WED - Westaim Corporation

[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.

 

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.

 

Arena had $1.3b AUM at end of '19.  They reported $1.4b at end of Q2, despite launching the credit opps fund you mention in the new year and reportedly having $300m in soft commitments by April (with potential to upsize).

 

https://www.privatedebtinvestor.com/arena-investors-has-secured-300m-for-credit-opps-fund-sources-exclusive/

 

I read somewhere that the $300m was slow to materialize, and the $1.4b number at end of Q2 backs that up.  Sorry, I did a quick search and couldn't find my source.  I don't know when the NZ real estate fund was supposed to ramp up. 

 

 

 

 

[doc75]

Some recent HIIG news:

 

https://coverager.com/amynta-group-acquires-a-workers-compensation-book-from-hiig/

 

https://www.reinsurancene.ws/hiig-launches-es-brokerage-business-unit/

 

Jim Hays continues his market purchases of WED.  The bids seem pretty firm recently. 

 

 

 

[doc75]

 

 

Arena had $1.3b AUM at end of '19.  They reported $1.4b at end of Q2, despite launching the credit opps fund you mention in the new year and reportedly having $300m in soft commitments by April (with potential to upsize).

 

https://www.privatedebtinvestor.com/arena-investors-has-secured-300m-for-credit-opps-fund-sources-exclusive/

 

I read somewhere that the $300m was slow to materialize, and the $1.4b number at end of Q2 backs that up.  Sorry, I did a quick search and couldn't find my source.  I don't know when the NZ real estate fund was supposed to ramp up.

 

Hmm... never mind?  Interesting to see where AUM stand at end of Q3.

 

https://www.privatedebtinvestor.com/arena-pushes-credit-opps-fund-to-400m/?utm_source=Sailthru&utm_medium=email&utm_campaign=PDI%20DAILY%20EUR%20BRONZE%202020-09-09&utm_term=PDI_DAILY_EUR_BRONZE

 

Arena Investors has secured a further $100 million for its credit opportunities fund, Private Debt Investor has learned. Sources close to the situation said the Arena Special Opportunities Partners Fund I, which launched in March with $300 million of commitments, has now brought its total to $400 million.

[doc75]

The share price has been grinding higher.  Jeff Hays continues to buy in the open market.

 

The Investor Day presentation available on Westaim's website is worth a listen for anyone interested.

 

Only time will tell how the new HIIG CEO's words will measure up against performance, but I'm cautiously optimistic that he has the company conservatively positioned (with respect to loss development) and is embarking on a prudent growth strategy.

 

Arena recently reported a $45m note issuance at one of the Arena FINCOs.  They telegraphed on Investor Day that they'd be adding some leverage into the Arena biz, and this announcement came a few days later.  The PR says committed AUM was at $1.6b at end of Sept.  Fee-paying AUM is somewhat lower. 

 

 

[doc75]

A belated Q3 update.  Results were stable / uninteresting:

 

HIIG (recently renamed Skyward Specialty)

- showed an underwriting profit of $3.6m

- LPT had no impact, only 0.1m of adverse reserve development

- gross written premiums WAY down as they exited a couple lines

- net written premiums down but not as significantly due to higher P&C retention

 

I was surprised to see NWP down so much (17% YoY) in a hard market but I like that they're exiting the unprofitable lines. They're adding new teams but this didn't materialize until late in the Q so maybe we'll see some evidence in Q4 or Q1.

 

Arena FINCOS

-  Treaded water.  Net return was 0.2%. 

 

Arena Investors

- Committed AUM up to $1.7b

- It's unclear how much the $1.7b figure is fee-paying capital.  Zwirn says they were quiet through Q2, but deployment picked up in September.  Management and asset-servicing fees back this up ($5m in Q3 compared to $4.8m in Q2)

- SG&A is up considerably over Q2 ($8.2m compared to $6.2) leading to a wider loss

- Recently closed their Special Opps closed-end fund with $519m committed.  Zwirn says about half of this is deployed.  They initially targeted $300m but this was before COVID and it was known last spring they were looking to upsize to take advantage.

- About 17% of HIIG's investment portfolio is with Arena.  Westaim and Fairfax have some history.  I wonder if any of the Fairfax subcos will push some $ over to Arena at some point as they prove themselves and scale.

 

Here's Zwirn talking his book to prospective clients, for those interested:

https://westaim.com/wp-content/uploads/Multi-Client-Call-Final.pdf

 

I'm curious about his comments on how Arena's transactions require a lot of "elbow grease".    He presents this as an advantage -- in that other larger players aren't competing on these deals. Makes sense, except it also seems to imply that the business won't scale efficiently. 

 

 

 

 

 

 

[petec]

Westaim and Fairfax have some history.  I wonder if any of the Fairfax subcos will push some $ over to Arena at some point as they prove themselves and scale.

 

 

I seem to remember Fairfax's purchase of prefs in Westaim came along with a commitment to invest with Arena. But I think both deals came in tranches and some tranches never happened.

 

My guess is after several years of not investing, and having committed $2bn to Kennedy Wilson, Fairfax aren't likely to scale here.

[doc75]

Westaim and Fairfax have some history.  I wonder if any of the Fairfax subcos will push some $ over to Arena at some point as they prove themselves and scale.

 

 

I seem to remember Fairfax's purchase of prefs in Westaim came along with a commitment to invest with Arena. But I think both deals came in tranches and some tranches never happened.

 

My guess is after several years of not investing, and having committed $2bn to Kennedy Wilson, Fairfax aren't likely to scale here.

 

Right. The 2017 arrangement involved Fairfax buying up to $100m preferred shares of Westaim, in tranches of $25m.  Each tranche came with WED warrants (strike $3.50, exp 2022) and commitment to invest in Arena.  Here's the part relevant to Arena:

 

Fairfax has also agreed to invest up to US $500 million in investments sourced by Westaim’s affiliate, Arena Investors, LP. Fairfax’s commitment to invest an initial US $125 million with Arena Investors was triggered by its purchase of the initial tranche today. Fairfax has agreed to invest an additional US $125 million with Arena Investors upon the next CDN $25 million drawdown of preferred securities by Westaim, and an additional US $250 million upon the final CDN $25 million drawdown of preferred securities by Westaim.

 

Westaim initially sold $50m in June 2017 and 6 months to trigger the other tranches, which they elected not to do.  So currently Fairfax has $125m in Arena.  Someone asked about Fairfax during Westaim's investor day (September), and the response was something along the lines of:

 

- the capital was primarily to help establish Arena and to signal confidence from a respected insurer

- declined to take up the last $50m because we didn't need the additional capital at the time and wanted to avoid further dilution

- relationship with Fairfax is ongoing and we expect it to deepen over time

 

Good point about the K-W deal. Just to be clear I wasn't really thinking of Fairfax plunking down a huge sum with the strategic purpose of building Arena, but rather taking smaller slices of Arena funds as part of their investment basket.

[doc75]

A recent Linkedin post (link below) suggests committed AUM at Arena are now up around $2b, with approx $400m deployed since September.

 

https://www.linkedin.com/posts/arena-investors-lp_add-on-acquisition-for-fst-technical-services-activity-6752000430592684032-jG9O

 

Skyward (previously HIIG) seems to be moving quickly to build new niche teams, as telegraphed in the spring.

 

I'm not expecting much from Q420 but I'm optimistic that both businesses will see significant operational improvement in 2021.

[petec]

Westaim and Fairfax have some history.  I wonder if any of the Fairfax subcos will push some $ over to Arena at some point as they prove themselves and scale.

 

 

I seem to remember Fairfax's purchase of prefs in Westaim came along with a commitment to invest with Arena. But I think both deals came in tranches and some tranches never happened.

 

My guess is after several years of not investing, and having committed $2bn to Kennedy Wilson, Fairfax aren't likely to scale here.

 

Right. The 2017 arrangement involved Fairfax buying up to $100m preferred shares of Westaim, in tranches of $25m.  Each tranche came with WED warrants (strike $3.50, exp 2022) and commitment to invest in Arena.  Here's the part relevant to Arena:

 

Fairfax has also agreed to invest up to US $500 million in investments sourced by Westaim’s affiliate, Arena Investors, LP. Fairfax’s commitment to invest an initial US $125 million with Arena Investors was triggered by its purchase of the initial tranche today. Fairfax has agreed to invest an additional US $125 million with Arena Investors upon the next CDN $25 million drawdown of preferred securities by Westaim, and an additional US $250 million upon the final CDN $25 million drawdown of preferred securities by Westaim.

 

Westaim initially sold $50m in June 2017 and 6 months to trigger the other tranches, which they elected not to do.  So currently Fairfax has $125m in Arena.  Someone asked about Fairfax during Westaim's investor day (September), and the response was something along the lines of:

 

- the capital was primarily to help establish Arena and to signal confidence from a respected insurer

- declined to take up the last $50m because we didn't need the additional capital at the time and wanted to avoid further dilution

- relationship with Fairfax is ongoing and we expect it to deepen over time

 

Good point about the K-W deal. Just to be clear I wasn't really thinking of Fairfax plunking down a huge sum with the strategic purpose of building Arena, but rather taking smaller slices of Arena funds as part of their investment basket.

 

Agreed. I’d actually love to see Fairfax take Arena in-house (at the right price). I think *the* key competitive advantage in insurance over the coming decade will be the ability to manufacture interesting fixed income investments. You can’t just buy them in the market any more.

[doc75]

Some positive news from Westaim:

 

https://www.businesswire.com/news/home/20210127005973/en/Westaim-Provides-Update-on-Arena-Investors-and-Announces-Release-Date-for-Q4-and-Full-Year-2020-Results

 

Arena committed AUM is up to $2.2b, from $1.6b at end of Q3 and $1.3b at end of last year.  Once this is deployed we should finally start seeing Arena Investors delivering consistent earnings to Westaim.  I assume there's a certain point of scale where the virtuous cycle kicks in and we'll start seeing lumpier investments from insurance cos etc.

 

Skyward has also been making a lot of moves, adding leadership, building new teams and recently purchasing Aegis Surety.