Spending time around trading markets, measured in decades, results in very occasionally making “blink” speed investment decisions (a term I came across on another blog).
In a prior post, House of Brindle, I mentioned how I had followed the career of Richard Brindle over the past decade. I owned stock in his prior vehicle, Lancashire, before he moved on and started Fidelis with private ownership. Every now and again I would collect all of the updated news on him in hopes of finding out when he would bring a vehicle to the public market again.
That happened in 2022 with the vehicle going public in 2023. I read the prospectus and presumed the vehicle would trade at a rich price given his track record. When the IPO busted I looked closer and was turned off by the heavy fee structure Brindle extracts from the public vehicle. But after the share price took a further dive post 3Q23 earnings, I dug further and concluded that the discount was too much. I outlined the following highly complex, nuanced, and detailed investment thesis (I kid):
The reasons one invests in FIG are simple. You believe that Brindle cares about FIG’s success, will write good paper, and pass on bad paper. You believe that there may be an extended hard market. You believe that he will return capital when things get soft. And last, you believe you’re getting compensated for the fee arrangement through purchase at 65% of book value. That’s it.
65% of book value was ~$12 / share, where the shares were trading in December. The simple math was book value was $18.50 and a 13% ROE (low point of their guidance) was $2.40 / share in earnings. A 20% earnings yield on a $12 stock if one believes that the business isn’t a melting ice cube. Pair that with structural reasons why others may not be able to own the stock today including recent IPO / low time in market, high fee structure, new corporate structure (MGU / Balance Sheet separation), and odd Q3 premium drop. While I didn’t make a knee jerk / “blink” investment decision, it wasn’t an overly complex investment decision and I sized us up within one month.
Fast forward only a few short months to today, FIHL / FIG released Q4-23 numbers which included a 13% increase in book value over the three month Q4 period, $1.15 / share in adj. earnings for Q4 alone, a 23% ROE for Q4, and guidance for similar premium growth in core segments for 2024 when compared to 2023. Book value sailed higher to roughly $20.50 / share. All good things.
Accordingly, the shares popped to ~$18 / share, which equates to roughly 87% of the latest book value. Profit guidance was upped to a 14-16% ROE, so to do the math again, a 14% ROE equates to roughly $2.87 / share in earnings on an $18 stock, a ~16% earnings yield (vs a 20% earnings yield in December).
While this was a quick hit, Brindle has a long history of prudent capital allocation during both soft and hard markets within the P&C space, making it a nice one to sit on and not have to think too much about going forward. One can hope that they hit their 12-15% ROE target net of fees over the long run and we have the buffer of buying at a fraction of the book value of equity.
Last, I tried to think about what lessons are learned from this scenario and I can think of two. First, aligning one’s interests with one’s investments. I’m odd in that I find insurance fascinating despite having no industry experience in the field. I probably should have worked in insurance if I had to redo my career. This interest enabled me to want to follow this guy for over a decade. Second, focusing on situations where there are barriers to ownership today that may resolve to allow greater supply of buyers in the future is probably a good thing.
One thing is certain though, lasting lessons often come from bad investments, and I have a note to pen on one of those that were crystallized recently and left a very foul taste in my mouth. More on that later.