White Mountains Insurance's Investment Portfolio -- Is This a Mini-Berkshire?

Is White Mountains Insurance (WTM 0.96%) an early-stage Berkshire Hathaway (BRK.A 1.18%) (BRK.B 1.30%) or are the business models completely different? Here's a look at the similarities and differences between the two conglomerates and another "mini-Berkshire" that could be worth examining instead.

A full transcript follows the video.

This video was recorded on June 18, 2018.

Michael Douglass: Let's also talk about their equities and fixed income investment portfolio, because that's a pretty big amount of money, and it's certainly doing a lot to drive -- or not, as the case may be --results.

Matt Frankel: It is. The investment portfolio is about $3.4 billion right now. About two-thirds of that is fixed-income investments -- bonds, mortgage-backed securities makes up a pretty large portion of it. The bonds have pretty staggered maturities. Generally, about six to ten years seems to be the average, mostly investment-related.

On the equity side, which makes up close to one-third of the portfolio, this isn't an equities portfolio in the sense that Berkshire Hathaway has the Buffett stocks. This is a bunch of mostly passive ETFs. This is essentially, an S&P Index Fund would be an example of something that they could invest in. We don't really have a long, detailed list of how they invest their money, but they do say it's mostly passive ETFs and stock portfolios managed by third parties. This is not the Buffett portfolio.

Douglass: Right. I think that's one of the key things to keep in mind here as a difference between this and a Markel (MKL 1.43%) or a Berkshire. This is a company that really isn't necessarily trying to find the next great investments that are going to beat the market. What they're mostly looking to do is invest in sectors through ETFs.

That's a thing that, certainly, if they have a core area of competence which is something else, that makes a lot of sense. But, at the same time, when you have a company that's largely dropped its insurance business, which theoretically was its core area of competence, and it's also not really picking stocks on the investment side, a lot really starts to depend on those wholly or partially owned companies that it's operating. And I think we have a lot of question marks about those. So, that's certainly a big concern for me.

Frankel: Yeah, definitely. It's not an investment portfolio in the sense that they're investing the float, like you just said. They're investing their own capital at this point to try to achieve a return, and it's a much different business model.

Douglass: Yeah. Which is interesting, because, again, they used to be more comparable, but that's definitely become a little bit less so over time.

Let's think a bit about how this company stacks up to, say, a Markel or a Berkshire, just in terms of thinking about companies in the insurance business and whether they make attractive potential investments.

One of the things for me is, let's consider the size difference. White Mountains, as of this morning, has a roughly $3.4 billion market cap. It's fairly small, particularly when you compare it to Markel at $15.4 billion and Berkshire at almost $500 billion. These are companies that are operating in very different leagues from each other, and there's a really big scale difference there.

Frankel: The scale difference could be a good thing or a bad thing. One of Buffett's biggest complaints is how big Berkshire is, that it's really tough to effectively invest his money. So, this is an area where it actually works out in favor. One of the businesses we talked about, NSM Insurance, is one Buffett probably wouldn't even look at. It's a relatively small player. Same with MediaAlpha, that's another one that Buffett probably wouldn't give a second look to, because it really wouldn't move the needle on Berkshire's balance sheet. These are opportunities that a smaller player in the industry could invest in, and it could really make a meaningful difference if they're successful.

Douglass: Yeah. And that's a very legitimate thing. That's one of the reasons why they've been able to go after these really niche businesses that might have some really attractive scale-up opportunities long-term. For me, I just keep coming back to the fact that this is a company that's really taken away the insurance float side of things and is just investing, basically, cash that they've kept on the books now. That feels, in a lot of ways, a lot riskier.

And personally, I'm not as excited about most of their businesses as I am about, say, a Fruit of the Loom for Berkshire, or some of Markel's ventures. For me, at least, I'm just not terribly attracted to White Mountains as a potential investment from here.

Frankel: And we haven't even talked about the company's buybacks yet.

Douglass: Oh, yes! Let's do that!

Frankel: That's been a big part of the story over the past few years. I think they've bought back about 30% of their shares over the past year or so.

Douglass: Yeah, about 33% since the end of 2015. It's wild.

Frankel: Yeah, in what's called a reverse Dutch auction, I think it is. They offer an above-market price to shareholders to get them to sell their stock. What most companies do when they buy back shares is just buy them back on the open market.

For example, before the latest tender offer was made in April, White Mountains was trading at about $806 the day before. They made the tender offer up to $875. It almost feels like they were overpaying for their own stock to be able to get out of these other businesses.

Douglass: Yeah. This is a thing that we've actually seen in a lot of financials, where companies will buy back shares at the wrong time. Bank of America was buying back shares at 4X what they were trading for during the financial crisis beforehand. Then, of course, they had to dilute on the other hand to gain cash during the financial crisis, which really hurt them, and hurt underlying shareholders, pain that I think has still persisted, really, into a lot more recently. This feels a little bit like that. More fuel to the fire that, when management is buying back shares, that is not necessarily a good sign for the business.

Frankel: Like I said, I wish they would have just kept some of their insurance operations and not done that. But that's just me.

Douglass: [laughs] Well, we're not the only folks who have turned away from the company. Buffett used to be a shareholder. The fact that he essentially divested from White Mountains is also, I think, a part of this story when thinking about this company.

Frankel: Yeah. Just to give you a little bit of context, Buffett had a pretty sizable stake, I think about one-sixth of the company, from about 2000-2008 right before the financial crisis. Talk about a case of good timing, he got out just in time.

Buffett was a big fan of the CEO at the time, who's no longer the CEO anymore. He essentially invested in White Mountains to help them make an acquisition, which they've since divested as part of their "get out of the insurance business" plan. So, it's a very different company than Buffett invested in.

Like I said, I used to follow White Mountains a lot when it was a Buffett stock. If any of the listeners did as well, it's worth pointing out, this is not the same company that Buffett owned in his portfolio.

Douglass: Right. Again, when I look at this company, there's not a lot that I'm really excited by. The fact that it's small is good and certainly gives optionality. But, I tend to think that if you're looking for reasonably small, Markel is a better bet, just because, they invest in individual stocks -- they've had a really good run with investing in tech stocks -- they have a very sizable ventures group, which is moving the needle for them meaningfully, and they're still in the insurance business. And, they're in these niche, difficult-to-value spaces, similar to what White Mountains is. The difference is, they're actually pocketing all of that profit on the premium side, on the underwriting side, instead of just trying to do it in a fee-commission way, which can hopefully help them build up more cash in the short-term before insurers cut them out.

Frankel: Yeah. Markel is definitely still using all of their insurance money to invest. They're the closest thing to a mini-Berkshire in the market right now.