I would like to get some other opinions on a good entry point for MRH.
After some quick number crunching I can see $19 to $20 with a lot of caveats though.
- Depending on the outcome of the rating agency review - No more significant Cats in 2005 - MRH's ability to get their hands on some capital - Katrina industry losses do not go above $40 billion - Pricing increases are significant enough to offset the Katrina losses within a 2-year time frame
Any opinions on a price per share entry point considering the above and any other caveats?
These numbers were cited in Business Insurance, and in Friday's WSJ, and deserve a due diligence investigation.
I am concerned about the relationship between White Mountains, which owns 10% of MRH, and lost $100mn-$200 mn in the New Orleans storm/flood, and Montpelier Re, which may have lost $500 mn or more. In my opinion, Montpelier's interests are always subordinated to White Mountains'. This is because of White Mountains 10% ownership position, and overlapping interests of Jack Byrne, a former MRH executive, and a huge WTM shareholder. In particular, I believe the special dividend which MRH paid March 31, helped White Mountains achieve growth in book value, but placed Montpelier in a precarious, cash-deprived posture.
I am also concerned about the probable dilution which will occur when Montpelier raises capital to replenish its losses from the New Orleans event. In my opinion, the most likely scenario is that MRH will issue convertible bonds, paying a high rate of interest, perhaps 12%, which will be offered in a private placement to White Mountains, and to certain favored investors, such as Berkshire Hathaway. These bonds will be senior, and will be convertible into common stock at a share price for MRH of perhaps $35 per share. Common shareholders will be diluted, and will not be able to purchase the senior convertible bonds.
In the Montpelier Re-White Mountains relationship, MRH is definitely subordinate. This reminds me of the relationship between AIG and Transatlantic Re, which has been deleterious for the latter. And also, Berkshire Hathaway and Wesco Financial. Wesco holds a ton of cash, about $2 billion, and is treated like a Berkshire money market fund. In all three of these relationships, one dominant partner calls the shots.
My personal belief is that there are much better opportunities than MRH. In particular Pulte Homes, at 7.5x EPS, growing EPS at 62%, is worth a glance. Also, ARM mortgage lender Golden West Financial, growing earnings at 15% year-after-year, is worth your due diligence.
Montpelier will not collapse, because White Mountains will prop it up with a capital infusion, but at what degree of dilution for common shareholders?