White Mountains Insurance: an industry gem?
By Shaun Ang, Nikos Motsis and Parthav Maheshwari, LSESU Trading Society
The insurance industry has always been in the mind of investors due to its ubiquity and size, let alone now as some estimates are valuing the U.S. market at 1.32 trillion in 2019. It can be segmented into three main sectors: property/casualty (P/C), which covers auto, home and commercial insurance and mostly insures against accidents of non-physical harm, such as natural disasters, car crashes and even lawsuits; life & annuity insurance which mostly occupies itself with life insurance, i.e. a contract that pays a lump sum of money upon the death of an individual but also with annuities, a contract which aims to establish a steady stream of future payments, functioning like a pension; health insurance, which, as the name suggests, covers private health insurance. A relatively recent industry trend has emerged where insurance companies act increasingly as financial advisors and institutions, offering a wide range of pension and wealth management plans and leveraging money accumulated from premiums to purchase and trade securities.
Life insurance premiums have seen the most growth, an estimated 54% in the last ten years, with P/C coming in second at 49.7% and life insurance last at 21.1%. The premium compensation composition is divided into 48.4% in P/C premiums, with the average premium being $637.7 in 2019 and 51.6% life & annuity and health insurance. The average premium price there is estimated at $678.7. The increase in P/C premiums is due to increased reinsurance costs of insurers and rising asset prices, mostly in residential and commercial real estate. A further reason for the increase is climate change and the increased frequency of natural disasters and other “black-swan” events, which increase the expected cost to insurers per contract. On the other hand, the increase in life & annuity and health insurance premiums has mostly been driven by government policies such as Medicaid in the U.S., increased costs of pharmaceutical products, and global health crises such as the COVID-19 pandemic.
(Reference: Insurance Information Institute)
Key players in the industry include Berkshire Hathaway (BRK.A), Ping An insurance group (PNGAY) and AXA SA (AXAHY), while White Mountain Insurance (WTM) is considered to be an up-and-coming insurance company showing impressive growth in recent times. It was incorporated in 1980 and has its headquarters at Hamilton, Bermuda. It operates through its subsidiaries, mainly four holding companies, H.G. Global/BAM, NSM, MediaAlpha, Kudu, and Other Operations. H.G. Global/BAM holds stock in two insurance companies, H.G. Global Limited and Build America Mutual Insurance. NSM is an underwriter and administrator in P/C insurance.
The Kudu branch is a liquidity provider for boutique asset managers, while Other Operations comprises the company itself, its two outright owned investment subsidiaries W.M. Capital and W.M. advisors, and other holding companies and private capital. White Mountains is considered an extremely diversified insurance company offering low volatility in its stock, which is why it is seen as appealing by many investors.
We recommend a strong buy on WTM, with a 71.5% upside and a five-year investment horizon.
This section outlines some key technicals of WTM and shows the basic chart pattern over time, and explains how technical analysis also hints towards a rise in the future stock price.
Moving averages is an important aspect of technical analysis as it indicates the current movement of the stock and the trend it has been following over some time, helping us predict how it will stay in the future. The table below summarizes the moving averages for WTM (source – TradingView). As visible, both the simple and exponential moving averages have been pointing towards a BUY showing the good current upward trend of the equity.
The illustrations above show the stock chart and respective MACD chart for the last six months.
The MACD over the last six months has been constant over the baseline, specifically after recovering from the stock price dip in October. It has had positive values shown by the green histograms on the graph. Since the MACD crosses above its signal line following a brief correction within a longer-term uptrend, it qualifies as bullish confirmation. This also gives a good signal for buying the WTM.
The graph below shows the stock chart with its respective RSI values over the last six months.
There is some caution as RSI value creeps over the 70.00 limit, indicating that the stock may be overbought. However, apart from the few times it goes over the limit, it stays in the range from 30.00 to 70.00 although staying closer to the upper limit. This tells us that the magnitude of recent price changes may have been because many people bought them, as supported by the volumes of the stock bought, which might drive the stock price up.
In addition, some other technicals of WTM show a positive uptrend. For instance, the momentum indicator, which measures the rate of change of an equity for the last one month, has a value of 52.09, highlighting a buy position. WTM’s year to date performance is +19.89% which is growing steadily along with the stock prices. Even if you look at the company’s stock charts above, after every short period of time, the company has been having higher highs and lows than the previous time period exhibiting steady and strong upward trend. In conclusion, the technical analysis justifies buying WTM because of its current upward trend and strong momentum.
White Mountains invests in interest rate sensitive securities. White Mountains manages the interest rate risk associated with its portfolio of fixed maturity investments by monitoring the average duration of the portfolio. White Mountains’s fixed maturity investments are primarily of debt securities issued by corporations, U.S. Government and agency obligations, municipal obligations and mortgage and asset-backed securities. Increases and decreases in prevailing interest rates generally translate into decreases and increases in fair values of fixed maturity investments, respectively.
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