This article is part of our Rising Star Portfolios series.
When most people think insurance, it's usually the bill for car insurance or renewing their homeowner's policy. But there's a nicer side to the insurance gig: the investing side. The catch is that you need to find the ones that will stand the test of time, through good markets and bad. And White Mountains Insurance Group (NYSE: WTM ) is one of them.
Under a mountain
Founded in 1980 and headquartered out of Hamilton, Bermuda, White Mountains is a holding company for property and casualty insurance and reinsurance businesses. The company conducts its principal business through four segments: OneBeacon (NYSE: OB ) , White Mountains Re, Esurance and White Mountains Advisors.
White Mountains Advisors represents the company's investment management wing and currently has approximately $29 billion under management. The managers aim to keep it simple, as is obvious from their four operating principles: Underwriting comes first; maintain a disciplined balance sheet; invest for total return; and think like owners. I can get behind a company with principles like those.
Where's the disconnect?
Mr. Market sometimes looks at things from a short-term perspective. One of our primary advantages as Foolish investors is that we can look at things from a long-term perspective. White Mountains shares are trading at a discount today. Here's my take on why that might be:
At a loss: White Mountains had a less-than-stellar 2010. Tough losses from the Chilean earthquakes and weather in the Northeastern U.S. and Europe lead to a drop in net income of more than 80%. Managers probably thought this was a walk in the park compared with the financial crisis, though, and they were still able to grow the company's book value 6% for the year.
Beacon of light: White Mountains is putting the finishing touches on OneBeacon's transformation into a specialty coverage provider, similar to Markel Insurance (NYSE: MKL ) . As such, there have been costs involved with acquiring new business and underwriting expenses that should abate as the company acclimates. CEO Ray Barrette stated that while he continues to see soft insurance markets, the company will continue to seek out excellent opportunities.
Missing the boat?: Much of White Mountains' investment portfolio is currently in fixed income. In fact, at the end of 2009, 66% was tied to fixed maturity investments. While this helps preserve capital in volatile times, the market may think that management has missed the boat with stocks' recent bull run. But think about this: Since 1993 management has grown book value at a compound annual rate of 10.5%, so they know a thing or two about creating value.
Who knows?: White Mountains flies under the radar -- no quarterly conference calls, no guidance. Other than the quarterly press release and appropriate SEC filings, the company quietly goes about its business. The closest we can get to any of this is through OneBeacon, but again, this is only part of the picture.
Taking a chance
There are of course risks inherent with any investment, and here are a few things worth keeping an eye on:
Interest-ing: With a large amount of fixed income, the company's portfolio can be more sensitive to interest rates. Management has stated its goal to shift back to its total return investment philosophy, so I'll be watching asset allocation.
Write well: Insurance is about underwriting plain and simple. The company needs to continue their focus on writing profitable policies. I'll be keeping an eye on the combined ratio.
Disastrous: Natural disasters are unavoidable. Management can't control them, but it can make sure the company stays healthy so it can weather through the inevitable storms.
This one's at a discount
The most common metric used for valuing insurance companies is book value. White Mountains caught my eye initially because it's trading below book value at about 0.8 times. While many insurance companies probably deserve this fate, I don't think White Mountains does. Historically speaking, the company has traded at an average of about 1.4 times book value over the past decade, with a high of 2.2 and low of 0.7.
I mentioned where I think the disconnects are, and I don't think it'll be long before the market comes back around and shows White Mountains a little respect. Let's look at it this way, the company's most recent reported book value is $441 per share. Today's price of $365 implies that shares are at least 17% undervalued -- if not more.
Insuring the bottom line
I may have left an insurance job in Georgia to take the job here at Fool HQ (heck, that was a no-brainer), but I still like insurance as an investment. And while White Mountains is trading at a discount today, I don't think it's going to stay that way for very long. I'm changing it up a bit and allocating a 10% position to my portfolio since I think the rewards well outweigh the risks. Drop on by my discussion board and let me know what you think about this latest pick. You can also follow me on Twitter.
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