brit Insurance by offering a $1.88bn binding all-cash offer just 10 days after entering into serious negotiations, and threatened to walk away if the proposal was not accepted in short order…"

Ha ha! Nice!
Title: Re: Fairfax acquires Brit PLC
Post by: giofranchi on February 25, 2015, 01:44:49 AM
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.

Well, it seems I was not too far off: from the 2014 AR in attachment tangible assets per share at the end of the year were 194 pps, therefore the multiple paid is: 305 / 194 = 1.57.

Cheers,

Gio
Title: Re: Fairfax acquires Brit PLC
Post by: FFHWatcher on February 25, 2015, 05:52:18 AM
Wouldn't it be better to look at Brit's excess capital?  FFH operating subs have a $25B portfolio but aside from the surplus, that belongs to the policyholders.   
(from Brit press release) After allowing for these dividends, our excess of capital resources over management entity capital requirements of £251.7m, (which is about $388M US$.

Prem always breaks out their holding company investments vs. their operating company portfolio investments.  I do not believe FFH is using their float/operating company $25B investment portfolio to buy Brit.  That will be financed and paid for from the holdco. 
Title: Re: Fairfax acquires Brit PLC
Post by: gfp on February 25, 2015, 05:54:51 AM
insurance insider article this morning -
-----------------
Brit CEO Mark Cloutier has underlined his intention to remain at the company for the foreseeable future, as well as indicating that there may be opportunities for him in the longer-term at other operations within Fairfax Financial.

In addition to publishing its full-year results this morning (25 February) - which showed a 40.5 percent jump in pre-tax profits to £149.1mn - Brit announced the promotion of Matthew Wilson from head of global specialty to group deputy CEO and CUO.

Wilson has long been assumed to be Cloutier's designated successor, which the CEO said the business has made no secret of.

"Matthew has been the architect of the significant improvement in our underwriting business, and in my view his leadership is critical to the future of the business," Cloutier told The Insurance Insider.

"That doesn't mean that I'm going anywhere soon...but it does set a clear indication of the future direction of the business."

Cloutier went on to say that there was no timetable for how long he would remain in charge at Brit, but that he intended to be at the helm for "some time", adding: "My principal job right now is to make Brit fit into Fairfax and make it a big contributor to shareholder value at Fairfax."

And hinting at future collaborations with Fairfax CEO Prem Watsa, Cloutier added: "My hope is that I'll continue to work with Matthew and the team here for the foreseeable future, and it may be that I'll have the opportunity to poke my fingers around into things that Prem may ask me to help out with."

Watsa has known Cloutier since the latter worked for Fairfax's loss adjuster Morden & Helwig. The two have remained in contact ever since, and their relationship was thought to be a key factor in the speed at which the proposed merger was agreed.

The Fairfax CEO prevented a potential bidding war for Brit by offering a $1.88bn binding all-cash offer just 10 days after entering into serious negotiations.

Commenting on the importance of his personal relationship with Watsa in getting the deal over the line quickly, Cloutier said that the fact they'd done business together in the past and knew how each other worked certainly helped.

"There have been a couple of pretty large transactions that I've been involved in with Prem where we were able to do [them] on a hand shake, the old-fashioned way. So I think a combination of a longstanding relationship and understanding of each other - and certainly from my side an appreciation of how Prem does things - was an enabler for the transaction to move very quickly," he said.

"Given we'd traded in the past, there was a level of trust that really enabled the transaction, which is what underpinned the ability of the deal to get done quickly. Given the business we're in, the market outlook and all the uncertainty facing our businesses today, a rapid, well-priced deal with the highest level of certainty was in the best interest of all of our shareholders."

Cloutier also suggested that Brit's chief investment officer John Stratton, the main architect behind the carrier's impressive 2.9 percent investment return, could yet be retained.

Under traditional Fairfax take-overs, the investments of the merged entity are moved into Fairfax's portfolio.

Cloutier said that he expected Brit would move towards the Fairfax model, but said he would not speculate on what that meant for the company's staff.

He added: "Having said that, John's done an outstanding job for us, and that's recognised, so I don't think people should make any assumptions one way or the other."


Title: Re: Fairfax acquires Brit PLC
Post by: petec on February 25, 2015, 06:00:48 AM
Wouldn't it be better to look at Brit's excess capital?  FFH operating subs have a $25B portfolio but aside from the surplus, that belongs to the policyholders.   
After allowing for these dividends, our excess of capital resources over management entity capital requirements of £251.7m, (which is about $388M US$.

Prem always breaks out their holding company investments vs. their operating company portfolio investments.  I do not believe FFH is using their float/operating company $25B investment portfolio to buy Brit.  That will be financed and paid for from the holdco.

That's exactly what I think you should use.   So they pay £1120 and get to take out £252m of excess capital (in theory anyway) so really they paid £870 for the company itself.   Which is nice...
Title: Re: Fairfax acquires Brit PLC
Post by: Cageyone on February 25, 2015, 06:03:50 AM
Globalfinance, many thanks for the link. It really underscores that this is a quality acquisition and adds to my comfort as to the way that Prem negotiated and financed it!