ESGR - Enstar Group

[giofranchi]

Enstar Group (ESGR) is a company that deserves to be closely watched (see presentation in attachment).

It is still run by its founders and is managed to achieve an healthy growth in book value per share. BVPS has grown at a CAGR of 19.6% since 2006.

Its strategy is straightforward: to increase net book value per share over time by growth in net earnings and re-investing in acquisitions. It specializes in running insurance businesses in run-off and has successfully acquired approximately 60 companies to date.

Mr. Chuck Akre, who needs no introduction, is on its Investment Committee.

Finally, it is based in the Bermudas, which might entail some tax advantages.

 

Maybe 1.43 x BVPS is not such an attractive entry point… But, if the price declines to the 1.1 – 1.2 x BVPS range, I would gladly invest in Enstar.

 

I would appreciate very much any comments from board members who know and have followed Enstar! :)

 

giofranchi

EGL_-_July_10_2013_Investor_Presentation_final.pdf

[Green King]

That presentation exploded my brain.

How do you know you know what they are going make (or grow intrinsic value ) and how much can they lose (risk exposure) and how do you know they are not making stuff up ?

 

Insurance is far beyond my circle.

 

TIA

[giofranchi]

How do you know you know what they are going make (or grow intrinsic value ) and how much can they lose (risk exposure) and how do you know they are not making stuff up ?

 

Well, I guess an increase in BVPS is a good proxy for growth in intrinsic value. I first got interested because also FFH runs a portfolio of insurance businesses in run-off, and has been very active in recent years purchasing those businesses. Evidently, they see good opportunities in that area.

Of course, risks tied to insurance contracts cannot be evaluated by outsiders, that’s why management in insurance is almost all that counts and the presence of Mr. Chuck Akre on the Investment Committee is important (of course, he is also a large investor in ESGR). His involvement in the business should give some assurance about the quality and trustworthiness of management: I simply don’t see him partnering with crooks or idiots…

 

giofranchi

 

[giofranchi]

I would also add that by now they have built a good track-record: 57 businesses bought and successfully integrated (results until now are pretty good and consistent) are no small feat… and should give some assurance they know what they are doing. They also seem to be very focused on their “circle of competence”, and never blunder into something they don’t know as well.

 

giofranchi

 

[Mikenhe]

I know a few people at enstar and they are a major player in buying and administering run-off portfolios.

 

I haven't looked too closely at the financials but I can say they are pretty good at what they do. Most importantly for me is staff retention. The staff have "been there done that" when it comes to integration and given the number they have now done they've probably faced most of the major integration problems you can face. The turnover seems very low which means the expertise stays with them  - you keep the expertise and you are ready to identify and them deal with potential issues . Bodes well for them.

Once you see the long term staff leave then you have to question why and who is replacing them. I don't see that happening with them at the moment.

 

 

[giofranchi]

I know a few people at enstar and they are a major player in buying and administering run-off portfolios.

 

I haven't looked too closely at the financials but I can say they are pretty good at what they do. Most importantly for me is staff retention. The staff have "been there done that" when it comes to integration and given the number they have now done they've probably faced most of the major integration problems you can face. The turnover seems very low which means the expertise stays with them  - you keep the expertise and you are ready to identify and them deal with potential issues . Bodes well for them.

Once you see the long term staff leave then you have to question why and who is replacing them. I don't see that happening with them at the moment.

 

Thank you, Mikenhe!

Your insights are always precious and very welcomed! :)

 

twacowfca, do you also know the company? Anything to add?

 

giofranchi

 

[giofranchi]

What I also like is their acquisition history on page 9 of the presentation.

In 2008, when everybody got scared and paralyzed, they bought more assets than during their whole existence until that year! Afterwards, they kept on buying, yet always less (on a yearly basis) than what they did in 2008. Talk about opportunistic behavior! :)

 

giofranchi

 

[giofranchi]

Also their portfolio of investments is interesting: as you can see on page 35 of the presentation, 83% of investments have short to medium duration, in between 1 month and 5 years. Instead, “Alternative Investments”, which could provide higher risk-adjusted returns, are only 16.8% of total invested assets. Yet, they amount to 67% of equity, and might therefore have a significant impact on BVPS growth.

 

giofranchi

 

[Green King]

thanks for your replay giofranchi

[obtuse_investor]

Thank you Gio for posting this idea. It has been on my watchlist since then. I haven't purchased any shares, although it is slowly heading to that territory.

 

P/B has been sliding to 1.25 and now it trades just 3% above 52-week low.

[scorpioncapital]

Thank you Gio for posting this idea. It has been on my watchlist since then. I haven't purchased any shares, although it is slowly heading to that territory.

 

P/B has been sliding to 1.25 and now it trades just 3% above 52-week low.

 

As far as I can tell, Enstar is currently trading at book value after the Torus acquisition of 1.05x. Remove the 100m in intangibles of Torus (http://www.bma.bm/Insurance/GROUP%20PUBLIC%20FILINGS/Torus%20Insurance%20Holdings%20Limited.pdf) and it's at 1.1x BV. I am assuming that the year will end with at least 80 million of profit and that the share price is $120/share. Since both are slightly optimistic, I'd say we're at 1.15x tangible BV. If this drops under $120 I'm buying.

[obtuse_investor]

Enstar Group Limited (Nasdaq:ESGR) today announced that it will be presenting at a meeting of investors in New York City on Wednesday, June 11, 2014 to provide a detailed update on the Company. The presentation, featuring remarks from the Company's four executive officers and the Chairman of the Board, will begin at 12:45 p.m. Eastern time and is expected to last approximately 90 minutes.

 

I am planning to call in and listen today.

 

The presentation is already posted. Looks like Mr Akre "decided not to stand for re-election"! See page 16.

 

http://www.enstargroup.com/events.cfm

[saltybit]

There's a (bullish) article about Enstar in today's Grant's Interest Rate Observer issue.

 

http://www.grantspub.com/ (Book’s closed)

[crastogi]

Enstar delisting soon? 

 

http://biz.yahoo.com/e/150120/esgr8-k.html

 

Are we going to see a take under :)

 

Akre is not selling much yet, and Van den Berg is buying. 

[obtuse_investor]

Enstar delisting soon? 

 

http://biz.yahoo.com/e/150120/esgr8-k.html

 

Are we going to see a take under :)

 

Akre is not selling much yet, and Van den Berg is buying.

 

If they can't find an independent director by end of May (cure period ending June 29, 2015) then I will sign up.

 

[walkie518]

Enstar is a fabulous company that in both good and times has made money.  The runoff business may be reaching its limit in the current markets, but Kayla Re and continued growth in StarStone shows how Enstar continues to diversify within areas where such extension is natural. 

 

Has anyone been watching? 

 

It looks like Enstar is changing how they market themselves.  The website got a much-needed shareholder friendly reboot.  Any thoughts?

[scorpioncapital]

I think they are pivoting to China and doing some interesting things with acquiring entire companies to access their environmental liabilities. However insurance is a commodity business so not expecting much from that side. The key will be the asset side. Berkshire excelled because they took these massive leveraged float assets and bought variable-rate investments. This worked to improve growth and as protection against inflation, to return a real return above inflation. Enstar seems to have delegated management of investments to Goldman? Always a bad idea in my opinion but that is reasonable given they didn't focus on this side of the equation, growing the operating business. However I think going forward this part will need more attention.

[TedKord]

I owned shares for a few years and did very well, I sold a couple of months ago around $200, but have kept my eye on it. In my experience they have done very well acquiring run off portfolios. What made me more cautious, is that they were growing their traditional P&C business. I assumed that was because they were seeing fewer opportunities in run offs. That said, I have nothing but respect for management and will go back in if the price falls to something crazy like 1.1-1.2x BV or I get comfortable with their ownership of an underwriting business.

 

[walkie518]

Enstar seems to have delegated management of investments to Goldman?

 

To be fair, StarStone has been funded by Stephen Friedman's private equity group (Stone Point)...Stephen Friedman, of course, being a former Goldman partner and chair.  Many Stone Point senior managers are Goldman alumni.

 

It's likely that Enstar has positions with some of the Stone Point funds and/or co-invests with some of their positions.  A publicly traded CLO, Eagle Point, comes to mind here as possibly a chunk of Enstar's investment portfolio.

 

The Stone Point team may be best of the best.  Their investment in Enstar perhaps highlights...that said, I'm sure that Enstar goes where Stone Point directs because of the relationship they have developed over the years. 

 

What's also interesting here is that Stone Point founded Alterra (purchased by Markel I believe) and Axis Capital from nothing but LP funds.  Axis lost its CEO to Endurance Specialty, where the former Axis CEO wound up building the business, integrating into Lloyd's (by buying Montpelier Re), somewhat moving away from the bread and butter of agriculture insurance to an re/insurance firm underwriting a diverse portfolio.

 

My thinking is that Enstar buys what runoff they can to boost returns, but in an effort to become bigger and better, write fresh policies to grow.  As a runoff business, it's hard to say that it's an easy target or easily understandable for an acquirer.  However, if runoff is a portion of business, ACE or Arch might be interested? 

[DiggingForValue]

A few points:

 

Enstar has been a tremendous business, but: It is very hard to feed the beast at their size, and as a business that makes the entirety of its returns off of run-off, and which explicitly tries to run those portfolios off as quickly as possible (compared with, for instance, Buffett, who wants the float as long as he can have it) they are dependent on new books of business coming to market. Otherwise they run out of fuel.

 

Additionally, there is VERY little transparency into the expected returns on new deals. People simply slapping similar rates of return to historicals are ignoring both the relative slimming of opportunities, and the increasing number of competitors for those opportunities. Five years ago, there was no one but Enstar looking to do the deals they were doing. They were too small to be bothered with by the biggest (Berkshire, the Re's) and too big to be done by anyone else. Fast forward to today, and there are a number of run-off insurers in the market (several of whom I have spoken to) who are willing to do deals at breakeven prices, because the biggest barrier to establishing a business in run-off insurance is simply getting your first deal done, so that you can prove to potential sellers that you can execute, and to the relevant insurance regulators that you're not going to kill their constituents by going bankrupt after taking on the liabilities.

 

Combine this with their push into live insurance (a very different beast) and the massive stock sales by Silvester, the departure of the head of their US business *to start a competitor* and the relative price, and you've got a much less exciting picture. Also, anyone looking at their performance in 2008 and assuming they would repeat it in a crisis today should probably take a look at their current investment book. In 2008 it was largely weighted to treasuries, if memory serves. Today, they'd be in a much worse position.

 

It's no fun shorting a stock that isn't going to lose money (but that just might make less than an acceptable ROE and thus should trade closer to or a bit below book) but neither would I buy it.

 

Biggest upside in this company is probably a quick rise in rates, which would make it more interesting to hold the float than to run-off quickly, and lower their need to continue finding books of business to buy.

 

--DFV

[scorpioncapital]

I was always wondering if a company's management believes its shares to be overpriced, wouldn't it benefit existing shareholders if it made a stock deal to acquire another company that was less overvalued?

 

PS. There's an article on the Net somewhere I can't remember the title that talks about insurance companies and inflation. I think the conclusion was that insurers and reinsurers can do well in most goldilocks environments but if control is lost, then inflation will not be kind to their asset balance sheet, even with proceeds reinvested. Imagine even a short term portfolio with a 5 year maturity when you expect inflation is 3% and it turns out to be 6% and you're leveraged 3:1. Say 1 billion in equity and 3 billion in assets. You will lose close to 10% of your capital per year or 1/2 of your net worth over 5. I'm not sure if insurers are able to weave in and out of cash quite so easily. Another aspect is that official inflation is often the tip of the iceberg. In the real world, prices can rise much faster than this official rate. Taking care of the asset side of the balance sheet is of paramount importance in the absence of hyper-growth via deals.

[walkie518]

the market fall off has made this very attractive...

 

I think there's a lot under the hood that doesn't get credit and hasn't been marked up

 

mgmt might be the best at what they do and growing into more "normal" markets from the runoff business (which likely will provide earnings boosts here and there) will set the foundation for a tremendous business