White Mountains Insurance Analyst Day 2009 - Part II

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.

2008 – Bad News

WTM had $1 billion in excess undeployed capital last year because of a lack of investment opportunities – so the company bought back stock and did Berkshire transaction. Barrette admitted that with hindsight this was obviously, not a good idea. He doesn’t think it will destroy value but will not do what he thought it would do.

Equity Portfolio – Bad News

Equities as a percent of adjusted shareholder value has gone from 55% in December 2007 to 70% pro forma for the Berkshire transaction in June 2008, to just under 38% in the first quarter of 2009. He said that with hindsight the company should have sold down its equity portfolio, but instead paid Berkshire out of proceeds from its fixed income portfolio.



By December 2008, WTM altered its equity strategy to a goal of capital preservation. After first two weeks of October 2008, WTM found its capital falling to levels that came close to minimum capital levels necessary to keep credit ratings where they needed to be. Moved out of common stocks and de risked fixed income portfolio.

Barrette said the company likes what they own and would probably own some different things if they had more capital or flexibility. WTM owns things not because they have to but because they want to.

WTM Life Re – Bad News

This was a business that WTM got into that it didn’t fully understand what they were getting into. Alan Waters is in charge of fixing the business.

WTM has reinsured two blocks of Japanese variable annuity policies with same counter party that guarantees the return of initial deposit at death or maturity. These are ten year policies with average remaining life of 7 years. Outstanding guarantee is $2.5 billion for WTM, which is the difference between the account value and the guaranty value. Seventy percent is invested in fixed income index funds, and 30% in equity index finds.

Lost $188 million in this business in 2008, $181 million in last quarter of 2008. This loss comprised $93 million from assumption and model changes, which was the change in WTM assumptions on policyholders surrenders.

When a policyholder surrenders a policy the insurer does not pay full guarantee value of policy but only the account value so when account or asset values are low, high surrender are good. Unfortunately for WTM actual surrenders were well below what the company had estimated when they wrote the policy so they had to change the surrender assumption in the last quarter of 2008. WTM changed surrender assumption from 6.2% to 2.2% of all policies.

WTM lost $32 million in first quarter of 2009, but business is now marginally profitable now that the markets have calmed down.

WTM has reduced risk through increased hedging and improved method of hedging. WTM uses swaps instead of bond futures. Increased volatility coverage from 60% to 70%., and added local trading coverage in Europe and Asia.

WTM is still sensitive to surrender rates and if rate decreased to 1.1% then it would cost company $44 million.

Barrette says WTM ventured into a business it did not fully understand, and now he understands that they didn’t fully understand it, and he apologizes for it.

Barrette said it is a big loss but believes that they have it under control but there is still possible downside. The lesson is when something looks easy then look again. WTM usually laughs at those who get into its business who think it is easy and now they are on the other side of that.

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.

Notes

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.