White Mountains Insurance (WTM)

In my previous post, we spoke about insurance companies over here.

Here is a short recap:

• Insurance is a commoditised industry, anyone is willing to underwrite policies to get access to the float. The key differentiator is to manage risk by underwriting selective policies. Do not chase premiums by underwriting high probability events because the company may suffer losses!
• Markel and Berkshire Insurance are two companies operating in the niche areas of the industry sector where there is lesser competition.
• Look for the long-term book value and its compounding track record.
• Check out for its combined ratio consistency and improvement
• Growth in premiums.
• Track record of private equity or investment results. All insurance companies tend to take float to invest to generate further returns for the group.

Today, I wish to highlight three companies which may interest you. They are Progressive Corp (35.9b mkt cap), White Mountains (2.8b mkt cap) and Chubb (60.3b mkt cap).

White Mountains Insurance (WTM)

In the past, the White Mountains was known as Fireman’s Fund. It was losing money then. John Byrne was then invited to join the company. Within a short span of time, he alleviated the bleeding and shifted the company to a path of prosperity. Previously, John Byrne was also CEO of GEICO. He was instrumental in changing the way how GEICO operated, which then led to Berkshire Hathaway acquiring in the company.

WTM competes with Assured Guaranty in the municipal bond insurance industry.

Apart from insurance, it invests its float into acquisitions of “sound businesses with strong owners and management teams“.

Their operating principles

Their current portfolio

In FY2017, they sold one of their portfolio company called OneBeacon. Over 16 year investment period, WTM generated a 14% IRR. In this regard, they are very similar to Markel. They invest in companies and grow them. When exit valuations become available, WMT disposes of the company.

The book value per share growth

You can’t help but applaud the management for growing the book value in the past few years. As of 30 September 2018, the adjusted book value per share is $926.  Currently, its share price $889.29, implying a P/B ratio of 0.96x. In Q3 2018, WMT purchased 585,033 of their shares at an average price of $877 or P/B ratio of 0.95x.

WMT also reported $1.4b of undeployed capital, which is nearly 50% of their total equity.

As for the shares outstanding, it is 3,180.5mil shares. It is a drastic drop of 47.8% from 6,098.7m shares which was their shares outstanding on 31 December 2013.

P/B historical chart

As you can see from the Koyfin chart above, the P/B trades roughly from 0.9x to 1.2x. The reason why you see the sharp drop in P/B around Nov 2017, it was because they recognised gains from their OneBeacon’s sale. This grew their equity while the share price remained the same.

Comment below or email me at which P/B range which you feel comfortable buying White Mountains Insurance!

Some other companies which you may wish to explore could be Chubb, Allstate Insurance or Progressive Corp.