market folly

Today we're posting up notes from day 1 of the Value Investing Congress.  Below is the presentation from Larry Pitkowsky and Keith Trauner of GoodHaven Capital on Alleghany (Y) and White Mountains Insurance (WTM).

About GoodHaven Capital:  Before founding GoodHaven, Trauner and Pitkowsky worked at Bruce Berkowitz's Fairholme Capital.  After starting the mutual fund GOODX in April 2011, they're in the top 1% of mutual funds.

Their goals are above average returns - consistent with capital preservation.  They seek to exude consistent behavior irrespective of short-term performance and want to run towards a fire.  "Better yet figure out when conditions are ripe for a conflagration before the match is lit."

Larry's rule is: "Perfection in avoiding permanent loss of capital is impossible but it is a worth goal."  They don't diversify, they want money in their best ideas.  And of course, price matters: price is what you pay and value is what you get.  The following notes are courtesy of Kyle Mowery from GrizzlyRock Capital.


"Back to the Future" Presentation

•    Larry and Keith - were buying insurance companies in 1999 and are now doing it again.
•    Bought 5% position of BRK at around book.
•    Markel – Berkshire like firm with good capital allocation.
•    Markel is an owner of GoodHaven.
•    Insurance interesting as you get money up front – create value by holding float.
•    Past couple years have been tough – catastrophe, poor insurance pricing, ultra-low interest rates, and financial crisis and volatile markets.
•    Negatives – inv. Income squeezed, rising rates = bond losses, pressure to increase duration
•    Think this might be about to change: Industry comments are getting stronger with respect to pricing
•    Interest rates are too low.  Central bank is now in 4th year of low rates.  Financially destabilizing, societally distorting, historical anomaly, horrible if you bet wrong.


On Alleghany (Y)

•    Strong capital allocators. Main business is transatlantic holdings, RSUI, Capitol Transamerica, Pacific Compensation, Alleghany Capital Partners, and Alleghany Properties.
•    Alleghany – acquisition of Transatlantic Holdings
•    Board change and estate and concentration of ownership.
•    Normalized earnings are at least $35 per share and may be as much as $60 per share.
•    Risks: potential Transatlantic reserve inadequate, large property cat loss, raid rise in interest rates before repositioning.


On White Mountains Insurance (WTM)

•    Strong capital allocators. Have 75% of OneBeacon, 100% of Sirius Group, 20% of Symetra, 100% of White Mountain Advisors.
•    White Mountains sold esurance
•    Last 3 years good but not great exposure (profitable underwriting)
•    Buybacks are hard to ignore from $500 down to 425.
•    Shares declining over last 5 years from over 10MM now to just under 7MM.
•    Singleton and Teledyne – “largest share shrink in Wall Street history”
•    Franklin Mutual is 26.4% of firm, ex CEO controls 10%
•    Est. of normalized earnings power is $65 to $85 per share.
•    Risks: Foolish capital allocation, larger than expected reinsurance exposure


Question & Answer Session

Have you looked at financials? Stayed away from unknowable factors at the large companies (AIG & BAC).  No opinion on AIG.  Bought a big slug of Jeffries (2% of balance sheet is Level 3). Market Folly note: You can view Berkowitz's presentation on AIG here.

Elaborate on both companies having investment leverage?  Modest increase in investment portfolio will be magnified in per share value.

How do you evaluate insurance company's underwriting?  Important to look at management compensation - run up near term EPS or long term value.  One Beacon - all incentive comp is tied to having a combined ratio less than 95%.

Common thread with Leucadia, Markel, Fairfax, Berkshire, Vornado, Howard Hughes Corp - management companies run by smart guys.

How do you think about the brokers long term, such as AON? Will do well in the hardening cycle. Market Folly note: AON was analyzed in a past issue of our Hedge Fund Wisdom newsletter.

What improvement of interest rates? Some but not an enormous amount.


Embedded below is GoodHaven Capital's slideshow presentation:




Be sure to click here for other presentations from the Value Investing Congress.