Westaim (TSXV:WED) is a Canadian-based holding company that owns two subsidiaries, a specialty property and casualty insurer called Houston International Insurance Group (HIIG) and a credit-based alternative asset manager called The Arena Group.
Company executives have an excellent track record and rely on a value investing strategy to maximize shareholder value over the long term.
Westaim appears to have the potential to be a compounding machine, growing book value at high rates for many years. Investor returns should match or exceed this growth, as the stock is priced below book value.
HIIG is a specialty insurer run by insurance legend, Stephen Way and is focused on underwriting specialty insurance in niche businesses. In the year 2014, Westaim acquired 70% of HIIG at a bargain price of 0.9 times book value.
Over the years, Westaim increased the ownership stake by investing more funds at book value, which resulted in current ownership percentage of 75%. It’s important to note that specialty insurers usually trade at well over 1 times book value.
HIIG has written nearly $600 million of underwriting premiums over the last year, up 5% year over year. The global P&C insurance industry has been in a difficult pricing environment due to reduced number of catastrophic events over the last 15 years.
HIIG has always underwritten insurance is a very disciplined manner and uses reinsurance to reduce risk. HIIG invests insurance float of approximately 650 million and adopts a value investment philosophy.
In 2014, Westaim began building credit-focused investment firm The Arena Group. The firm makes credit-focused investments and looks to generate high returns with reduced risk by investing in debt securities.
Arena looks to earn a minimum of 10% return on the investment portfolio and the firm’s mandate allows investments in a wide variety of credit related financial products.
Credit-focused asset management firm have recently been popular and the industry has seen some consolidation with Brookfield Asset Management’s acquisition of Oaktree.
In order to increase liquidity and take advantage of market opportunities, Westaim issued nearly $250 million of equity at $3.25 per share in 2015. Insiders participated in this equity offering and purchased a significant amount of Westaim’s stock.
Westaim has also entered into a strategic partnership with Prem Watsa’s highly respected firm, Fairfax Financial Holdings. Fairfax invested in Westaim’s preferred shares, received warrants to purchase common stock and agreed to invest in Arena’s credit fund.
This resulted in increasing assets under management at Arena and Westaim now has access to capital to take advantage of market opportunities.
Westaim is one of few companies traded in Canada with potential to grow book value by over 15% annually. In addition, Westaim’s valuation is expected to improve as investors realize the incredible investment opportunity this stock presents.
CEO Cam MacDonald has an excellent track record and is a 20-year investment veteran. Westaim’s COO, Robert Kittel, also has an impressive track record as a disciplined capital allocator.
Near-term catalysts that can increase the value of the stock include book value growth, HIIG sale, share buybacks, new acquisitions and investments. Management is aware of the underpriced stock and has been buying significant amounts over the last few months.
In summary, Westaim appears to be low risk investment at an attractive valuation and a large margin of safety.
Expecting exciting things from Westaim in the future!
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Fool contributor Nikhil Kumar owns shares in THE WESTAIM CORPORATION, BROOKFIELD ASSET MANAGEMENT INC. CL.A LV and FAIRFAX FINANCIAL HOLDINGS LTD.The Motley Fool owns shares of and recommends BROOKFIELD ASSET MANAGEMENT INC. CL.A LV. The Motley Fool owns shares of THE WESTAIM CORPORATION. The Motley Fool recommends FAIRFAX FINANCIAL HOLDINGS LTD. Fairfax Financial and Brookfield Asset Management are recommendations of Stock Advisor Canada.