Business Context and Reporting Period
Company: White Mountains Insurance Group, Ltd.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: White Mountains is a Bermuda-based holding company operating through four primary segments: OneBeacon (specialty, personal, and commercial insurance), White Mountains Re (reinsurance), Esurance (direct personal auto insurance), and Other Operations (including weather risk management and variable annuity reinsurance). The company adopted FAS 159 effective January 1, 2008, electing to report changes in fair value for most investment securities directly in net income rather than other comprehensive income.
Key Financial Metrics
| Metric (Nine Months Ended Sept 30, 2008) | Amount (Millions) |
|---|---|
| Total Revenues | $2,595.1 |
| Net (Loss) Income | $(342.7) |
| Comprehensive Net (Loss) Income | $(567.5) |
| Net Investment Income | $334.2 |
| Net Realized Investment Losses | $(146.9) |
| Net Unrealized Investment Losses | $(480.1) |
| Total Assets | $17,764.4 |
| Total Debt | $1,367.1 |
| Cash and Short-term Investments | $2,477.4 |
| Common Shareholders' Equity | $4,061.9 |
| Adjusted Book Value Per Share | $404.62 |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 27% to $2,595.1 million for the nine months ended September 30, 2008, compared to $3,532.1 million in the prior year period. This was driven primarily by a shift in accounting treatment (FAS 159) which moved unrealized losses into net income, alongside a 2% decrease in earned premiums.
- Investment Performance: The company reported a GAAP pre-tax total return on invested assets of -3.8% for the nine months ended September 30, 2008, compared to 5.6% in the prior year. This decline was due to significant market volatility, widening credit spreads, and a strengthening U.S. dollar. Net unrealized investment losses totaled $480.1 million.
- Underwriting Results:
- OneBeacon: GAAP combined ratio increased to 98% (nine months 2008) from 93% (nine months 2007), impacted by $51 million in catastrophe losses (primarily Hurricane Ike).
- White Mountains Re: GAAP combined ratio increased to 111% from 94%, driven by $145 million in catastrophe losses and $88 million in net adverse loss reserve development following a comprehensive reserve review.
- Esurance: GAAP combined ratio improved to 107% from 114%, aided by selective rate increases and lower claims frequency.
- Loss Reserve Development: White Mountains experienced $53.1 million of net adverse loss reserve development for the nine months ended September 30, 2008, compared to $53.4 million of net favorable development in the prior year. White Mountains Re recorded $87.7 million of adverse development, largely due to a reserve review and construction defect losses.
Guidance, Outlook, Risks, and Unusual Items
- Accounting Changes: The adoption of FAS 159 resulted in the recognition of $480.1 million in net unrealized investment losses within net income for the nine months ended September 30, 2008, significantly impacting reported earnings compared to prior periods where such items were in other comprehensive income.
- Acquisitions: White Mountains acquired 100% of Answer Financial Inc. (AFI) in July 2008 for $44.4 million, consolidating the online insurance agency into the Esurance segment. The company also acquired Helicon Re Holdings, Ltd. in January 2008.
- Berkshire Exchange: The company entered into an agreement to exchange substantially all of Berkshire Hathaway's 16.3% stake in White Mountains for a subsidiary holding run-off businesses and $707.4 million in cash. The transaction was expected to close in October 2008.
- IRS Examination: The IRS asserted that subsidiaries owe an additional $90.0 million in taxes for years 2003-2004, with a total estimated assessment of $174.0 million including interest. The company disputes this and intends to defend its position.
- Market Risks: Significant exposure to equity market declines and credit market illiquidity. The company noted an $8.4 million collateral shortfall in its securities lending program related to troubled financial services companies and sub-prime mortgage-backed securities.
- Dividend Policy: The Board adopted a new policy in Q3 2008 to revert to a $1.00 per share annual dividend declared in the first quarter, replacing the previous $2.00 per share quarterly dividend.
Investor Verification Checklist
- Investment Portfolio Valuation: Verify the impact of the FAS 159 election on net income and the specific composition of unrealized losses, particularly in fixed maturity and equity securities.
- Loss Reserve Adequacy: Review the details of the comprehensive loss reserve review at White Mountains Re and the $87.7 million adverse development, specifically regarding casualty reinsurance books from 1996-2002.
- Catastrophe Exposure: Assess the impact of Hurricane Ike and other weather events on the combined ratios of OneBeacon and White Mountains Re, and the adequacy of reinsurance coverage.
- Liquidity and Credit Facilities: Confirm the status of the $475 million WTM Bank Facility, noting that Lehman Brothers (a lender) failed to fund a portion of a recent draw request.
- IRS Dispute: Monitor the resolution of the IRS examination regarding the $174 million tax assessment for 2003-2004.
- Berkshire Transaction: Confirm the closing of the Berkshire Exchange and its pro-forma impact on book value per share.