Saturday, May 30, 2009

White Mountains Insurance Analyst Day 2009 - Part I

Here are my notes from the White Mountains Insurance Analyst Day held on May 20, 2009. These are for the introductory section, the financial highlights and a review of bad news in 2008. When I went back to the events section of the White Mountains Insurance web page, the webcast link was missing, so I don't know if I'll be able to review the rest of the meeting. I have e-mailed the company asking for the link but haven't heard back. If anyone has the link to the webcast, please send it to me.


Ray Barrette introduces the Board of Directors of White Mountains Insurance (WTM) and says that some are in the room and the rest are listening on the phone. He commented that the Board had a tough time with them due to the poor returns the last few years. Barrette says that he was not sure if Bruce Berkowitz would be there in person or listening on the web.

Barrette then introduced some of the WTM people who would be speaking:

David Foy, CFO
David Linker? (spelling), fixed income manager
Mike Miller, One Beacon
Alan Waters. White Mountains Re

Financial Highlights

Barrette said that 2008 was a tough tough year. Book value of WTM dropped 20% and book value of One Beacon dropped 22%. First quarter things have stabilized with WTM book value flat and OneBeacon up 3%.

One Beacon combined ratio at 94% for first quarter of 2009.

WTM Re has had a bit of an up and down combined ratio and has had reserve issues in the past but Barrette believes that those reserve issues are behind them. He knows that he has said that before and if people are skeptical he is not surprised.

Answer Financial (AFI) – controls $1.2 billion in premiums combined with Esurance. He believes that Esurance/AFI is third choice for consumers behind Geico and Progressive.

Esurance combined ratio is at 103% in first quarter of 2009, but WTM looks at loss ratio rather than combined ratio, but the combined ratio did come down 10 points. WTM cut marketing and advertising expenses but are ready to ramp them up when needed.

Investment Returns

Barrette said it was the first time in his very long career that underwriting is doing well, but investments are the problem. Investments were always value added to the company. Total investment results were down 9.5% in 2008, and while this might be good for some people, the company’s job is not to lose money, and the company was disappointed with that. Things stabilized in first quarter of 2009, and the company likes what it owns.

Surprise from last year was Life Reinsurance business, which they had barely talked about in past meetings and then there were significant losses with it. First quarter of 2009 was a problem and the company lost $32 million in the Life Reinsurance business, but things have stabilized.

Book Value Growth

Barrette said this a chart that he used to love to show at investor meetings, but it looks a whole lot less attractive now. Since IPO in 1985, 15% growth in book value – still ranks pretty high in industry. Stock value growth used to be above book value growth but now it is below.

Since 1999, book value has grown at 10% a year and market value of stock at 8% a year. Barrette apologizes for the results.

Friday, May 29, 2009

The Mind of Wall Street - Part II

I just started reading a book called “The Mind of Wall Street,” by Leon Levy. Levy died in 2003, but had a fifty year career on Wall Street and was one of the early partners at Oppenheimer and Company. Levy is a value and contrarian investor who incorporates the psychology of the market into his investment process.

An interesting bit of information is that according to Levy, the concept of the adjustable rate mortgage was conceived by Gene Fenton, an employee of Oppenheimer and Company. Fenton, in true Wall Street spirit, constructed it so that it could only adjust upwards. Of course, this concept did not catch on too well given the one sided nature of the product.

Some time later, Marion Sandler, another Oppenheimer and Company employee, came along and changed it so it would adjust either way. If you don't recognize this name, years later Marion and Herb Sandler went on to fame with Great West Financial, a leader in the mortgage market. The Sandlers sold out to Wachovia at the peak of the housing bubble.

Thursday, May 28, 2009

FDIC Quarterly Banking Profile - Q1-2009

The Federal Deposit Insurance Corporation (FDIC) just released its quarterly banking profile for the first quarter of 2009. Highlights include:

1) FDIC-insured institutions post an aggregate net profit of $7.6 billion in the first quarter of 2009. This was down 60.8% year over year, but up from the $36.9 billion net loss reported in the fourth quarter of 2008.

2) Banks set aside $60.9 billion in loan loss provisions.

3) Banks reported an average net interest margin of 3.39%.

4) First-quarter net charge-offs of $37.8 billion.

5) Noncurrent loans and leases increased by $59.2 billion, the largest increase in three years.

6) The percentage of loans and leases that were noncurrent in the quarter was 3.76%, the highest percent since 1991.

7) Total equity capital of insured institutions increased by $82.1 billion in the first quarter, concentrated mostly in large TARP recipients.

8) Twenty one banks failed in the quarter, the most since 1992.

Wednesday, May 27, 2009

Varsity Notes

I recently stumbled across an interesting web site that contains hundreds of free lecture notes and other materials for various courses at different colleges and universities across the world.

The site is called Varsity Notes, and is great if you want to freshen up your knowledge in certain areas related to investing or elsewhere. The relevant categories for our purposes would be:


Business Administration



Some of the more famous professors whose notes are available include Aswath Damodaran of New York University. Damodaran makes available on his web site a 58 page handout on Valuation.

Monday, May 25, 2009

The Mind of Wall Street

I just started reading a book called “The Mind of Wall Street,” by Leon Levy. Leon Levy was one of the first partners at Oppenheimer and Company. Levy died in 2003, and was a value investor incorporating much behavioral psychology into his investment process.

When I saw the book at the store, I saw the title and the name Levy, and my eyes skipped over the first name and I assumed that Gus Levy was the author. Gus Levy was in charge of Goldman Sachs in the early 1970’s.

Oppenheimer and Company has an interesting history. The firm was founded in 1951 after Max Oppenheimer left the firm Hirsch and Co. Levy joined soon after that. Oppenheimer catered to many German refugees at the beginning, and in the first few years more German was spoken at Oppenheimer than English.

Another interesting tidbit recounted by Levy was his accounting of the ethnic divisions that used to exist on Wall Street. The major street firms were broken down as follows:

Merrill Lynch – Catholic.
Brown Brothers, Morgan Stanley – WASP
Goldman Sachs, Lehman Brothers - Jewish

This book should be an interesting read, and I will post on it over the next few weeks.

Friday, May 15, 2009

White Mountains Insurance Analyst Day

White Mountains Insurance is holding its annual investor meeting on May 20, 2009. The meeting is in New York City, but is being webcast. White Mountains Insurance doesn't hold earnings conference calls or market very much to the investment community so this is a good chance to get a review of what going on in its business segments.

Some investors may feel that management has some explaining to do considering the stock was trading at close to $450 last year compared to $214 per share today.

Here are my notes from the meeting last year.

Tuesday, May 5, 2009

The Credit Crunch Peaks

The April 2009 Senior Loan Officer Opinion Survey on Bank Lending was released yesterday and the results show that the "credit crunch," may have peaked. Here are highlights:

Forty percent of domestic respondents reported having tightened their credit standards on commercial and industrial (C&I) loans. This was down considerably from the 65% in the January survey.

Sixty five percent of domestic respondents reported having tightened their credit standards on commercial real estate loans (CRE). Once again, this was down from the 80% in the January survey.

The story was somewhat mixed for consumers, where a higher percent of banks tightened standards on Residential Mortgage Loans, both prime and non prime.

On credit card loans and other consumer loans the opposite was true, a smaller percentage of banks tightened standards on these loans.

Here is the full survey and some charts to look at.

Monday, May 4, 2009

Gulf South Bank Conference

I’m heading down to the Gulf South Bank Conference later in the week. This is an industry-sponsored event that has about 20 or so banks presenting to investors. These aren’t the giant commercial banks that dominate the news, but are smaller community banks that don’t get a lot of publicity. I think the largest bank presenting has a market capitalization of approximately $2 billion. Here is a list of the banks attending:

BancorpSouth, Inc. (BXS)
MidSouth Bancorp, Inc. (MSL)
Bank of Florida Corporation (BOFL)
Peoples Financial Corporation (PFBX)
Bank of the Ozarks, Inc. (OZRK)
Porter Bancorp, Inc. (PBIB)
Capital City Bank Group, Inc. (CCBG)
Renasant Corporation (RNST)
CenterState Banks of Florida, Inc. (CSFL)
Simmons First National Corporation (SFNC)
Encore Bancshares, Inc (EBTX)
Southside Bancshares, Inc. (SBSI)
First Financial Bankshares, Inc (FFIN)
Superior Bancorp (SUPR)
First Security Group (FSGI)
Teche Holding Company (TSH)
Hancock Holding Company (HBHC)
TIB Financial Corporation (TIBB)
Home BancShares, Inc. (HOMB)
Trustmark Corporation (TRMK)

I just found out that Whitney Holding (WTNY) pulled out of the conference several weeks ago because it didn’t want to get any political flack from Congress about spending money on wining and dining investors. I will post my thoughts on the conference when I return.