Speaking of companies that do it right, White Mountains Insurance (NYSE:WTM) today reported that its tangible book value per share had increased by 18% to $343 per share. Book value for insurance companies, particularly ones with longer-tail policies, has an outsized importance over other types of companies, since GAAP earnings don't tend to capture the full tenor of how a company is doing.
Were White Mountains to wish to "pump up" earnings, it would be extremely easy to do so -- just write a huge number of policies of questionable long-term value to the company. The end result down the road would likely be catastrophe, but hey, the company could always point back to what great earnings it showed in 2005!
That said, White Mountains' earnings for the quarter were extremely good, more than doubling to $233 million from last year's $92 million per share. Much of these gains were related to investment gains (the company's portfolio increased 20% on the year) and acquisitions. This helped the company overcome the higher payouts on claims to customers as a result of a higher incidence of catastrophe-related property damage. Catastrophes to which White Mountains had some exposure include Hurricane Ivan and the December tsunami in the Indian Ocean.
White Mountains, an independent, Bermuda-based company, is owned 16% by Berkshire Hathaway (NYSE:BRKa) (NYSE:BRKb). Its shares shot up more than 6% today, yet another big return in what has been termed "Warren Buffett's really big week."
Each of the company's three main insurance subsidiaries saw their combined ratios (the percentage of premium revenues paid out in claims and expenses) rise in 2004 versus 2003, which is a negative trend. One interesting element is that White Mountains' spiking share price in 2004 actually hurt its combined ratio, as it expenses its stock compensation. Rising share prices equal higher compensation costs, which reduce earnings, though this element is non-cash, and actually tied to a trend that shareholders (sane ones, at least) would find quite pleasing: rising price per share.
See also The Perfect Earnings Report.
Bill Mann owns shares of Berkshire Hathaway. The Motley Fool has a disclosure policy.
