White Mountains Insurance(NYSE:WTM) has largely exited its traditional insurance businesses, but it has some major businesses that are closely related to the insurance industry. Here’s a rundown of what NSM Insurance and MediaAlpha do and how White Mountains makes money from them.
A full transcript follows the video.
This video was recorded on June 18, 2018.
Michael Douglass: Another insurance-adjacent business that they have is NSM Insurance Group. This one is … it’s a little weird. [laughs] They operate in 19 very different niche industries. We’re talking brewery and winery insurance, private and charter school insurance, pet insurance, addiction treatment centers, just to name a few. These are really inefficient, small, niche markets, so there’s probably some nice opportunity for them.
What NSM Insurance is doing is, it’s another commission business, so they’re passing on this business to other insurance underwriters who are putting up the capital, and what they’re just doing is collecting a fee, basically, for sourcing and structuring this business in a way that other insurance carriers can work with.
Matt Frankel: I would prefer if they were the insurer themselves here, because this is a pretty lucrative business model, when you do it correctly. A lot of these, like you said, pet insurance, school insurance, brewery and winery insurance, these are things that a lot of risk assessors don’t know how to assess the risk on. So, it could be a very lucrative market, especially if you’re one of the only companies writing policies in a certain niche.
I would prefer that they were the insurer, but it’s definitely an interesting business. It’s a business, like I mentioned, where a lot of these niches don’t really have much competition. That’s definitely a big competitive advantage. But like I said, I’d prefer if they were they insurer themselves.
Douglass: One of my other concerns here is, what’s to stop an insurer from just cutting them out? With PassportCard and DavidShield, they’ve created a process flow that makes things easier, that can enable an insurer to focus on offering the insurance, and them to focus on the customer service. Those of you who have dealt with insurers know that customer service tends not to be a strong point. [laughs] So, that actually makes sense, as them being an intermediary and taking a cut.
But with this, it’s really helping source business. You would think that those insurers, once they’ve had enough time to build up a book of business and get used to certain things, and say, “OK, here’s what the loss ratio is going to look like,” it’s not very clear to me what would prevent another insurer from saying, “NSM Insurance Group, it’s been great. We’ve spent the last five years really learning from you. Now we’re going to insure breweries and wineries ourselves and take you out as the middleman so that we can offer a more competitive product.”
Frankel: And another reason it would be great if they were the actual insurer.
Douglass: Yeah. This one is just kind of odd to me, particularly because they have plenty of capital. We’ll get to that, I’m sure, a bit more.
Let’s turn to another insurance-adjacent business. Are you seeing a trend yet? A lot of insurance-adjacent businesses. One of their other really big ones is called MediaAlpha. This is a company that specializes in what’s called vertical search. Consumers in certain areas — think folks looking to buy a plane ticket or purchase insurance or rent a car — start entering in some very specific data in very specific websites that are designed to facilitate transactions — think an Expedia or a KAYAK, for example. Basically, by entering in that information — like travel dates, city of origin, city they’re trying to fly to, and that sort of thing — they’re basically saying, “Hey, I’m price-shopping right now. I’m trying to make this decision right now.” That’s what this idea of vertical search is. Think auto insurance. You have a lot of different options. Chances are good you’re on there because you’re trying to get an auto insurance locked down now, because you just bought a car. It’s high-intent.
It’s a really interesting business. And, folks offering products really want to get in front of those people and are willing to pay a lot per lead to do so, because these are people who are trying to make the decision right then. Being the first on the page, or the most attractive initial offer, might just get it done.
What MediaAlpha does is figure out dynamic content and pricing and things like that based on what they know about the user. It’s a fee-based business, again, so no capital at risk. But it’s an interesting business, because again, this is something where, if you have a really specific set of expertise, which is in how to market and how to use data to price things, that can give you an inherent advantage over the insurers, who are really just looking to go through the clearing house and make sure that something is going to make them money. They’re not digital marketers at heart. So, it’s a really interesting business.
One of my concerns, though, is just how many niches they can get into, as well as the fact that there are a billion and one media companies trying to do something similar. There are ad agencies all over the place. If they have an advantage now — and it appears that they do — it’s not clear how long or durable that advantage is going to be, given the incredible disruption going on across the internet every day.
Frankel: Yeah. The counter to that is, this is arguably the strongest area of White Mountains’ business right now, especially in recent results. Their first quarter wasn’t particularly strong. Municipal bonds were issued less by municipalities, so that market declined a little bit. MediaAlpha has more than doubled in revenue over the past year. Some of that was due to an acquisition, but a lot of it is just growth. This has been a very successful area so far. But, like Michael said, it’s just tough to identify their durable competitive advantage here.
Douglass: Yeah. Again, this isn’t to say that it’s not the best business in its space right now. It may well be. It’s just that, frankly, eight other people with laptops might be able to figure out something similar, not immediately, but over time.