Friday, October 10, 2008

White Mountains Insurance (WTM) Analyst Day - Berkshire Transaction

White Mountains Insurance (WTM) held its annual analyst meeting on June 17, and I finally got around to listening to the webcast. The URL is here if you want to listen yourself.

I have written six other posts on the meeting. They are:

WTM - Introductory Comments

WTM - The Reserve Issue

WTM - Review of One Beacon

WTM - Review of White Mountains Re

WTM - Review of Esurance

WTM - Investment Portfolio

Berkshire Transaction

WTM discussed the Berkshire transaction in a little more detail. In March 2008, WTM announced an agreement with Berkshire Hathaway to buy back 1,724,200 of WTM shares that they held. WTM would pay $751 million and transfer two insurance entities that are in run off. The two subsidiaries are Commercial Casualty Insurance Company and International American Group. The shares held by Berkshire Hathaway represent 16.3% of the company. The aggregate exchange value is $836 million, or $485 per share.

Management said “As our founding father Jack Byrne says, you shoot ducks not when the gun is loaded but when the ducks are flying….we had a lot of activity last year but the ducks weren’t flying. But when we got to this year, and we got some additional capital…and there was a duck that was quacking, and that duck was our own stock.”

“We had the opportunity to create this exchange with BRK, which valued WTM at $485 per share or 1.1 times book.”

“Ben Graham would say when you look at a company and if you can get that company in at a 20% discount to its intrinsic business value, that’s an attractive time to do something there is no company we know better than our own so being able to do a transaction where we value WTM at $485 and then had 2 run off businesses valued at 1.5 times book, we value that as a very attractive proposition.”

Management went out of its way to assure investors that the company would have the capacity to make acquisitions if needed despite the outflow of cash to buy its shares from Berkshire. Debt to total tangible capital would be 22% and total debt would be $1.3 billion on a pro forma basis.

WTM said that the deal had been under discussion for quite some time and that the two companies almost reached agreement a year ago. The sale is expected to close in the third quarter.

My Comments:

With WTM closing at $310 on 10/09/2008, this deal looks like a steal for Berkshire, although I haven't seen a press release announcing the close of the deal. Does WTM want to use its precious capital in this manner during this crisis?

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