White Mountains Insurance WTM
May 27, 2001 - 6:09pm EST by
2001 2002
Price: 333.00 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 2,000 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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  • Property and Casualty
  • Insurance


Whie Mountains (WTM) is a collection of insurance operations & liquid securities. At 31 March 2001, it's book value stood at about $185 per share.
The reason why the current share price is more than 50% above book value is the agreement which White Mountains has entered into to buy CGNU's US operations, CGU, for approximately $2.2 billion.
This transaction also involves Berkshire Hathaway & a Lehman Bros led lending syndicate. From WTM's point of view (after allowing for exercise of Berkshire's warrants for 20% of WTM), the tranasction is roughly 40% debt and 60% equity.

I'll post a breakdown of the deal structure separately for those interested.

The purchase price appears to be roughly $1.4 billion below tangible book value - which will accrue to the equity holders. Equity participation in the deal appears to be entirely via WTM (3.9m share equivalents are being issued - against 5.9m currently outstanding)

The White Mountains which I want to suggest is the proforma post-transaction White Mountains. All of the figures below are based on the recent reported transaction details, however, it doen't include the 20 February ammendment due to adverse reserve development.
I estimate that this entity will have a tangible book value of around $335 per share (accounting book value will be less due to the negative goodwill arising from the purchase being below book value)
As part of the transaction, CGNU will purchase extensive reinsurance from Berkshire Hathaway (it's paying $1.25b for $2.5b in asbestos/environmental cover and $300m for $550m of cover on adverse development on the 200 and prior accident years).
This reinsurance looks a lot like it is priced to be nearly entirely used - ie the premiums are discounted values of the claims payable. If this is the case, then they represent substantial pre-acquisition strengthening of reserves.

With WTM currently selling close to my estimate of post-transaction book value, it is clearly no Ben Graham bargain. In spite of this, investors like Marty Whitman who've held it since prior to the run up still apear to be holding.

My investment thesis with WTM is that at this price; with the strengthened reserves; with Jack Byrne (turned around GEICO, etc) overseeing management (& Berkshire with a half billion dollar stake) it is a leveraged pure play on improvements in insurance pricing.

Unlike other insurers which may well have to cope with continued adverse development of past loss reserves as current pricing picks up, WTM appears to have substantial insulation, in the form of reinsurance ($1.55b on loss reserves of $11.5b (at 31/12/99)) and the increases should flow through to the bottom line. Improving insurance pricing appears to be widely reported (see for example Marsh McLennan and AIG's quarterly reports). The CGU operation wrote $4.2b in premium in 1999 (A.M. Best) - obviously the $0.5b reported profit on that was somewhat optimistic, but on about 10m shares outstanding, that would be a healthy EBITDA (the amortisation being 'earnings' positive).

In practice, White Mountains is probably more likely to sell the CGU operation to a 'strategic buyer' once the industry has become more attractive to new entrants, etc and the adequacy of past reserves at P&C insurers generally has been clarified.
From the management report "We have never made a strategic purchase ... maybe we will someday. We often sell to strategic buyers."

I have ignored WTM's other operations, taking them at their book value. While WTM has a history of adding value to the operations which it purchases and turns round/improves, these are not likely to make a huge contribution in comparison to the CGU deal.


At present the share price is around the post-deal nta & not much is likely to change until after the deal goes through. It is expected to close in the second quarter (WTM press release), with announcement of the closing and release of the 30 June quarterly balance sheet both potential catalysts.
Any further signs of continued improvement in pricing - especially coming from management should also be strong catalysts.
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