White Mountains Provides Exit Visa for Insurance Industry
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By Brian Zen, Ph.D.
"We provide services to people who want to get out of the insurance business,"
said Jack Byrne, chairman and chief executive of White Mountains Insurance
Group Ltd.(Symbol: WTM), who recently offered his business insights
and jokes at the company's annual shareholder meeting in New York.
"Mutual Capital Bothers Me A Lot"
State Farm, one of Jack Byrne's competitor, is financed by mutual
capital, the policy holders' money. Policy holders, unlike the
shareholders, don't care about return on equity. So mutual
capital
can keep competing on a 2% return and a 126 combined ratio. But those
numbers will not be acceptable at shareholder financed insurance
companies. Jack Byrne echoed what Warren Buffett said earlier in the
year: "Mutual capital bothers me a lot."
Shrink Your Circle of Competence
"When you are 30 years old, you circle of competence is pretty
large.
As you grow old, the circle of competence shrinks to a very small
size," said Byrne.
Tracking Tangible Book Value
White Mountains currently has a negative good will because the
operation is losing money. According to Jack Byrne, tangible book
value is pretty good surrogate of the economic value of the business.
How Jack Byrne Restructures OneBeacon Insurance?
Here are the tricks of Jack Byrne:
1) Strengthen reserves. Write down assets to a conservative
valuation. Make sure the number is right with no future surprises.
2) Properly record liabilities.
3) Purchase additional reinsurance to limit future liabilities.
4) Sold equities. Avoided market downturn. Invested in quality
bonds.
5) Wrote down non-financial assets.
6) Further reduce debt.
7) Reduce combined ratio from between 115-126 to 102.
8) Become the regional underwriter for underwriters. Underwrite
with control and discipline.
An Early Start in Insurance
Jack Byrne started 56 years in his father's insurance agency.
That
was in 1944. His basic strategy during all those years is to buy
broken insurance businesses below book value during industry slumps,
restructure the operation and sell them during industry booms at
around 3 times book value. He described with humor: "Many people
aren't sure what they are doing when they get into the insurance
business. The time will come when they want to get out. We help them
to get out. We provide the exit visa to Heaven. It's very
socially
responsible."
The Quick and "Tough" Deal With Warren Buffett
When Jack Byrne needed money to buy broken insurance operations,``Mr.
Buffett is always there,'' said Byrne. ``He's the best partner to
have.'' Byrne said the Berkshire Hathaway investment in White
Mountains to facilitate the CGU purchase was obtained during a ``60-
second phone conversation.''
``Warren said how much do you need? Is $800 million enough? You've
got it, Jack.''
``If something wonderful came along, Warren would be my first call,"
Byrne added with a witty smile. "Of course, he always negotiates a
tough deal."
What To Ignore In Insurance Business
Jack Byrne doesn't care about:
1) GAAP earnings
2) Revenue growth
3) Market share
4) Strategic Purchases. (In fact, he sells to people who make
strategic purchases.)
Owners are now running businesses. It is a sea change.
Businesses used to be run by salaried managers hired by trust
departments. Now Jack Byrne sees more and more shareowners are
running the businesses. It is sea change. If the business is not
performing, the CEO is gone. That's good for businesses.
Managing Money For An Insurance Company
White Mountains believes that the investments of an insurance company
can be divided into two parts:
1) Policy holders' money, which shows up as reserves on the
balance sheet. Reserves have to be right.
2) Shareholders' money, which can show up anywhere. The company
has to be properly financed. |
