Does White Mountains [WTM] fall in the same nice-upside, downside-is-boredom category?
JB: Yes. This is a diversified insurance company, with divisions offering commercial and property insurance, reinsurance and auto insurance sold directly online. This was originally Jack Byrne’s company, who when he was the CEO of GEICO helped teach Warren Buffett about the insurance business. The board and management team are very deep and have done a superb job allocating capital, through buying and selling insurance companies and in investing what is now more than $20 billion in assets. They alternate over time between intelligently growing when the insurance business is under stress and pulling back when everyone else is pouring capital into the business. Over the past decade they’ve grown book value per share at a low- to mid-teens annualized rate.
One problem for the stock in the past couple of years is that that book-value growth can be lumpy. There in a lull right now as the insurance cycle has firmly turned downward and they also haven’t had as many capital “events” to unlock significant value. For example, last November they had to shelve the IPO of life-insurance subsidiary Symetra Financial – which is jointly owned with Berkshire Hathaway – because of the unfavorable market environment.
Is anything on the horizon to snap them out of the lull?
JB: One of the beauties of sticking with management teams that are shareholder-oriented and first-rate capital allocators is that you can rely on them to see around corners. White Mountains has a tremendous amount of cash and borrowing flexibility, at a time when many financial companies have neither. We can’t tell you what deal they’re going to do or where specifically they see opportunity, but in a distressed financial-services world, the chances of their finding deals that will provide that future burst to book value have gone up.
To give an example, we first bought into the company seven or eight years ago, when it was basically just selling assets and buying back stock because it couldn’t find anything better to do. Then they announced the acquisition of the U.S. business of a British insurer that was dumping non-core assets. That business, now called OneBeacon, completely and brilliantly transformed the company and part of it was sold to the public in 2006. We obviously didn’t see that coming, but we didn’t have to.
With the shares near a 52-week low, what do you see as the upside from the recent price of $469?
JB: A total-return, well-managed property/casualty insurer typically sells for between 1.2x and 1.7x book value. The low end of that range usually provides an excellent buying opportunity, while the high end – when everyone’s writing business like crazy and reporting great numbers – is a nice time to sell. White Mountains today sells for less than 1.1x its $435 per-share book value, which is as hard as rock and provides excellent downside protection. If they can grow book value at even 80% of the rate of the past ten years, this will be a very successful investment through the next insurance cycle. We just think they’re perfectly positioned to take advantage of the current financial mess.