Value Investing Congress: Attracted to Global Risk

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Jeff Ubben is a hedge fund manager who doesn’t hedge.  As a result, he sets a very high bar for investments at ValueAct Capital.

While he’s an activist investor, Jeff’s focused on building relationships with management and influencing positive change. Unlike other activist investors, ValueAct doesn’t use proxy contests or public threats toward their investments.

That’s one of the reasons that his partner was recently asked to join the board of directors at Microsoft (Nasdaq: MSFT). ValueAct invested $2 billion in Microsoft several months ago, and sees value.

But Ubben wasn’t at the Value Investing Congress to discuss Microsoft (it’s the one thing he refused to discuss.  Instead, he was here to talk about an insurance company called Willis (NYSE: WSH).  Here are the notes from that presentation.

Recommends Willis (NYSE: WSH)

  • Stock price: $41.64, Market Cap $7.3 billion
  • Dividend $1.12 or 2.7% yield
  • 2012 EBIT Margin: 21.6%
  • Pure play insurance broker, not a consulting business
  • Pricing environment is improving
  • New CEO
  • North American market is growing, company taking global market share
  • Capital spending is flat, and free cash flow is growing
  • 90% recurring sales
  • Helps clients manage risk
  • Total insurance market growing 5.9% per year from 2012 to 2020
  • 2012 Revenues of $3.5 billion
  • Organic, sustainable growth of business
  • 2011 and 2012: North American business was underperforming
  • Created an opportunity to get in at a depressed valuation
  • Has lots of emerging market exposure: 32% today, growing to 45% by 2017
  • New CEO is focusing sales force through incentives to cross-sell customers
  • Global reinsurance broker market has three players: Aon Benfield (AON @ 38%), Guy Carpender (MMC @ 26%), and Willis Re (@17%)
  • Insurance brokers perform well in periods of inflation
  • Outcome: 12% earnings growth + 3% dividend = 15% return without multiple expansion
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