Monday, October 13, 2008

The Bad News On White Mountains Insurance Is Out

White Mountains Insurance has fallen precipitously the last month with the rest of the insurance group, and all of us knew something was coming either in regard to the mortgage backed securities portfolio, or the Level III asset portfolio which consists mostly of long/short investment partnerships, according to management. The company issued a press release this morning with the details:

"In light of recent developments in financial markets, White Mountains Insurance Group, Ltd. (the "Company") announced today that it expects its adjusted book value per share at September 30, 2008 to be between $400 and $420, a reduction from $444 at June 30, 2008. These results have not been reviewed by the Company's independent auditors and are subject to change."

The stock is now up $43 to $338 so it sells at 80% of book value.

"The reduction is due mainly to a 5% drop in the value of invested assets during the quarter. The total return on fixed maturity investments, including mortgage-backed and asset-backed securities, was -2% to -3% for the quarter, compared to a return of -0.5% for the Lehman Aggregate Index. The total return on equity securities was between -13% and -15%, compared to -8.4% for the S&P 500."

Not bad, many did much worse.

"Our underwriting results for the quarter were impacted by after tax catastrophe losses of roughly $100 million. For the quarter, our segment GAAP combined ratios are estimated to be as follows: OneBeacon, about 100%; White Mountains Re, about 120%; and Esurance, about 102%. Mark-to-market losses on the White Mountains Life Re portfolio were about $15 million."

OK, the insurance business sucks as well, but we all knew that too.

"Finally, we expect to receive final approval from the IRS on the Berkshire exchange by the end of October and to close that transaction soon thereafter."

The company stands behind its word, and will pay Berkshire $485 a share. No private equity cop out here.

As previously disclosed, White Mountains does not invest in any collateralized loan obligations or collateralized debt obligations. The Company's high quality, short duration fixed maturity portfolio remains defensively positioned and had minimal exposure to the adverse credit events during the third quarter. As of June 30, 2008, the Company had $2.6 billion in mortgage-backed securities, which represented 57% of the Company's shareholders' equity. $1.5 billion of the Company's mortgage-backed securities owned at June 30, 2008 carry the full faith and credit guaranty of the U.S. government. As of September 30, 2008, the total mortgage-backed security portfolio was approximately $2.6 billion. Management remains comfortable with the credit outlook of this short duration, high quality portfolio."

Disclosure - I am long WTM.

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