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CPP Investments and OMERS Buy Minority Stake in Odyssey Group

CPP Investments put out a press release stating that Fairfax announces US$1.0 Billion substantial issuer bid and sale of 9.99% minority stake in Odyssey Group:

Fairfax Financial Holdings Limited (“Fairfax” or the “Company”) (TSX: FFH and FFH.U) announces its intention to commence a substantial issuer bid (the “Offer”), pursuant to which the Company will offer to repurchase for cancellation up to US$1.0 billion of its subordinate voting shares (the “Shares”) from shareholders for cash. Fairfax also announces that it has entered into an agreement with an affiliate of CPPIB Credit Investments Inc. (“CPPIB Credit Investments”), a wholly-owned subsidiary of Canada Pension Plan Investment Board, and OMERS, the defined benefit pension plan for Ontario’s municipal sector employees pursuant to which each of CPPIB Credit Investments and OMERS will acquire 100% of a new series of securities representing a 4.995% interest in Odyssey Group Holdings, Inc. (“Odyssey Group”), Fairfax’s U.S. based reinsurance and insurance subsidiary, for an aggregate cash purchase price of US$900.0 million (the “Odyssey Group Transaction”). After closing, Fairfax will retain the flexibility to repurchase the interests of OMERS and CPPIB Credit Investments in Odyssey Group over time.

The Offer will proceed by way of a “modified Dutch auction”, which allows shareholders to select the price, within the specified range, at which each shareholder is willing to sell all or a portion of their Shares. The Offer prices range from US$425.00 to US$500.00 per Share (in increments of US$5.00 per Share). The Offer will be for up to a maximum of 2,352,941 Shares, or approximately 8.72% of Fairfax’s 26,986,170 total issued and outstanding Shares, based on full participation and a purchase price equal to the minimum purchase price per Share.

Shareholders who wish to participate in the Offer will be able to do so through (i) auction tenders in which they will specify the number of Shares being tendered at a price of not less than US$425.00 and not more than US$500.00 per Share, in increments of US$5.00 per Share; or (ii) purchase price tenders in which they will not specify a price per Share, but rather, will agree to have a specified number of Shares purchased at the purchase price to be determined by auction tenders. Shareholders who validly deposit Shares without specifying the method in which they are tendering their Shares will be deemed to have made a purchase price tender. Fairfax has been informed by Mr. Watsa that he, and entities controlled by him, will not deposit any Shares owned or controlled by him pursuant to the Offer (including, for greater certainty, in respect of any Shares into which multiple voting shares of Fairfax controlled by Mr. Watsa are convertible).

Upon expiry of the Offer, Fairfax will determine the lowest purchase price (which will not be more than US$500.00 per Share and not less than US$425.00 per Share) that will allow the Company to purchase the maximum number of Shares properly tendered to the Offer, and not properly withdrawn, having an aggregate purchase price not exceeding US$1.0 billion.

If Shares with an aggregate purchase price of more than US$1.0 billion are properly tendered and not properly withdrawn, Fairfax will purchase the tendered Shares on a pro rata basis after giving effect to “odd lot” tenders (of shareholders beneficially owning fewer than 100 Shares), which will not be subject to proration. In that case, all Shares tendered at or below the finally determined purchase price will be purchased, subject to proration, at the same purchase price determined pursuant to the terms of the Offer. Shares that are not purchased, including Shares tendered pursuant to auction tenders at prices above the purchase price, will be returned to shareholders.

The Offer will expire at 5:00 p.m. (Eastern time) on December 23, 2021, unless the Offer is extended or withdrawn by Fairfax. The Offer will not be conditional upon any minimum number of Shares being tendered. The Offer will, however, be subject to other conditions and Fairfax will reserve the right, subject to applicable laws, to withdraw or amend the Offer, if, at any time prior to the payment of deposited Shares, certain events occur. Fairfax intends to use the proceeds of the Odyssey Group Transaction and other available cash resources to fund the purchase of Shares under the Offer, however, the Offer is not conditional upon closing of the Odyssey Group Transaction.

Details of the Offer, including instructions for tendering Shares, will be included in the formal offer to purchase and issuer bid circular, letter of transmittal, notice of guaranteed delivery and other related documents (the “Offer Documents”). The Offer Documents will be mailed to shareholders and will be filed on or about November 18, 2021 with the applicable Canadian securities regulatory authorities and made available without charge on SEDAR at www.sedar.com, filed on a Schedule 13E-4F with the U.S. Securities and Exchange Commission and made available without charge on EDGAR at www.sec.gov.

Neither Fairfax nor its Board of Directors makes any recommendation to shareholders as to whether to tender or refrain from tendering any or all of their Shares to the Offer or as to the purchase price or prices at which shareholders may choose to tender Shares. Shareholders are urged to read the Offer Documents carefully and in their entirety, and to consult their own financial, tax and legal advisors and to make their own decisions with respect to participation in the Offer.

Any questions or requests for assistance in tendering Shares to the Offer may be directed to Computershare Investor Services Inc., the depositary for the Offer. Fairfax has engaged Scotiabank to act as exclusive financial advisor in respect of the Offer.

Odyssey Group Transaction

Pursuant to the Odyssey Group Transaction, each of OMERS and CPPIB Credit Investments will acquire a 4.995% interest in Odyssey Group. Following the closing of the Odyssey Group Transaction, Fairfax will have the flexibility to repurchase the interests of OMERS and CPPIB Credit Investments in Odyssey Group over time. Closing of the Odyssey Group Transaction is subject to customary closing conditions and is expected to occur during the fourth quarter of 2021. Proceeds from the Odyssey Group Transaction will be used by Fairfax to fund the purchase of Shares pursuant to the Offer. Closing of the Odyssey Group Transaction is not conditional upon the closing of the Offer or any minimum number of Shares being acquired in the Offer and the Offer is not conditional upon the closing of the Odyssey Group Transaction.

Not an Offer or Solicitation

This press release is neither an offer to purchase nor a solicitation of an offer to sell any Shares. The solicitation and the offer to purchase Shares by Fairfax will be made pursuant to the Offer Documents that Fairfax will file with the Canadian securities regulatory authorities and the United States Securities and Exchange Commission. Neither Fairfax nor its Board of Directors makes any recommendation to any shareholder as to whether to deposit or refrain from depositing Shares. These documents contain important information about the Offer and shareholders of Fairfax are urged to read them carefully.

Fairfax is a holding company which, through its subsidiaries, is primarily engaged in property and casualty insurance and reinsurance and the associated investment management.

So what is this all about? According to Benefits Canada:

The CPPIB is joining the Ontario Municipal Employees Retirement System in a deal to purchase a combined 9.99 per cent ownership share in a U.S.-based reinsurance company.

The securities have been issued as part of a new series of securities from the Odyssey Group Holdings Inc. Under the terms of the deal, the organizations will each pay US$450 million to secure a 4.995 per cent share in the business.

You can read more about Odyssey Group here:

Odyssey Group Holdings, Inc. and its subsidiaries, collectively referred to as the Odyssey Group, is one of the world’s leading providers of reinsurance and specialty insurance that operates through five Divisions: North America, Latin America, EuroAsia, London Market and U.S. Insurance.

Reinsurance is predominantly underwritten through Odyssey Reinsurance Company and specialty insurance is underwritten through Hudson Insurance Company,  Hudson Excess Insurance Company, Newline Insurance Company Limited, Newline Syndicate 1218 at Lloyd’s and Newline Europe Versicherung AG.

Diversification is a critical focus of our business strategy as it provides portfolio stability and allows us to rapidly respond to business opportunities as they emerge around the world. We have 35 discrete business units organized along different product, territorial and distribution lines, with 19 of these focused on reinsurance and 16 dedicated to insurance markets.

Business is underwritten in more than 100 territories through a global network of over 30 offices located in 13 countries.

Odyssey Group is wholly-owned by Fairfax Financial Holdings Limited, a financial services holding company with total assets of $74.1 billion and $17.5 billion in total equity as of December 31, 2020. Fairfax is traded on the Toronto Stock Exchange under the symbol FFH.

Any wholly-owned subsidiary of Fairfax Financial Holdings is one worth looking at as they are insurance and reinsurance experts.

A couple of weeks ago, Greg Meckbach of Canadian Underwriter reported on three reasons Fairfax predicts a continuing hard market:  

As carriers continue taking a good hard look at their risk appetites, price increases could continue well into 2022.

“We expect market conditions to remain strong throughout 2021 and well into 2022,” said Peter Clarke, chief operating officer of Toronto-based Fairfax Financial Holdings Ltd., during an earnings call Friday morning.

“The main drivers of the hard market continue to be low interest rates, social inflation and industry participants re-evaluating their risk appetites and capacity deployment.”

Fairfax reported Thursday its gross written premiums were $5.97 billion in the three months ending Sept. 30, up 26% from $4.73 billion in Q2 2020. All figures are in United States dollars. Fairfax owns a variety of subsidiaries (one being Canada’s Northbridge Financial) in insurance as well as other industries. Net premiums written in property and casualty insurance and reinsurance (other than in run-off operations) rose 25%, from $3.74 billion in the three months ending Sept. 30, 2020 to $4.7 billion in the latest quarter.

“This growth has been made possible by the favourable market conditions that prevail in many of our markets, particularly in North America,” said Clarke.

In addition to Toronto-based Northbridge, Fairfax also owns Stamford, Conn.-based Odyssey Group, London-based Brit and Switzerland-based Allied World.

At Allied World, gross written premiums rose 34%, from $791 million in Q3 2020 to $970 million in the latest quarter. Growth was “especially strong in the directors and officers and excess casualty segments,” Clarke said Friday during the earnings call.

Bottom line growth was also high, though Fairfax lost money overall – in underwriting – during the latest quarter because of high catastrophe losses outside of Canada.

Fairfax recorded net earnings attributable to shareholders of $462.4 million in Q3 2021, up from $133.7 million in Q3 2020.

But Fairfax’s overall combined ratio deteriorated 2.6 points from 98.5% in Q3 2020 to 101.1% in the most recent quarter.

The main drivers of its Q3 2021 underwriting loss were Hurricane Ida and floods this past July in Germany (pictured above) and neighbouring European nations. Fairfax’s insurers paid out a grand total – both in primary and reinsurance – of $340 million on Ida-related claims. The European floods cost Fairfax’s insurers an additional $174 million.

Hurricane Ida made landfall in Louisiana as a Category 4 storm and went on to cause flooding in the northeastern United States, Clarke noted Friday.

“Ida was a big event and typically when we get bigger events, our reinsurance books get hit and that is what happened in the case of Odyssey,” Clarke said.

For the third quarter, Odyssey Group’s combined ratio increased 10.1 points, from 99.4% in 2020 to 109.5% in 2021.

“For the better part of 10 years, this is only the second quarter that (Odyssey Group has) had a combined ratio of above 100% and the other quarter was the third quarter of 2017 with (Hurricanes) Harvey, Irma and Maria,” said Clarke.

The article provides a glimpse of what Fairfax and other reinsurers  face in a world where climate change is impacting everything, especially the insurance industry.

There are enormous profits to be made too but you need to be well diversified and manage risks properly. 

Owning a minority stake in Odyssey Group makes perfect sense for OMERS and CPP Investments as part of their insurance platforms. 

These insurance businesses provide stable cash flows over the long run and make great sense for long-term pensions looking to pay out long-term liabilities.

Below, Brian Young, president and chief executive officer, Odyssey Group Holdings, shares some of the challenges and highlights from the company's first 25 years as a Fairfax Company.

You can watch this interview here as I cannot embed it below.




 

 

 

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