WED - Westaim Corporation

[chompsterama]

Chompsterama: Thanks for the comments.  What's your source behind your claim that there was no interest in HIIG at  > 80% BV?  Not doubting it, but I've been trying to piece together some info on that sales process with no luck.  Westaim made a semi-cryptic PR about unsolicited interest, but I read somewhere they had engaged Credit Suisse to shop their stake. 

 

Insurance brokers/M&A contacts are very aware of the kabuki dance.  Both of those I ran it by offered similar details:  Westaim wants too much.  Offers are ~80%/bv.

[Mondegreen]

Based on AUM growth I expect Arena Investors to be marginally profitable in Q1 of this year. But  I have trouble seeing how they plan to scale this operation significantly, let alone efficiently, when their whole investment thesis  seems to revolve around small deals.  So I don't put a lot of faith in Arena Investors being a huge engine of growth for Westaim.

 

I do think we're seeing some scale at Arena. Taking fee income and OpEx (sorry for formatting):

 

Year   AUM Fee income OpEx         Total

2019   1300     28.3   -27.8         0.5

2018   1024     21.1   -22.6         -1.5

2017   760        13.1 -20.6         -7.5

2016   380       8.8 -13.5         -4.7

 

They currently have (According to Linked In) 64 employees so an average of $321,875 per head and ~85 positions so around $15M avg position size, will be interesting to see how much these scale with growth in AUM.

 

For reference they funded:

68 deals from Jan-Dec 2018

80 deals from Mar 2018 - Mar 2018

 

Will also be interesting to see how they fared through March/April this year. Given that they just raised $300M I think its unlikely they fared too badly. Should this be true, I can't see how these current prices are justified.

[doc75]

Thanks again for the comments.

 

HIIG BV was $370m at Dec 31, including $142m of goodwill/intangibles.  They had $75m of equity investments.  The S&P declined 20% from Dec 31 to March 31 so let's say a $15m loss there.  The LPT transaction will take BV down by another $34m (post-tax). 

 

Anyone have any insight as to why the rights offering has been restructured? 

 

Originally it was going to be a $30m offering, with the purchase price simply being the BVPS as at Dec 31, which was approx 370/67 = $5.52 according to HIIG financials.

 

It has now been changed to be a $100m issue, wherein subscribers purchase convertible preferred shares with $50 face value and initial conversion price set at $1.74.  But I must be misunderstanding something with respect to the conversion.  Why would it be set at 1/3 book?  Naively it looks like a way of coercing shareholders to pony up for their pro-rata allotment or else be substantially diluted by others buying below book.

 

PS: I assume this has to do with the initial rights offering being oversubscribed by roughly the same 3:1 ratio.

 

 

[Mondegreen]

Q1 report is out: https://westaim.com/wp-content/uploads/2020-First-Report-to-Shareholders-FINAL.pdf

[doc75]

Q1 report is out: https://westaim.com/wp-content/uploads/2020-First-Report-to-Shareholders-FINAL.pdf

 

Westaim is now carrying HIIG at 1.0x book.  They say the change is due to the general decrease in P&C multiples, though I was curious how they'd keep it at 1.1x anyway with a $100m offering being done at book.  Combined ratio 97.% and no net reserves development, but there was another $4.4m adverse effect from the Commercial segment.  They also booked a $2m COVID-related reserve this quarter.

 

A big dividend from the Arena FINCOs to the parent provided the missing liquidity for the HIIG rights purchase.  Arena Investors AUM still at 1.3bn as of March 31 but should was up to 1.6bn in April according to 3rd party reports.  There's a lot of money flowing into distressed funds.  I hope Arena isn't in too much of a hurry.

 

Book value now CAD$3.26. 

 

 

 

 

 

[Philbert77]

Can someone please explain this whole HIIG rights offering to me? How does it benefit Westaim to participate in this?

[doc75]

Can someone please explain this whole HIIG rights offering to me? How does it benefit Westaim to participate in this?

 

I think it's mostly about buffeting capital requirements at HIIG to put it into a stronger position for a future IPO. 

 

The offering was originally to be $30m and was scheduled to close Dec 31.  An update on Jan 13 advised it would close sometime in Q1.  Then on March 19 we learned of the LPT transaction and the upsizing to $100m.  No details were given about the upsize aside from saying the offering was oversubscribed.  But surely the LPT transaction and market conditions must have come into play.

 

As I said in an earlier post I don't understand the mechanics of the new conversion price at 1/3 book, and I don't know if this has anything to do with Westaim putting in more capital than expected/desired.    I await the opinion of more astute observers. :)

 

 

 

 

[fishwithwings]

Does anyone know how you can have a combined ratio below 100 but still incur a loss?

[petec]

Does anyone know how you can have a combined ratio below 100 but still incur a loss?

 

Yes. Invest float badly. Fairfax give excellent demonstrations of this on a fairly regular basis.

[doc75]

Does anyone know how you can have a combined ratio below 100 but still incur a loss?

 

Yes. Invest float badly. Fairfax give excellent demonstrations of this on a fairly regular basis.

 

Contributing to the $13.8m pre-LPT loss is $18.8m in unrealized investment losses and a $2m provision for COVID uncertainty. Underwriting profit was up $1.6m YoY. 

 

In fairness I don't think they invested float badly.  They were quite conservatively positioned with only about 9% in broad equities going into the meltdown.

 

From reading I've been doing recently, COVID implications sound like a big concern across the P&C industry.  HIIG has taken a $2m charge and say they're not currently aware of material exposure.  It's unclear whether they'll be exposed to COVID business interruption liabilities, should various governments mandate  retroactive inclusions.  Other carriers are certainly talking about big impacts.   

 

FWIW I also happened upon HIIG's Glassdoor reviews yesterday.  Pretty consistent reports of a toxic work environment, though not sure how much weight to assign to such reports.

 

EDIT:  Huge volume today at $1.60-1.61

 

 

[petec]

Would you mind posting any good links on COVID and the P&C industry?

[chompsterama]

Does anyone know how you can have a combined ratio below 100 but still incur a loss?

 

Yes. Invest float badly. Fairfax give excellent demonstrations of this on a fairly regular basis.

 

 

 

FWIW I also happened upon HIIG's Glassdoor reviews yesterday.  Pretty consistent reports of a toxic work environment, though not sure how much weight to assign to such reports.

 

Steven Way is very difficult to work with.  Keep digging.  That may or may not be why some acquirers are not as interested as they might be otherwise - particularly at >BV on top of the prior period developments never-ending.   

[TBW]

Interesting what you are alluding to. But HIIg did just pay up to cover those loss development issues. And Mr Way is getting up there in age, so not sure why he would spook investors that much (but would be interested to hear more if you can share). I think these reasons are why Wed never got the above 1.5x book bid they were hoping for.

 

In some ways HIIg has been setup for this. They had lots of reinsurance waiting for a hardening mkt. And they say they have no direct pandemic exposure, which I have to believe them. But then they did raise money at a huge discount...

 

I have no idea what the right value for HIIG is now. Certainly below book value. But then you do have the option that things are as they say and they could do quite well in the future. No idea.

[doc75]

I guess we no longer have to worry about Stephen Way's leadership style being a liability...

 

https://www.businesswire.com/news/home/20200525005133/en/

 

I wonder how long this was in the works. 

 

UPDATE:  Cam Macdonald (CEO of Westaim) is now chairman of HIIG

 

https://hiig.com/wp-content/uploads/2020/06/JCM-Chairman-Final.pdf

[doc75]

Here's a fairly detailed interview with Dan Zwirn (Arena Investors) that may be of interest:

 

https://www.globalcapital.com/article/b1lqkf3q9w2lx6/crisis-talk-with-dan-zwirn-of-arena-investors

 

[doc75]

FWIW two recently-appointed board members at HIIG (Don Larson and Jim Hays) have been making very significant public purchases of WED stock.  I believe ownership is mandated to some degree, but I'd be surprised if Westaim/HIIG requires directors to purchase $3M+ as Hays has done. 

 

There are a couple articles on HIIG behind a paywall that I'd like to read. Perhaps someone here has access and can provide a summary:

 

https://www.theinsurer.com/news/hiig-replaces-founder-and-ceo-stephen-way/8828.article

 

https://www.theinsurer.com/program-manager/new-hiig-ceo-targets-team-hires-and-renewal-rights-transactions/8884.article

[doc75]

The previously announced LPT transaction between HIIG and R&Q has closed.

 

https://www.reinsurancene.ws/rq-wraps-up-loss-portfolio-transfer-with-hiig/

[doc75]

Some insight on HIIG's plans under the new CEO:

 

https://www.theinsurer.com/program-manager/new-hiig-ceo-targets-team-hires-and-renewal-rights-transactions/8884.article

[doc75]

Here's a recent interview with Andrew Robinson, new CEO of HIIG CEO.  Very articulate and well worth listening for anyone still interested in Westaim (IMO).

 

https://www.thevoiceofinsurance.com/podcast/episode/34d37139/ep-40-rule-your-niche-with-andrew-robinson-of-hiig

 

A couple takeaways:

- Recently upgraded to A- stable

- They're building new teams in very specialized lines / subcategories

- A few lines were put in runoff shortly after his arrival (e.g. workers comp)

- Feel they can make a lot of progress with current levels of capital

- Around 27:30 he briefly mentions the LPT and further reserving actions that were taken in Q2.  He feels they're now in a conservative position with respect to liabilities. Time will tell.

 

Of course you'd expect a new CEO to talk their book, be optimistic, etc.  But I do think this is a positive leadership change. 

 

On the Arena side, here's a recent interview with Dan Zwirn:

 

https://www.bloomberg.com/news/videos/2020-08-21/credit-veteran-dan-zwirn-seess-more-pain-ahead-video

 

 

 

 

[Philbert77]

I used to have high hopes for my shares in westaim but it’s just year after year with no real results to show for it.

 

[doc75]

I used to have high hopes for my shares in westaim but it’s just year after year with no real results to show for it.

 

Disappointing for sure.  Q2 was surprisingly poor at both HIIG and Arena.  Zwirn's recent comments lead me to believe they don't expect anything exciting to happen at Arena until after the election. I no longer expect much growth in AUM this year and I don't assign much value to Arena Investors.  I assume a nominal return on the Arena FINCOs and I am somewhat optimistic about improvements at HIIG under new leadership.

 

 

 

 

 

[Spekulatius]

I used to have high hopes for my shares in westaim but it’s just year after year with no real results to show for it.

 

Disappointing for sure.  Q2 was surprisingly poor at both HIIG and Arena.  Zwirn's recent comments lead me to believe they don't expect anything exciting to happen at Arena until after the election. I no longer expect much growth in AUM this year and I don't assign much value to Arena Investors.  I assume a nominal return on the Arena FINCOs and I am somewhat optimistic about improvements at HIIG under new leadership.

 

I agree with the sentiment and have started to reduce my position at a loss

 

1) HIIG seems like a fixer upper. It is not clear to me that reserves are adequate

2) re Arena - I always thought that Arena was build for dislocations like we have experienced in credit markets, but I don’t see evidence that they can take advantage

3) The holding Co short on Cash and since itis burning cash with no income, they may have to raise equity or debt.

 

The above is not exactly what I had in mind when initiated the position. I see easier way to make money, so I rather take a smallish loss now and move on.

[5xEBITDA]

I used to have high hopes for my shares in westaim but it’s just year after year with no real results to show for it.

 

Disappointing for sure.  Q2 was surprisingly poor at both HIIG and Arena.  Zwirn's recent comments lead me to believe they don't expect anything exciting to happen at Arena until after the election. I no longer expect much growth in AUM this year and I don't assign much value to Arena Investors.  I assume a nominal return on the Arena FINCOs and I am somewhat optimistic about improvements at HIIG under new leadership.

 

I agree with the sentiment and have started to reduce my position at a loss

 

1) HIIG seems like a fixer upper. It is not clear to me that reserves are adequate

2) re Arena - I always thought that Arena was build for dislocations like we have experienced in credit markets, but I don’t see evidence that they can take advantage

3) The holding Co short on Cash and since itis burning cash with no income, they may have to raise equity or debt.

 

The above is not exactly what I had in mind when initiated the position. I see easier way to make money, so I rather take a smallish loss now and move on.

 

Arena only has a very small public credit portfolio, so you wouldn't have expected them to really reap any big gains from the credit market rally from April - YTD. Also, that was lots of beta risk which they don't really have interest in. Since they originate short duration private credit transactions, I'd expect to start seeing flow through of opportunistic investments they've made starting in March/April to show up in 3Q results but more likely the bulk in 4Q and beyond.

[doc75]

I used to have high hopes for my shares in westaim but it’s just year after year with no real results to show for it.

 

Disappointing for sure.  Q2 was surprisingly poor at both HIIG and Arena.  Zwirn's recent comments lead me to believe they don't expect anything exciting to happen at Arena until after the election. I no longer expect much growth in AUM this year and I don't assign much value to Arena Investors.  I assume a nominal return on the Arena FINCOs and I am somewhat optimistic about improvements at HIIG under new leadership.

 

 

I agree with the sentiment and have started to reduce my position at a loss

 

1) HIIG seems like a fixer upper. It is not clear to me that reserves are adequate

2) re Arena - I always thought that Arena was build for dislocations like we have experienced in credit markets, but I don’t see evidence that they can take advantage

3) The holding Co short on Cash and since itis burning cash with no income, they may have to raise equity or debt.

 

The above is not exactly what I had in mind when initiated the position. I see easier way to make money, so I rather take a smallish loss now and move on.

 

Arena only has a very small public credit portfolio, so you wouldn't have expected them to really reap any big gains from the credit market rally from April - YTD. Also, that was lots of beta risk which they don't really have interest in. Since they originate short duration private credit transactions, I'd expect to start seeing flow through of opportunistic investments they've made starting in March/April to show up in 3Q results but more likely the bulk in 4Q and beyond.

 

Agreed. But I don't think they did nearly as much volume as they would've liked during the crisis.  If you listen to Zwirn's interviews, he's very clear that the feds swooped in so quickly and boldly that they have much of a window to transact on appropriate terms.  He expects nothing to change before the election, but is anticipating a lot more opportunities once the supports fall away (if ever?).

 

I think they've had a little trouble attracting new capital.  I read somewhere that some of the previous "soft commitments" were taking a long time to materialize.

 

[5xEBITDA]

I used to have high hopes for my shares in westaim but it’s just year after year with no real results to show for it.

 

Disappointing for sure.  Q2 was surprisingly poor at both HIIG and Arena.  Zwirn's recent comments lead me to believe they don't expect anything exciting to happen at Arena until after the election. I no longer expect much growth in AUM this year and I don't assign much value to Arena Investors.  I assume a nominal return on the Arena FINCOs and I am somewhat optimistic about improvements at HIIG under new leadership.

 

 

I agree with the sentiment and have started to reduce my position at a loss

 

1) HIIG seems like a fixer upper. It is not clear to me that reserves are adequate

2) re Arena - I always thought that Arena was build for dislocations like we have experienced in credit markets, but I don’t see evidence that they can take advantage

3) The holding Co short on Cash and since itis burning cash with no income, they may have to raise equity or debt.

 

The above is not exactly what I had in mind when initiated the position. I see easier way to make money, so I rather take a smallish loss now and move on.

 

Arena only has a very small public credit portfolio, so you wouldn't have expected them to really reap any big gains from the credit market rally from April - YTD. Also, that was lots of beta risk which they don't really have interest in. Since they originate short duration private credit transactions, I'd expect to start seeing flow through of opportunistic investments they've made starting in March/April to show up in 3Q results but more likely the bulk in 4Q and beyond.

 

Agreed. But I don't think they did nearly as much volume as they would've liked during the crisis.  If you listen to Zwirn's interviews, he's very clear that the feds swooped in so quickly and boldly that they have much of a window to transact on appropriate terms.  He expects nothing to change before the election, but is anticipating a lot more opportunities once the supports fall away (if ever?).

 

I think they've had a little trouble attracting new capital.  I read somewhere that some of the previous "soft commitments" were taking a long time to materialize.

 

Hm what sort of size of soft commitments do you think didn't show up? They did just close the new $300mn fund in April which seemed good, and I think theyre in the market with a separate real estate fund as well. I think probably the bigger issue they've faced is part the Fed stepping in as mentioned, but also part the fact that a lot of other firms raised new dislocation funds at the same time. Though I don't really recall seeing any new funds raised that specifically target the size of their checks.

 

I sort of look at Arena as a steady growing firm for a 2015 inception. Do you think they hit $2bn by end of year? $1.5bn now. Think this is appropriate size for what they do, but they are highly incentivized to grow AUM.