After completing the acquisition of JEVCO, Westaim is a leading Canadian provider of P&C insurance products, specializing in non-standard auto and motorcycle, recreational vehicles, commercial auto, as well as property and liability. Historically Westaim was a holding company of a slew of unprofitable businesses, including Nucryst Pharmaceuticals and iFire Technologies. Needless to say neither of these businesses made any money. In 2009 alternative asset manager Goodwood Inc. acquired 20% of Westaim with the intention of using it as a shell company by disposing of the two unprofitable holdings, leaving effectively a small sum of cash and tax loss carryforwards.
JEVCO was locked within insurance holding company Kingsway Financial. Kingsway's Canadian CEO Serge Lavoie removed JEVCO from unprofitable lines of business like cross border trucking and focused on efficiency gains in its core non-standard auto business, for instance by introducing a web based portal from brokers. In early 2010 Westaim, JEVCO, and Kingsway hammered out a deal whereby Westaim would buy JEVCO for $261mm, or 95% of book value. The deal was financed by Alberta Investment management Corp ($148mm), insiders of Jevco and Westaim ($17.5mm), and a brokered placement for the balance. The deal worked out to $0.50 per share.
What I like about the story, as in any asset conversion story, is that management becomes directly responsible for the firm's results. This gives them autonomy over their roles and provides justification for higher compensation down the road. It is also a vote of confidence that management bought the deal and now have skin in the game.
Financials for JEVCO are broken out in some company filings, but these only offer a glimpse of what the consolidated Westaim results can look like. JEVCO was under the influence of Kingsway (hence engaged in less profitable or riskier underwriting). Now that the company is leaner and can use its dominant market position to improve its combined ratio. The company also just pushed through a 10% rate hike and is benefiting from Ontario's new claims rules that limit the damages a customer can claim in the event of an accident.
WED's valuation is compelling. At 0.495/share, the market cap is $328mm. Book value is $353mm which consists of $1B in investment grade corporate and government securities earning 3% or so. Historically JEVCO has been very conservative with their loss reserves and have adjusted them higher, so realized claims may well be lower. So basically you are buying a levered investment grade bond fund at a discount to NAV. Their tax loss carry forwards give them a near zero tax rate over the next year and a half, so $1b yielding 3% is $30mm per year. Historically they have operated at a combined ratio in the 95% range, but even if underwriting breaks even over a prolonged period you are getting a 9% cash flow yield on high quality debt instruments.
The fact that management bought a big slug of stock makes me think prolonged periods of operating loss are not too likely. WED could also get more aggressive and throw equity into its $1B portfolio to increase yield.
