As we all might know, Prem Watsa, with Fairfax Financial, adopted a similar strategy to legendary investor Warren Buffett with Berkshire Hathaway Inc. (NYSE:BRK-B). Prem Watsa is also considered one of the greatest investors in the world. In the period of 1986 to 2012, Fairfax Financial has grown its book value at as high as 22.7%, while the annualized gain in its share price was around 19% during those 27 years.
White Mountains with high underwriting profitability
Compared to one of American Safety Insurance Holdings, Ltd. (NYSE:ASI)’s peers, White Mountains Insurance Group Ltd (NYSE:WTM), American Safety had a lower price-to-book valuation. White Mountains is trading at $600 per share, with the total market cap of around $3.7 billion. The market values White Mountain at nearly its book value. Most of its earned insurance and reinsurance premiums, some $1.1 billion, were generated from its OneBeacon segment, while the Sirius Group produced nearly $932 million in earned premiums.
What I like about White Mountains is its consistent positive operating profit in the two biggest segments. In the past three years, OneBeacon segment’s combined ratio fluctuated in the range of 92% to 98%. The combined ratio of the Sirius segment fluctuated in the range of 90% and 100% during the three-year period. In 2012, its combined ratios of the OneBeacon and Sirius segment were 98% and 90%, respectively.
Among those three insurance companies, only White Mountains pays investors a dividend with a very small yield at 0.2%, while both Fairfax Financial and American Safety Insurance Holdings, Ltd. (NYSE:ASI) do not pay any dividends. White Mountains pays out only 3% of its earnings in dividends. Consequently, with the consistent underwriting profit and low payout ratio, White Mountain’s dividend could be considered quite sustainable.
My Foolish take
Prem Watsa seems to be excited about the deal as it could enhance Fairfax Financial’s insurance operations in several special lines of businesses. Moreover, by acquiring American Safety, Fairfax Financial could bring in more float for investments. With the potential synergy, American Safety Insurance Holdings, Ltd. (NYSE:ASI) could lower its cost to generate floats.
Under Prem Watsa’s leadership, Fairfax Financial has been always a long-term buy for many investors. I am also quite impressed with White Mountains in terms of the consistent underwriting profits in both of its insurance segments.
Anh HOANG has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
The article Prem Watsa Likes This Small-Cap Insurance Business originally appeared on Fool.com.
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