White Mountains Insurance Group, Ltd. — 2010 Form 10-K
Business context and period. This annual filing covers the fiscal year ended December 31, 2010; it is not a standalone fourth-quarter report. White Mountains is a Bermuda-based insurance holding company with four reportable segments: OneBeacon, White Mountains Re, Esurance and Other Operations. OneBeacon completed the transition to a specialty-focused insurer through its commercial-lines renewal-rights sale and personal-lines sale.
Financial performance and position
| Metric | 2010 | 2009 | Change / context |
|---|---|---|---|
| Total revenue | $3.571 billion | $4.427 billion | Down 19% |
| Net earned premiums | $3.162 billion | $3.600 billion | Down 12% |
| Net written premiums | $2.938 billion | $3.492 billion | Down 16% |
| Pre-tax income | $150.5 million | $764.0 million | Lower investment gains and premiums were major factors |
| Net income attributable to White Mountains common shareholders | $86.5 million | $470.0 million | Diluted EPS was $10.12 versus $53.10 |
| Adjusted comprehensive income | $140.9 million | $559.5 million | Non-GAAP measure |
| Adjusted book value per share | $440.59 | $416.52 | Up 6%, including dividends; share repurchases added about $7 per share |
| Net cash from operations | $56.0 million | $(46.7) million | Improved by $102.7 million |
Revenue included $228.5 million of net investment income and $95.9 million of net realized and unrealized investment gains, compared with $272.4 million and $384.6 million, respectively, in 2009. The consolidated investment portfolio returned 5.0% in 2010, versus 9.4% in 2009. Total expenses were $3.421 billion, including $2.068 billion of losses and loss-adjustment expenses.
Underwriting: OneBeacon’s GAAP combined ratio was 101% (94% in 2009); its specialty business ratio was 94% (83%). White Mountains Re’s combined ratio was 94% (80%), with $192 million of catastrophe losses net of reinsurance and reinstatements. Esurance’s adjusted combined ratio was 103%, unchanged from 2009. A combined ratio below 100% generally indicates an underwriting profit.
Balance sheet and liquidity: At year-end, total assets were $14.534 billion, total liabilities $10.273 billion, and White Mountains common shareholders’ equity $3.653 billion. Investments totaled $8.733 billion, including $6.380 billion of fixed maturities and $1.106 billion of short-term investments. Debt was $818.8 million carrying value, down from $1.051 billion; debt was 17% of total adjusted capital, versus 20% in 2009. The $475 million revolving credit facility was undrawn. The company reported $338 million of net unrestricted cash, short-term and fixed-maturity investments at the parent and intermediate holding-company level; management said available liquidity was adequate for expected requirements.
Material changes and significant items
- OneBeacon net written premiums fell 35% to $1.236 billion, mainly reflecting the commercial-lines transaction and the July 2010 sale of traditional personal lines. Specialty premiums increased 4% to $988 million.
- White Mountains Re net written premiums rose 7% to $866 million, while Esurance net written premiums rose 7% to $836 million, supported by improved policy conversion and retention.
- OneBeacon’s total combined ratio worsened amid catastrophe and large losses, particularly in businesses exited during the year. White Mountains Re’s ratio increased chiefly due to catastrophe losses, including the Chile earthquake; favorable reserve development partly offset the impact.
- Prior-year loss reserves developed favorably by $126.1 million overall, compared with $121.5 million in 2009. Management cautioned that reserve estimates are inherently uncertain.
- WM Life Re recorded a $60.8 million pre-tax loss. Lower assumed surrender rates increased the variable-annuity guarantee liability by about $48 million. The underlying guarantees totaled approximately $2.9 billion; account values were about 82% of guarantee value at year-end.
- White Mountains repurchased 677,125 of its common shares for approximately $222 million and paid $1 per share in dividends. OneBeacon’s personal-lines sale generated approximately $167 million of consideration and a reported after-tax gain of $24.6 million. Central National was acquired for $5 million, with a reported pre-tax gain of about $13 million; the Delos investment was sold for $22 million, with an approximately $11 million loss.
Outlook, risks and contingencies
The filing provides no specific consolidated earnings or premium guidance. Management described 2010 underwriting as solid but weaker than 2009, said it was gradually returning from capital preservation toward its total-return investment approach, and expected to continue shifting equity exposure opportunistically. It stated that cash, operating cash flows, investment maturities and credit availability were expected to meet foreseeable cash requirements.
- Insurance risks: Catastrophe severity and frequency, long-tail claims, reserve estimation, inflation, adverse legal developments and reinsurance collectibility could materially affect results. Models may understate actual catastrophe losses.
- Concentration and credit: White Mountains Re reported approximately $2.0 billion of contractual loss exposure in trade-credit business and a Latin American surety book with a maximum bond value of approximately $318 million; economic downturns or legal changes could increase losses. Reinsurance recoverables depend on counterparties paying claims.
- Life reinsurance and markets: WM Life Re’s valuation and hedges are sensitive to equity markets, interest rates, foreign exchange, volatility and policyholder behavior. Management noted hedge-basis and counterparty risks, and that some swap markets were illiquid.
- Reserves and legacy exposures: OneBeacon had approximately $320 million of estimated unused capacity under its $2.5 billion NICO cover at year-end, against about $2.2 billion of incurred losses ceded. White Mountains Re’s asbestos and environmental net reserves were about $170 million; further adverse development remains possible.
- Capital access and regulation: Insurance-subsidiary dividends are subject to regulatory limits. Esurance had no capacity to pay dividends in 2011 without prior approval. Solvency II was scheduled to take effect in 2013; future requirements and regulatory changes could affect capital needs.
- Ratings and other contingencies: OneBeacon held a negative Moody’s outlook, while its other listed principal agency outlooks were stable. A Scandinavian Re arbitration dispute with St. Paul remained on appeal, with the parties awaiting a decision. The filing did not identify other material litigation expected to materially affect financial condition or cash flows.
Important facts for investors to verify
- Review the full audited statements and segment disclosures, particularly the causes of the sharp decline in 2010 earnings and adjusted comprehensive income.
- Assess reserve adequacy, including the favorable prior-year development, long-tail casualty exposures, asbestos/environmental claims and reinsurance recoverable balances.
- Evaluate OneBeacon’s post-sale specialty underwriting performance and whether premium growth can be achieved without weakening pricing or combined ratios.
- Examine WM Life Re’s guarantee liability, account-value coverage, hedge effectiveness, collateral requirements and potential future capital contributions.
- Confirm parent-level liquidity, subsidiary dividend capacity, debt maturities and compliance with credit-facility covenants.
- Track investment-portfolio returns and valuation judgments, including Level 3 assets, Symetra exposure and the effect of market movements on reported earnings.