8
Marketing
OneBeacon offers its products thoughthrough a combinationnetwork comprised of independent insurance agents, regional and national brokers wholesalers and captive agents (through NFU). In total, OneBeacon haswholesalers. OneBeacon’s distribution relationships consist of approximately 2,0002,800 select agencies and brokers. No agency and distribution relationships.or broker produced more than 3% of OneBeacon’s direct written premiums during 2006.
OneBeacon'sOneBeacon’s specialty lines businesses are located in separatemanaged from locations logistically appropriate to their target markets. AutoOne Insurance issuesOBPP is based in Avon, Connecticut and distributes its LAD businessproducts through independent agents, generating takeout credits (inselect national and regional brokers and agents. IMU is headquartered in New York only)City and operates through this business to sell to other insurance carriers subject to NYAIP assignments. IMU distributes itsnine branch locations throughout the United States. Its products are distributed through a network of select agents that specialize in the ocean marine business. AgriDewar’s affiliate, A.W.G. Dewar Agency, is headquartered in Quincy, Massachusetts and distributes tuition refund products to independent schools and colleges throughout North America.
OneBeacon distributes its commercial and personal lines products through select independent agencies. NFU distributes itsinsurance agents, except for products primarily through a network of exclusive agents. Substantially all of these exclusive agents are under contract with NFUsold by OBSP and the National Farmers Union, a non-profit organization founded in 1902 to advance the interests of family farmers. OBPP distributes its products nationally through excess and surplus lines brokers. OBSP'sAutoOne. OBSP’s excess property solutions are provided primarily through surplus lines wholesalers. ThroughIn New York, AutoOne generates take-out credits by writing policies through select insurance brokers that were previously in the New York Automobile Insurance Plan, or NYAIP, and sells these distribution channels, credits to insurance companies subject to NYAIP assignments. AutoOne markets its LAD and CLAD services and New York take-out credits directly to insurance carriers seeking assigned risk solutions.
OneBeacon leveragesprotects the integrity of its knowledge about specialty markets to provide products and services that are tailored to meet customer needs.
OneBeacon distributes its personal and commercial lines products through select independent insurance agents.franchise value by selectively appointing agents in those areas where it conducts business. OneBeacon believes that independent insurance agents provide more complete assessments of their clients'clients’ needs, which results in more appropriate coverages and prudent risk management. OneBeacon also believes that independent agents will continue to be a significant force in overall industry premium production.production as well as facilitate the cross-selling of specialty, commercial and personal business products.
OneBeacon’s top performing agencies have been designated as Lighthouse Partners, a program designed to strengthen these priority relationships and build those books of business. This program was introduced in the second quarter of 2006 and provides enhanced benefits such as priority handling of accounts, access to OneBeacon’s entire franchise of products, preferred profit-sharing opportunities, and priority access to OneBeacon’s producer development school and co-op advertising. There were 98 agencies with this designation in 2006. These agencies represent fewer than five percent of OneBeacon’s overall agency plant but write approximately 22 percent of OneBeacon’s business and over 25 percent of OneBeacon’s new business. OneBeacon believes that its Lighthouse Partners are the core of its distribution and marketing system and that this deeper mutual commitment will benefit both these agencies and OneBeacon.
Underwriting and Pricing
OneBeacon believes that there must be a realistic expectation of attaining an underwriting profit on all the business it writes, as well as a demonstrated fulfillment of that expectation over time.overtime. Adequate pricing is a critical component to the achievement offor achieving an underwriting profit and requiresprofit. OneBeacon will underwrite its book with a disciplined approach towards pricing its insurance products. Inadequate pricing can be caused by pressures from: (1) insurance companies selling their products at rates less than those acceptable to OneBeacon because they either underestimate ultimate claim costs or overestimate the amount of investment income and investment gains they will earn on premiums collected before claims are paid, (2) insurance companiesis willing to acceptforgo a lower returnbusiness opportunity if it believes that the opportunity is not priced appropriately to the exposure.
Specialization — or a heightened focus on investmentcertain customer groups and/or geographies through products, pricing and expertise — is a key driver of OneBeacon’s strategy in specialty lines and is being extended into OneBeacon’s commercial and personal businesses. The proprietary knowledge OneBeacon develops regarding the industry, class and risk characteristics provides it with a competitive edge for their stakeholders thanits terms and conditions on individual accounts. OneBeacon (3) insurance companies seekingbelieves that specialization will result in superior returns as compared to increase revenues and market share by reducing the price of their products beneath levels acceptable to a more “generalist” underwriting approach.
OneBeacon (4) the emergence and continued growth of insurance company competitors that have lower cost structures, and (5) state regulation, legislation and judicial mandates.
Beginning in 2003 and continuing through 2004, OneBeacon introducedhas used tiered rating plans since 2003 in both its commercial and personal and commercial lines which permit OneBeaconlines. Doing so permits it to offer more tailored price pointsquotes to its customers based on underwriting criteria applicable to each tier. As a result, OneBeacon now has the flexibility to renew expiring policies into the appropriate tier rather than being forced to choose to either renew the policy at the same base rate or cancel the policy. Management believes that this significant improvement in theThe enhanced accuracy and precision of OneBeacon'sOneBeacon’s rate plans movesenable it towardto more confidently price its products to the pricing sophisticationexposure, and thereby permits its agency partners to deliver solutions to a broader range of the best insurance underwriters in the market.
These tiers are just one example of OneBeacon's segmented underwriting and pricing strategy. Segmentation is a key driver of OneBeacon's success in specialty lines and is being carried over into personal and commercial lines. OneBeacon develops proprietary knowledge about a given industry/class/risk type which provides it with a competitive edge when offering terms and conditions on individual accounts. OneBeacon believes this will deliver superior returns versus a more "generalist" underwriting approach.customers.
OneBeacon also monitors pricing activity on a weekly basis and regularly measures usage of tiers, credits, debits and limits; this includes monthly review calls with all field offices.limits. In addition, itOneBeacon regularly updates base rates to achieve targeted returns on surplus and attempts to shift writings away from price inadequate lines/classes.lines and classes where pricing is inadequate. To the extent changes in premium rates, policy forms or other matters are subject to regulatory approval, OneBeacon proactively monitors its pending regulatory filings to facilitate, to the extent possible, their prompt processing and approval. Lastly, OneBeacon expends considerable effort to measure and verify exposure basesexposures and insured values.
Property and casualty insurance is highly competitive and extensively regulated by state insurance departments.competitive. In specialty lines, OneBeacon competes with numerous regional and national insurance companies, most notably The Robert Plan Corporation, The Chubb Corporation, American International Group, The St. Paul Travelers Companies and the regional Farm Bureaus.CNA Financial Corporation. In personalcommercial and commercialpersonal lines, OneBeacon competes with numerous regional and national insurance companies, most notably The St. Paul Travelers Companies, Inc., Zurich InsuranceFinancial Services Group, CNA Financial theCorporation, Hartford Financial Services Group, Allmerica Financial Corporation,Inc., The Hanover Insurance Group, Inc., W.R. Berkley Corporation, The Chubb Corporation, The Progressive Insurance,Corporation, Allstate Insurance Company and Liberty Mutual.Mutual Insurance Company (“Liberty Mutual”). The more significant competitive factors for most insurance products offered by OneBeacon offers are price, product terms and claims service, which OneBeacon believes is the most important product differentiation that it brings to its agents and insureds. OneBeacon'sservice. OneBeacon’s underwriting principles and dedication to independent agency distribution are unlikely to make themit the low-cost provider in most markets. However, while it is often difficult for insurance companies to differentiate their products to consumers, OneBeacon believes that its dedication to providing superior product offerings, expertise and local talent, claims service and localizeddisciplined underwriting experience gives itprovide a competitive advantage over typical low-cost providers.
Effective claims management is a critical factor in achieving satisfactory underwriting results. OneBeacon maintains an experienced staff of appraisers, medical specialists, managers, staff attorneys and field adjusters strategically located throughout its operating territories. OneBeacon also maintains a special investigative unit designed to detect insurance fraud and abuse, and supportsupports efforts by regulatory bodies and trade associations to curtail the cost of fraud.
OneBeacon's claims department's commitment to improvement is producing positive results. In 2004, OneBeacon made several operational changes in the claims department. Claims are now separately organized by specialty, and commercial, lines, personal lines and run-off operations. This segmentation has allowedapproach allows OneBeacon to increase loss cost management specializationbetter identify and better identifymanage claims handling costs. In addition, a shared service unit manages costs related to both staff and vendors. OneBeacon introducedtakes a total claims cost management practice whichapproach that gives equal importance to controlling claims handling costs,expenses, legal expenses and claims payments, enabling OneBeaconit to lower its overall claims handling costs. At the same time, over 97%sum of OneBeacon's insuredsthe three. This approach requires the utilization of approximately fifty metrics to monitor the effectiveness of various programs implemented to lower total loss cost. The metrics are designed to guard against the implementation of an expense containment program that respondedwill cost OneBeacon more than it expects to surveys were satisfiedsave. As an example, an internal legal bill audit team has contributed to savings by the service providedreducing legal invoices submitted by OneBeacon.outside counsel.
OneBeacon'sOneBeacon’s claims department utilizes a modern claims workstation implemented in 2002, that in addition to recordingrecords reserves, payments and adjuster activity and assists each claimsclaim handler in evaluating bodily injury claims, determining liability and identifying fraud. OneBeacon'sOneBeacon’s commitment and performance in fighting insurance fraud not only reduceshas reduced claim costs but hasand aided law enforcement.enforcement investigations. Under OneBeacon's Staff Counsel Program,its staff counsel program, OneBeacon’s in-house attorneys defended 55%defend the majority of its newly arising suits at anew lawsuits, which has resulted in savings when compared to the cost of $8.0 million less than it would have cost to useusing outside counsel. OneBeacon'sIn addition, OneBeacon’s internal legal bill audit team saved an additional $6.2 millionhas contributed to savings by reducing legal invoices submitted bythe amounts paid to outside counsel.
Calender year reportedMost of OneBeacon’s claims in OneBeacon's ongoing businesses were down 19% in 2004 compared to 2003. This allowed the claims department personnel to increase their focus on older open claims. At December 31, 2004, total open claims were down 22% from December 31, 2003.
for run-off operations are handled by in-house adjusters. Calendar year reported claims in OneBeacon'sOneBeacon’s run-off operations have decreased to 1,700 in run-off were2006 compared to 3,400 in 2005 and 5,900 in 2004, comparedin part due to 10,300the lapse of time and the nature of run-off operations. These levels of reported claims are down from 202,000 in 2002 and 64,800 in 2003. Total open claims infor run-off operations were 7,300 at December 31, 2004 were 14,6002006 compared to 28,50010,200 at December 31, 2003,2005, a 49% reduction. This number includes28% reduction, which reflects the success of OneBeacon’s focus on settling claims from its run-off operations. Total open claims for run-off operations were 14,600 in 2004 and 33,000 in 2003. These numbers included all of the claims that were previously handled by Liberty Mutual as a Third Party Administrator ("TPA"(“TPA”). The majority of OneBeacon's claims are handled by in-house adjusters
In connection with the exceptionpurchase of certainOneBeacon by White Mountains in 2001, to help protect against potential asbestos and environmental claims of certain businesses in run-off. Additionally,relating to the pre-acquisition period, OneBeacon purchased a reinsurance contract (the “NICO Cover”) from the National Indemnity Company ("NICO"(“NICO”) is used as. See the discussion in the “Reinsurance Protection” section below. NICO has retained a TPA, Resolute New England (“Resolute”, formerly Cavell USA), to manage the claims processing for asbestos and environmental reinsurance claims relating toreinsured under the NICO Cover (see "Asbestos and Environmental Reserves" discussion included inCRITICAL ACCOUNTING ESTIMATES inManagement's Discussion and Analysis of Financial Condition and Results of Operations below). OneBeaconCover. OneBeacon’s claims department personnel are consulted by NICO and Resolute on major claims. As with all TPAs, claims department personnel perform claim audits on NICOResolute to ensure their controls, processes and settlements are appropriate. For more information regarding OneBeacon’s A&E exposures, see the “Asbestos and Environmental Reserves” discussion included in “CRITICAL ACCOUNTING ESTIMATES” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
During the year, OneBeacon identified additional areas in claims processing which will be continuously improved in 2005, including litigation management, expense management and staff productivity.Terrorism
Since the terrorist attacks of September 11, 2001 (the "Attacks"“Attacks”), OneBeacon has sought to mitigate the risk associated with any future terrorist attacks by reducinglimiting the aggregate insured value of policies written in geographic areas with a high concentration of exposure to losses from terrorist attacksattacks. This is accomplished by either limiting the total insured values exposed, or, by seekingwhere applicable, through the use of terrorism exclusions.
On December 22, 2005, the United States government extended the Terrorism Act, which was set to exclude coverageexpire on December 31, 2005, for such losses from their policies.
Ontwo more years. The Terrorism Act, originally enacted on November 26, 2002, President Bush signed the Terrorism Risk Insurance Act (the "Terrorism Act") establishingestablished a federal "backstop"Federal “backstop” for commercial property and casualty losses, including workers compensation, resulting from acts of terrorism by or on behalf of any foreign person or foreign interest. The Terrorism Act requireslaw limits the industry’s aggregate liability by requiring the Federal government to share 85% of certified losses in 2007 once a company meets a specific retention or deductible as determined by its prior year’s direct written premiums and limits the aggregate liability to be paid by the government and industry without further action by Congress at $100.0 billion. In exchange for this “back-stop,” primary commercial insurers are required to make terrorism coverage available immediatelyto commercial insureds for losses from acts of non-domestic terrorism as specified in the Terrorism Act. The following types of coverage are excluded from the program: commercial automobile, burglary and provides Federal protection above individual company retentiontheft, surety, farmowners multi-peril and aggregate industry retention levels. all professional liability coverage except directors and officers coverage.
OneBeacon estimates its individual retention level for commercial policies subject to the Terrorism Act to be approximately $160.0$162 million in 2005. Aggregate2007. The aggregate industry retention levels are $15.0level is $27.5 billion for 2005.in 2007. The Federal government will pay 90%85% of covered terrorism losses that exceed either OneBeacon'sOneBeacon’s or the industry'sindustry’s retention levels in 2007 up to $100.0a total of $100 billion.
The fate of the Terrorism Act beyond 2005 remains uncertain. It is anticipated that Congress will likely rule on a possible extension during the summer of 2005; however, there is a chance that the Terrorism Act could expire on December 31, 2005. To prepare for that possibility, OneBeacon is notifying customers (in states where permitted) with policies that expire in 2006 of the potential implications to their coverage. OneBeacon's current property and casualty catastrophe reinsurance programs provideprotection that OneBeacon currently has obtained provides coverage for "non-certified"“non-certified” events as defined under the Terrorism Act, provided such losses are not the result of a nuclear, biological or chemical attack. See the discussion in the"“Reinsurance Protection"Protection” section below for a further description of OneBeacon'sOneBeacon’s catastrophe program.
OneBeacon closely monitors and manages its concentration of risk by geographic area. BeginningOneBeacon’s strategy is to control its exposures so that its total maximum expected loss from a likely terrorism event within any half-mile radius in 2002 and continuing through 2004,a metropolitan area or around a target risk will not exceed $200 million, or $300 million in all other areas. OneBeacon aggressively reducedmonitors its terrorism exposure inexposures from existing policies on a quarterly basis, and the largest metropolitan areas in which OneBeacon writes insurance by implementing a strategy that limits total probable maximum loss ("PML") from a terrorism event in any half mile radius. (PML is a statistical modeling technique that measures a company's catastrophic exposure as the maximum probable loss in a given time period.) The addition of the Atlantic Mutual book in 2004 resulted in some areas exceeding corporate PML thresholds. In these areas, specific account exposure reduction plans have been established to bring exposures within tolerance levels by the end of 2005. The financial exposure of potential new business is evaluated when it is located in an areaareas of existing concentration or that individually presentspresent significant terrorism exposure. Additionally, formal reports are generated quarterly to validate that action adheres to corporate standards.exposure is evaluated during the underwriting process. As a result, OneBeacon believes that it has taken appropriate actions to mitigatelimit its exposure to losses from future terrorist attacks and it will
continue to monitor its terrorism exposure in the future. Nonetheless, risks insured by OneBeacon, andincluding those contemplatedcovered by the enacted Terrorism Act, remain exposed to future terrorist attacks and the possibility remains that anylosses resulting from future terrorist lossesattacks could prove to be material to the Company's financial position and/or its cash flows.material.
In the ordinary course of its business, OneBeacon purchases reinsurance from high-quality, highly rated, third party reinsurers in order to provide diversification of its business and minimize loss from large risks or catastrophic events. OneBeacon uses PML forecasting to quantify its exposure to catastrophic losses.
The timing and size of catastrophe losses are unpredictable and the level of losses experienced in any year could be material to OneBeacon'sOneBeacon’s operating results and financial position. Examples of catastrophes include losses caused by hurricanes, earthquakes, wildfires hurricanes and other types of storms and terrorist acts. The extent of losses caused by catastrophes is both a function of the amount and type of insured exposure in an area affected by the event and the severity of the event. OneBeacon continually assesses and implements programsuses models (primarily AIR V.8) to estimate losses its exposures would generate under various scenarios as well as the probability of those losses occurring. OneBeacon uses this model output in conjunction with other data to manage its exposure to catastrophe losses through individual risk selection and by limiting its concentration of insurance written in catastrophe-prone areas, such as coastal regions. In addition, OneBeacon imposes wind deductibles on existing coastal windstorm exposures. OneBeacon'sOneBeacon believes that its largest single event natural catastrophe risk is Northeast windstorm.exposures are Northeastern United States windstorms and California earthquakes.
OneBeacon seeks to further reduce its exposure topotential loss from catastrophe lossesexposures through the purchase of catastrophe reinsurance. Effective July 1, 2004,2006, OneBeacon renewed its normal property catastrophe reinsurance program to cover its full estimated PML (one-in-250 year) through June 30, 2005.2007. Under that cover, the first $200.0$200 million of losses resulting from any single catastrophe are retained by OneBeacon and losses from a single event in excess of $200.0the first $200 million and up to $850.0$850 million are reinsured for 100% of the loss. OneBeacon anticipates this $850 million limit is sufficient to cover Northeast windstorm losses with a 0.4%-0.5% probability of occurrence (1-in-250-year event to 1-in-200-year event). In the event of a catastrophe, OneBeacon can reinstate itsOneBeacon’s property catastrophe reinsurance program is automatically reinstated for the remainder of the original contract term by payingfor a reinstatement premium whichthat is based on the percentage of coverage reinstated and the original property catastrophe coverage premium.
OneBeacon'sOneBeacon’s property catastrophe reinsurance program does not cover personal or commercial property losses resulting from nuclear, biological or chemical terrorist attacks. The program covers personal property losses resulting from other types of terrorist attacks,“certified” events as defined under the Terrorism Act, such as foreign terrorism, provided such losses were not caused by nuclear biological or chemical means. The program also covers personal and commercial property losses resulting from other types of domestic terrorist attacks or“non-certified” events not "certified" as defined under the Terrorism Act. The Terrorism Act, provides protection for commercial propertysuch as domestic terrorist attacks, provided such losses for certified events including those arising fromwere not caused by nuclear, biological or chemical attacks.means.
OneBeacon also purchases individual property reinsurance coverage for certain risks to reduce large loss volatility. The Property per Riskproperty-per-risk reinsurance program reinsures losses in excess of $5.0$5 million up to $75.0$75 million. Individual risk facultative reinsurance may be purchased above $75.0$75 million where OneBeacon deems it appropriate. The Property per Riskproperty-per-risk treaty also reinsuresprovides one limit of reinsurance protection for losses in excess of $10.0$10 million up to $75.0$75 million on an individual risk basis for terrorism losses. However, nuclear, biological and chemical events are not covered.
OneBeacon also maintains a casualty reinsurance program whichthat provides protection for individual risk or catastrophe losses involving workers compensation, general liability, automobile liability or automobileumbrella liability in excess of $5.0$6 million up to $60.0$81 million. This program provides one full $55.0 million limitcoverage for either "certified"“certified” or "non-certified"“non-certified” terrorism losses but does not provide coverage for losses resulting from nuclear, biological or chemical attacks.
In connection with the2001, OneBeacon Acquisition, Aviva caused OneBeacon to purchasepurchased reinsurance contracts with two reinsurance companies rated "AAA" (Extremely Strong)“AAA” (“Extremely Strong”, the highest of twenty-one ratings) by Standard & Poor'sPoor’s and
"A+ “A++" (Superior)” (“Superior”, the highest of fifteen ratings) by A.M. Best:Best. One contract is a full risk-transferreinsurance cover fromwith NICO forwhich entitles OneBeacon to recover up to $2.5 billion in oldultimate loss and LAE incurred related primarily to A&E claims arising from business written by OneBeacon’s predecessor prior to 1992 for asbestos claims and 1987 for environmental claims (the "NICO Cover") and an adverse developmentclaims. As of December 31, 2006, OneBeacon has ceded estimated incurred losses of approximately $2.1 billion to the NICO Cover. The other contract is a reinsurance cover fromwith General Reinsurance Corporation, ("GRC")or GRC, for up to $400.0$570 million onof additional losses occurring inon all claims arising from accident years 2000 and prior (the "GRC Cover").prior. As of December 31, 2006, OneBeacon has ceded estimated incurred losses of $550 million to the GRC Cover. Pursuant to the GRC Cover, OneBeacon is not entitled to recover losses to the full contract limit if such losses are reimbursed by GRC more quickly than anticipated at the time the contract was signed. OneBeacon intends to only seek reimbursement from GRC for claims which result in payment patterns similar to those supporting the recoverables recorded pursuant to the GRC Cover. The economic cost of not submitting certain other eligible claims to GRC is primarily the investment spread between the rate credited by GRC and the rate achieved by OneBeacon on its investments. This cost, if any, is expected to be small.
Reinsurance contracts do not relieve OneBeacon of its obligation to its ceding companies.policyholders. Therefore, collectibility of balances due from its reinsurers is critical to OneBeacon'sits financial strength. SeeNote 4 "Third- “Third Party Reinsurance"Reinsurance” in the accompanying Consolidated Financial Statements for a discussion of OneBeacon's topthe largest balances due from OneBeacon’s reinsurers.
Loss and Loss Adjustment Expense Reserves
OneBeacon establishes loss and LAE reserves that are estimates of amounts needed to pay claims and related expenses in the future for insured events that have already occurred. The process of estimating reserves involves a considerable degree of judgment by management and, as of any given date, is inherently uncertain. See "“CRITICAL ACCOUNTING ESTIMATES"ESTIMATES” in "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations"Operations” for a full discussion regarding OneBeacon'sOneBeacon’s loss reserving process.
The following information presents (1) OneBeacon'sOneBeacon’s reserve development over the preceding ten years and (2) a reconciliation of reserves in accordance with accounting principles and practices prescribed or permitted by insurance authorities ("Statutory"(“Statutory” basis) to such reserves determined in accordance with GAAP, each as prescribed by Securities Act Industry Guide No. 6.
Section I of the ten10 year table shows the estimated liability that was recorded at the end of each of the indicated years for all current and prior accident year unpaid lossesloss and LAE. The liability represents the estimated amount of lossesloss and LAE for claims that were unpaid at the balance sheet date, including incurred but not reported ("IBNR"(“IBNR”) reserves. In accordance with GAAP, the liability for unpaid lossesloss and LAE is recorded in the balance sheet gross of the effects of reinsurance with an estimate of reinsurance recoverables arising from reinsurance contracts reported separately as an asset. The net balance represents the estimated amount of unpaid lossesloss and LAE outstanding as of the balance sheet date, reduced by estimates of amounts recoverable under reinsurance contracts.
Section II shows the cumulative amount of net loss and LAE paid relating to recorded liabilities as of the end of each succeeding year. Section III shows the re-estimated amount of the previously recorded net liability as of the end of each succeeding year. Estimates of the liability for unpaid lossesloss and LAE are increased or decreased as payments are made and more information regarding individual claims and trends, such as overall frequency and severity patterns, becomes known. Section IIIIV shows the cumulative net (deficiency)/redundancy representing the aggregate change in the liability from original balance sheet dates and the re-estimated liability through December 31, 2004.2006. Section IVV shows the re-estimated gross liability and re-estimated reinsurance recoverables through December 31, 2004.2006. Section VVI shows the cumulative gross (deficiency)/redundancy representing the aggregate change in the liability from original balance sheet dates and the re-estimated liability through December 31, 2006.
OneBeacon Loss and LAE(1), (3), (4)
Years Ended December 31,
($ in millions) |
| 1996 |
| 1997 |
| 1998(2)(5) |
| 1999 |
| 2000 |
| 2001 |
| 2002 |
| 2003 |
| 2004 |
| 2005 |
| 2006 |
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I. Liability for unpaid losses and LAE: Gross balance |
| $ | 5,804.4 |
| $ | 5,655.9 |
| $ | 6,869.5 |
| $ | 6,276.0 |
| $ | 6,875.4 |
| $ | 8,320.2 |
| $ | 7,507.0 |
| $ | 6,109.0 |
| $ | 5,328.2 |
| $ | 5,713.4 |
| $ | 5,108.2 |
|
Less: reins. recoverables on unpaid losses and LAE |
| (1,260.4 | ) | (1,159.2 | ) | (1,641.0 | ) | (1,262.7 | ) | (1,252.1 | ) | (3,591.5 | ) | (3,534.4 | ) | (2,954.8 | ) | (2,670.9 | ) | (3,382.0 | ) | (3,079.7 | ) | |||||||||||
Net balance |
| $ | 4,544.0 |
| $ | 4,496.7 |
| $ | 5,228.5 |
| $ | 5,013.3 |
| $ | 5,623.3 |
| $ | 4,728.7 |
| $ | 3,972.6 |
| $ | 3,154.2 |
| $ | 2,657.3 |
| $ | 2,331.4 |
| $ | 2,028.5 |
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II. Cumulative net amount of liability paid through |
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1 year later |
| 1,594.8 |
| 1,684.3 |
| 1,784.3 |
| 1,938.1 |
| 1,965.3 |
| 1,851.6 |
| 1,610.2 |
| 1,421.1 |
| 1,146.7 |
| 1,004.6 |
| — |
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2 years later |
| 2,621.3 |
| 2,732.5 |
| 2,908.5 |
| 3,065.1 |
| 3,153.0 |
| 3,039.5 |
| 2,764.2 |
| 2,274.5 |
| 1,833.5 |
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3 years later |
| 3,331.1 |
| 3,515.0 |
| 3,643.7 |
| 3,824.9 |
| 3,984.7 |
| 3,963.6 |
| 3,489.6 |
| 2,809.9 |
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4 years later |
| 3,872.2 |
| 4,028.8 |
| 4,061.7 |
| 4,330.3 |
| 4,596.8 |
| 4,529.5 |
| 3,941.0 |
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5 years later |
| 4,225.0 |
| 4,282.8 |
| 4,353.7 |
| 4,666.9 |
| 4,957.3 |
| 4,876.0 |
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6 years later |
| 4,398.1 |
| 4,464.4 |
| 4,555.9 |
| 4,887.2 |
| 5,194.4 |
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7 years later |
| 4,516.6 |
| 4,584.6 |
| 4,701.7 |
| 5,044.7 |
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8 years later |
| 4,609.4 |
| 4,694.6 |
| 4,801.6 |
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9 years later |
| 4,691.3 |
| 4,767.3 |
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10 years later |
| 4,743.9 |
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III. Net liability re-estimated as of: |
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1 year later |
| 4,627.8 |
| 5,370.1 |
| 5,237.1 |
| 5,829.0 |
| 4,730.8 |
| 4,781.3 |
| 4,110.3 |
| 3,253.4 |
| 2,763.2 |
| 2,354.3 |
| — |
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2 years later |
| 5,476.0 |
| 5,424.7 |
| 5,916.1 |
| 4,942.0 |
| 4,824.2 |
| 5,059.4 |
| 4,227.0 |
| 3,380.4 |
| 2,765.5 |
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3 years later |
| 5,549.0 |
| 5,965.0 |
| 4,929.6 |
| 4,927.0 |
| 5,294.3 |
| 5,143.8 |
| 4,344.8 |
| 3,396.2 |
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4 years later |
| 5,924.8 |
| 4,980.5 |
| 4,857.5 |
| 5,221.8 |
| 5,336.0 |
| 5,222.8 |
| 4,365.1 |
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5 years later |
| 4,948.0 |
| 4,911.8 |
| 5,042.9 |
| 5,165.8 |
| 5,383.6 |
| 5,244.3 |
|
|
|
|
|
|
|
|
|
|
| |||||||||||
6 years later |
| 4,900.4 |
| 5,069.3 |
| 4,929.1 |
| 5,197.2 |
| 5,385.8 |
|
|
|
|
|
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|
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|
|
|
| |||||||||||
7 years later |
| 5,028.9 |
| 4,902.3 |
| 4,936.5 |
| 5,169.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
8 years later |
| 4,867.4 |
| 4,910.2 |
| 4,902.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
9 years later |
| 4,868.0 |
| 4,881.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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| |||||||||||
10 years later |
| 4,836.4 |
|
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|
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|
|
|
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|
|
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| |||||||||||
IV. Cumulative net (deficiency)/ redundancy |
| $ | (292.4 | ) | $ | (384.5 | ) | $ | 325.6 |
| $ | (155.9 | ) | $ | 237.5 |
| $ | (515.6 | ) | $ | (392.5 | ) | $ | (242.0 | ) | $ | (108.2 | ) | $ | (22.9 | ) | — |
| |
Percent (deficient)/redundant |
| (6.4 | )% | (8.6 | )% | 6.2 | % | (3.1 | )% | 4.2 | % | (10.9 | )% | (9.9 | )% | (7.7 | )% | (4.1 | )% | (1.0 | )% | — |
| |||||||||||
V. Reconciliation of net liability re-estimated as of the end of the latest re-estimation period (see I. above): |
|
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| |||||||||||
Gross re-estimated liability |
| 8,926.8 |
| 8,891.2 |
| 9,385.1 |
| 9,376.8 |
| 9,560.0 |
| 9,852.4 |
| 8,918.1 |
| 7,266.3 |
| 6,269.1 |
| 5,756.8 |
| — |
| |||||||||||
Less: gross re-estimated reinsurance recoverable |
| (4,090.4 | ) | (4,010.0 | ) | (4,482.2 | ) | (4,207.6 | ) | (4,174.2 | ) | (4,608.1 | ) | (4,553.0 | ) | (3,870.1 | ) | (3,503.6 | ) | (3,402.5 | ) | — |
| |||||||||||
Net re-estimated liability |
| $ | 4,836.4 |
| $ | 4,881.2 |
| $ | 4,902.9 |
| $ | 5,169.2 |
| $ | 5,385.8 |
| $ | 5,244.3 |
| $ | 4,365.1 |
| $ | 3,396.2 |
| $ | 2,765.5 |
| $ | 2,354.3 |
| — |
| |
VI. Cumulative gross (deficiency)/redundancy |
| $ | (3,122.4 | ) | $ | (3,235.3 | ) | $ | (2,515.6 | ) | $ | (3,100.8 | ) | $ | (2,684.6 | ) | $ | (1,532.2 | ) | $ | (1,411.1 | ) | $ | (1,157.3 | ) | $ | (940.9 | ) | $ | (43.4 | ) | — |
| |
Percent (deficient)/redundant |
| (53.8 | )% | (57.2 | )% | (36.6 | )% | (49.4 | )% | (39.0 | )% | (18.4 | )% | (18.8 | )% | (18.9 | )% | (17.7 | )% | (.8 | )% | — |
| |||||||||||
amount of net losses and LAE paid relating to recorded liabilities as of the end of each succeeding year.
| | OneBeacon Loss and LAE(1),(3) Years Ended December 31, | ||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ($ in millions) | |||||||||||||||||||||||||||||||||||
| 1994 | 1995 | 1996 | 1997 | 1998(2) | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | |||||||||||||||||||||||||
| I. Liability for unpaid losses and LAE: | $ | 5,535.4 | $ | 5,844.4 | $ | 5,804.4 | $ | 5,655.9 | $ | 6,944.0 | $ | 6,368.8 | $ | 6,982.7 | $ | 8,425.2 | $ | 7,630.5 | $ | 6,241.2 | $ | 5,475.5 | |||||||||||||
| Less: reins. recoverables on unpaid losses and LAE | (1,069.8 | ) | (1,307.4 | ) | (1,260.4 | ) | (1,159.2 | ) | (1,651.9 | ) | (1,285.6 | ) | (1,276.4 | ) | (3,609.7 | ) | (3,560.6 | ) | (2,984.0 | ) | (2,714.7 | ) | |||||||||||||
| Net balance | $ | 4,465.6 | $ | 4,537.0 | $ | 4,544.0 | $ | 4,496.7 | $ | 5,292.1 | $ | 5,083.2 | $ | 5,706.3 | $ | 4,815.5 | $ | 4,069.9 | $ | 3,257.2 | $ | 2,760.8 | |||||||||||||
| II. Net liability re-estimated as of: | |||||||||||||||||||||||||||||||||||
| 1 year later | 4,494.1 | 4,584.7 | 4,627.8 | 5,370.1 | 5,305.3 | 5,901.2 | 4,815.8 | 4,872.9 | 4,216.7 | 3,357.4 | — | ||||||||||||||||||||||||
| 2 years later | 4,552.1 | 4,667.1 | 5,476.0 | 5,424.7 | 5,985.4 | 5,013.5 | 4,913.7 | 5,155.0 | 4,337.0 | ||||||||||||||||||||||||||
| 3 years later | 4,642.8 | 5,460.6 | 5,549.0 | 5,965.0 | 5,002.8 | 5,001.5 | 5,384.7 | 5,244.0 | |||||||||||||||||||||||||||
| 4 years later | 5,406.5 | 5,510.6 | 5,924.8 | 4,980.5 | 4,932.1 | 5,297.5 | 5,429.3 | ||||||||||||||||||||||||||||
| 5 years later | 5,431.8 | 5,779.5 | 4,948.0 | 4,911.8 | 5,117.6 | 5,243.4 | |||||||||||||||||||||||||||||
| 6 years later | 5,632.0 | 4,794.7 | 4,900.4 | 5,069.3 | 5,006.1 | ||||||||||||||||||||||||||||||
| 7 years later | 4,658.7 | 4,749.4 | 5,028.9 | 4,902.3 | |||||||||||||||||||||||||||||||
| 8 years later | 4,625.6 | 4,871.8 | 4,867.4 | ||||||||||||||||||||||||||||||||
| 9 years later | 4,744.2 | 4,714.2 | |||||||||||||||||||||||||||||||||
| 10 years later | 4,593.1 | ||||||||||||||||||||||||||||||||||
| III. Cumulative net (deficiency)/redundancy | $ | (127.5 | ) | $ | (177.2 | ) | $ | (323.4 | ) | $ | (405.6 | ) | $ | 286.0 | $ | (160.2 | ) | $ | 277.0 | $ | (428.5 | ) | $ | (267.2 | ) | $ | (100.3 | ) | $ | — | |||||
| Percent (deficient)/redundant | (2.9 | )% | (3.9 | )% | (7.1 | )% | (9.0 | )% | 5.4 | % | (3.2 | )% | 4.9 | % | (8.9 | )% | (6.6 | )% | (3.1 | )% | — | % | |||||||||||||
| IV. Reconciliation of net liability re-estimated as of the end of the latest re-estimation period (see II. above): | |||||||||||||||||||||||||||||||||||
| Gross re-estimated liability | 5,559.2 | 5,893.0 | 5,996.2 | 5,898.5 | 6,574.0 | 6,545.8 | 6,730.0 | 8,830.6 | 7,878.1 | 6,331.6 | — | ||||||||||||||||||||||||
| Less: gross re-estimated reinsurance recoverable | (966.0 | ) | (1,178.8 | ) | (1,128.8 | ) | (996.2 | ) | (1,567.9 | ) | (1,302.4 | ) | (1,300.7 | ) | (3,586.6 | ) | (3,541.1 | ) | (2,974.2 | ) | — | ||||||||||||||
| Net re-estimated liability | $ | 4,593.1 | $ | 4,714.2 | $ | 4,867.4 | $ | 4,902.3 | $ | 5,006.1 | $ | 5,243.4 | $ | 5,429.3 | $ | 5,244.0 | $ | 4,337.0 | $ | 3,357.4 | $ | — | |||||||||||||
| V. Cumulative net amount of liability paid through: | |||||||||||||||||||||||||||||||||||
| 1 year later | 1,390.1 | 1,476.6 | 1,591.9 | 1,687.3 | 1,815.2 | 1,966.5 | 2,007.9 | 1,892.0 | 1,656.7 | 1,463.7 | — | ||||||||||||||||||||||||
| 2 years later | 2,240.8 | 2,372.6 | 2,621.3 | 2,735.4 | 2,954.8 | 3,136.2 | 3,213.8 | 3,101.3 | 2,834.7 | ||||||||||||||||||||||||||
| 3 years later | 2,821.9 | 3,083.3 | 3,331.1 | 3,518.0 | 3,709.2 | 3,882.3 | 4,057.3 | 4,040.5 | |||||||||||||||||||||||||||
| 4 years later | 3,328.3 | 3,571.3 | 3,872.2 | 4,044.0 | 4,125.9 | 4,394.5 | 4,677.2 | ||||||||||||||||||||||||||||
| 5 years later | 3,672.7 | 3,961.5 | 4,233.4 | 4,282.8 | 4,421.0 | 4,736.0 | |||||||||||||||||||||||||||||
| 6 years later | 3,978.3 | 4,225.4 | 4,398.1 | 4,464.4 | 4,627.2 | ||||||||||||||||||||||||||||||
| 7 years later | 4,186.9 | 4,329.4 | 4,516.6 | 4,584.6 | |||||||||||||||||||||||||||||||
| 8 years later | 4,265.6 | 4,416.0 | 4,609.4 | ||||||||||||||||||||||||||||||||
| 9 years later | 4,335.6 | 4,485.7 | |||||||||||||||||||||||||||||||||
| 10 years later | 4,392.9 | ||||||||||||||||||||||||||||||||||
(1)
- In 1998, Commercial General Union (“CGU”), the predecessor company to OneBeacon, was formed as a result of a pooling of interests between Commercial Union Corporation and General
Accident.Accident Corporation of America. All historical balances have been restated as though the companies had been merged throughout the periods presented. (2)
In 1998, OneBeaconCGU acquired Houston General Insurance Companyand NFU. All(“HGIC”) in 1998. In 2005, OneBeacon contributed HGIC to Houston General Insurance Exchange. Even though no longer owned by OneBeacon, all liabilities related tothese entities have beenthis entity continue to be shown fromthe acquisition date1998 forward in thistable.- table because GAAP continues to require it to be consolidated by OneBeacon.
(3)
- This table reflects the effects of the NICO Cover and the GRC Cover as if they had been in effect for all periods presented.
(4)OneBeacon became a wholly-owned subsidiary of White Mountains during 2001. Reserve development for the years ended 1995 through 2000 reflects development on reserves established before White Mountains consolidated OneBeacon’s results.
(5)OneBeacon acquired NFU in 1998 and sold it during 2005. All liabilities related to this entity are shown from 1998 through 2004.
The cumulative net (deficiency)/redundancy in the table above reflects reinsurance recoverables recorded in connection with the OneBeacon Acquisition under the NICO Cover and the GRC Cover. SeeNote 4, "Third4- “Third Party Reinsurance"Reinsurance” in the accompanying Consolidated Financial Statements for a description of the NICO Cover and the GRC Cover. These covers apply to losses incurred in 2000 and prior years. As a result, they have the effect of significantly increasing OneBeacon'sOneBeacon’s reinsurance recoverables in 2001 and 2002 and reducing its reserve deficiency for each of the years presented prior to the OneBeacon Acquisition by the amount of the reserves ceded at the time these covers were purchased. See "“Asbestos and Environmental Reserves"Reserves” under "“CRITICAL ACCOUNTING ESTIMATES"ESTIMATES” in"Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations"Operations” for a discussion of the impact of the NICO Cover on OneBeacon'sOneBeacon’s net loss and LAE reserve position. The table presented below represents OneBeacon's cumulative net deficiency without regard to the NICO Cover and the GRC Cover.
| | Years Ended December 31, | |||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ($ in millions) | ||||||||||||||||||||||||||||||||||
| 1994 | 1995 | 1996 | 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | ||||||||||||||||||||||||
| Cumulative net deficiency adjusted for the NICO Cover and the GRC Cover | $ | (1,831.1 | ) | $ | (1,906.6 | ) | $ | (2,076.5 | ) | $ | (2,194.9 | ) | $ | (1,560.9 | ) | $ | (2,092.3 | ) | $ | (1,788.0 | ) | $ | (428.5 | ) | $ | (267.2 | ) | $ | (100.3 | ) | $ | — | ||
Percent deficient | (41.0 | )% | (42.0 | )% | (45.7 | )% | (48.8 | )% | (29.5 | )% | (41.2 | )% | (31.3 | )% | (8.9 | )% | (6.6 | )% | (3.1 | )% | — | % | ||||||||||||
The following table reconciles loss and LAE reserves determined on a Statutory basis to loss and LAE reserves determined in accordance with GAAP at December 31, as follows:
| | December 31, |
| December 31, |
| ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ($ in millions) | ||||||||||||||||||||
| 2004 | 2003 | 2002 | ||||||||||||||||||
Millions |
| 2006 |
| 2005 |
| 2004 |
| |||||||||||||
| Statutory reserves | $ | 4,413.4 | $ | 5,085.5 | $ | 6,029.0 |
| $ | 3,863.9 |
| $ | 4,253.4 |
| $ | 4,413.4 |
| ||||
| Reinsurance recoverable on unpaid losses and LAE(1) | 1,046.8 | 1,197.5 | 1,650.9 | |||||||||||||||||
| Reserves allocated from other segments | 44.5 | — | — | |||||||||||||||||
| Other(2) | (29.2 | ) | (41.8 | ) | (49.4 | ) | ||||||||||||||
Reinsurance recoverable on unpaid losses and LAE(1) |
| 1,280.5 |
| 1,455.2 |
| 1,046.8 |
| |||||||||||||
Reserves allocated from other segments, net |
| — |
| 41.6 |
| 44.5 |
| |||||||||||||
Purchase accounting |
| (270.5 | ) | (317.5 | ) | (361.5 | ) | |||||||||||||
Other(2) |
| (36.2 | ) | (36.8 | ) | (29.2 | ) | |||||||||||||
| GAAP reserves | $ | 5,475.5 | $ | 6,241.2 | $ | 7,630.5 |
| $ | 4,837.7 |
| $5,395.9 |
| $5,114.0 |
| ||||||
(1)Represents adjustments made to add back reinsurance recoverables included with the presentation of reserves under Statutory accounting.
(2)
OneBeacon’s Intermediate Holding Companies
OneBeacon’s intermediate holding companies include Fund American Enterprises Holdings, Inc. (“FAEH”) and Fund American Companies, Inc. (“Fund American”), both U.S.-domiciled companies, as well as various intermediate holding companies domiciled in the United States, Gibraltar, Luxembourg and Bermuda.
In May 2003, Fund American issued $700 million face value of senior unsecured debt through a public offering, at an issue price of 99.7% (the “Senior Notes”). The Senior Notes bear an annual interest rate of 5.9% until maturity in May 2013. Pursuant to the offering of the Senior Notes, White Mountains fully and unconditionally guaranteed the payment of principal and interest on the Senior Notes. Following the OneBeacon Offering, White Mountains continues to guarantee the payment of principal and interest on the Senior Notes. OneBeacon Ltd. pays White Mountains a guarantee fee equal to 25 basis points per annum on the outstanding principal amount of the Senior Notes. If White Mountains’ voting interest in OneBeacon Ltd.’s common shares ceases to represent more than 50% of all their voting securities, OneBeacon Ltd. will seek to redeem, exchange or otherwise modify the senior notes in order to fully and permanently eliminate White Mountains’ obligations under its guarantee. In the event that White Mountains’ guarantee is not eliminated, the guarantee fee will increase over time up to a maximum of 450 basis points.
As part of the financing for the OneBeacon Acquisition, Berkshire Hathaway Inc. (“Berkshire”) invested a total of $300 million in cash, of which (1) $225 million was for the purchase of cumulative non-voting preferred stock of Fund American (the “Berkshire Preferred Stock”), which has a $300 million redemption value; and (2) $75 million was for the purchase of warrants to acquire 1,724,200 common shares of the Company. The Berkshire Preferred Stock is entitled to a dividend of no less than 2.35% per quarter and is mandatorily redeemable on May 31, 2008. During 2004, Berkshire exercised its warrants for $294 million in cash.
Also as part of the financing of the OneBeacon Acquisition, Zenith Insurance Company (“Zenith”) purchased $20 million in cumulative non-voting preferred stock of FAEH (the “Zenith Preferred Stock”). The Zenith Preferred Stock is entitled to a dividend of no less than a 2.5% per quarter through June 30, 2007 and a dividend of no less than 3.5% per quarter thereafter. The Zenith Preferred Stock is mandatorily redeemable on May 31, 2011. At White Mountains’ option, which it expects to exercise, the Zenith Preferred Stock may be redeemed on June 30, 2007.
In connection with the OneBeacon Offering, Fund American and FAEH each established an irrevocable grantor trust to economically defease the Berkshire Preferred Stock and the Zenith Preferred Stock. The assets of each trust are solely dedicated to the satisfaction of the payment of dividends and redemption amounts on the $300 million
liquidation preference of the Berkshire Preferred Stock and the $20 million liquidation preference of the Zenith Preferred Stock. Concurrently with the closing of the OneBeacon Offering, Fund American and FAEH funded their respective trust with cash that was used to purchase a portfolio of fixed maturity securities issued by the U.S. government or government-sponsored enterprises. The scheduled interest and principal payments of the portfolio of fixed maturity securities in each trust is sufficient to pay when due all amounts required under the terms of the Berkshire Preferred Stock and the Zenith Preferred Stock, including the mandatory redemption of the Berkshire Preferred Stock in May 2008 and the optional redemption of the Zenith Preferred Stock in June 2007.
In connection with the OneBeacon Offering, Fund American established a $75 million revolving credit facility that matures in November 2011 (the “FAC Bank Facility”). As of December 31, 2006, the FAC Bank Facility was undrawn.
During 2004, White Mountains formed White Mountains Re is a global multi-line reinsurance organization that provides reinsurance for property, liability, accident & health, aviation and certain marine exposures on a worldwide basis through its subsidiaries, Folksamerica Re and Sirius International. Folksamerica Re is a multi-line property and casualty reinsurer that provides reinsurance primarily in the United States, Canada, Continental Europe, Latin America, the Caribbean and Japan. Sirius International, which combinedis the largest reinsurance company domiciled in Scandinavia based on gross written premiums, is a multi-line property and casualty reinsurer that provides reinsurance primarily in Europe, North America and Asia.
WMRUS provides reinsurance underwriting advice and reinsurance portfolio analysis services to Sirius, Folksamerica, Fund AmericanOlympus Reinsurance Company Ltd. ("Fund American Re"(“Olympus”) and WMU with the newly acquired Sirius to form a cohesive, global reinsurance organization.
Helicon Reinsurance Company, Ltd. (“Helicon”). As White Mountains Re offers lead capacityRe’s “center of excellence” for reinsurance on most property accident & healthcatastrophe risk evaluation, its goal is to promote increased efficiencies, consistency in pricing and liabilityunderwriting methodology, centralized management of catastrophe exposures and writes direct program insuranceadvanced catastrophe modeling, as well as value-added services for intermediaries and clients. In exchange for these services, WMRUS receives fee income on the business through Sirius America. White Mountains Re also provides reinsurance advisory services through WMU, specializing in international property and marine excess reinsurance. it refers.
White Mountains Re has offices in Belgium, Bermuda, Chicago, Connecticut, Dublin, Hamburg, London, Miami, New York, Singapore, Stockholm, Toronto and Zurich.
At December 31, 20042006 and 2003,2005, White Mountains Re had $8.2$7.3 billion and $3.7$8.5 billion of total assets and $1.7$2.1 billion and $1.0$1.9 billion of shareholder'sshareholder’s equity, respectively.
Folksamerica, which became a wholly-owned subsidiary of White Mountains in 1998, is a multi-line property and casualty reinsurer that provides reinsurance to insurers primarily in the United States, Canada, Continental Europe, Latin America, the Caribbean and Japan. Folksamerica Re is rated "A"“A-” (Excellent, the fourth highest of fifteen ratings) by A.M. Best and “A-” (Strong, the seventh highest of twenty-one ratings) by Standard & Poor’s. Sirius International is rated “A” (Excellent, the third highest of fifteen ratings) by A.M. Best.Best and “A-” (Strong, the seventh highest of twenty-one ratings) by Standard & Poor’s.
On April 16, 2004, White Mountains Re has completed several significant transactions involving interests in other insurance and reinsurance organizations. In most cases the transactions were acquisitions of entities that were owned by organizations that no longer considered them core businesses. Since 2000, White Mountains Re has completed the following significant transactions in addition to the Sirius Acquisition,Acquisition:
· On December 22, 2006, White Mountains Re acquired Mutual Service Casualty Insurance Company (“Mutual Service”), a Minnesota-domiciled, runoff insurer for $34 million in cash. Mutual Service has been renamed Stockbridge Insurance Company (“Stockbridge”) as part of a sponsored demutualization and conversion to a stock company and was formerly affiliated with Illinois-based Country Insurance & Financial Services (“Country”). As part of the transaction, Country has provided Stockbridge with approximately $25 million of reinsurance protection in excess of Stockbridge’s carried reserves as of September 30, 2006. White Mountains Re did not acquire any infrastructure or employees and is managing Stockbridge’s run-off administration through which the principal operating companiesuse of a TPA under White Mountains Re’s direction.
· On August 2, 2006, White Mountains Re sold Sirius America to an investor group led by Lightyear Capital for $139 million in cash. As part of the transaction, White Mountains acquired werean equity interest of approximately 18% in the acquiring entity and accounts for its remaining interest in Sirius America on the equity method within its Other Operations segment.
·On November 11, 2004, Sirius International andacquired Denmark-based Tryg-Baltica Forsikring, internationalt forsikringsselskab A/S (“Tryg-Baltica”). Following the closing, White Mountains Re placed Tryg-Baltica into run-off, with select business renewed by Sirius America. Stockholm-based Sirius International is a multi-line property and casualty reinsurer that provides reinsurance primarily in Europe, North America and AsiaInternational. White Mountains Re did not acquire any infrastructure or employees and is managing the largest reinsurance company domiciled in Scandinavia (based on gross written premiums)company’s run-off administration.
· On March 31, 2004, Folksamerica acquired the Sierra Insurance Group companies (the “Sierra Group”). Sirius America is a U.S.-based insurer that specializes in primary insurance programs. Sirius InternationalSubsequent to the acquisition, the Sierra Group companies, which previously wrote mainly workers compensation business, were placed into run-off and Sirius America are both rated "A" (Excellent,all of the third highest of fifteen ratings) by A.M. Best.acquired companies’ run-off claims administration was transferred to TPAs working under White Mountains Re’s direction.
· Effective October 1, 2003, White Mountains Re acquired renewal rights to the property and casualty treaty reinsurance business of CNA Reinsurance ("(“CNA Re"Re”), a division of CNA Financial Corporation (the "CNA“CNA Re Agreement"Agreement”). Under the terms of the CNA Re Agreement, White Mountains Re payspaid CNA Re a renewal commission on the premiums renewed over the two contract renewal periods subsequent to October 1, 2003. The renewal commission is 3% for the initial renewal and 2% for the second renewal.
In December 2001, White Mountains formed WMU, a reinsurance advisory company domiciled in Ireland. As part of a corporate reorganization, WMU established a sister company in Bermuda in June 2003. WMU provides reinsurance underwriting advice and reinsurance portfolio analysis services to both Folksamerica and Olympus Reinsurance Company Ltd. ("Olympus"). Prior to the Sirius Acquisition, WMU's Irish company, a specialist in handling non-marine property treaty excess of loss classes, expanded White Mountains Re's international profile, particularly in the United Kingdom, Continental Europe, Japan and Australia. WMU's Bermuda company specializes in excess reinsurance coverages for the marine and energy sector.
Since 1999, in addition to the transactions discussed above, White Mountains Re has made the following acquisitions:
•On November 11, 2004, Sirius International acquired 100% of Denmark-based Tryg-Baltica Forsikring, internationalt forsikringsselskab A/S ("Tryg Baltica"). Following the closing, White Mountains Re placed Tryg Baltica into runoff, though it is anticipated that select business will be renewed by Sirius International. White Mountains Re did not acquire any infrastructure or employees and will manage the company's runoff administration.•On March 31, 2004, Folksamerica acquired 100% of the Sierra Insurance Group companies (the "Sierra Group"). Subsequent to the acquisition, the Sierra Group companies, which previously wrote mainly workers compensation business, were placed into runoff and all of the acquired companies' runoff claims administration was transferred to TPAs working under White Mountains Re's direction.•- ·In 2002, Folksamerica acquired
100% ofImperial Casualty and Indemnity Insurance Company,("Imperial"),a company in run-off. •·In 2001,
Fund AmericanWhite Mountains Re acquired substantially all of the international reinsurance operations of Folksam International Insurance Company and Folksamerica acquired100% ofC-F Insurance Company,("C-F"),a company in run-off.•·In 2000, Folksamerica acquired substantially all the reinsurance operations of Risk Capital Reinsurance Company
("(“RiskCapital"Capital”) and100% ofPCA Property & Casualty Insurance Company("PCA"(“PCA”), a company in run-off.•In 1999, Folksamerica acquired 100% of USF Re Insurance Co. ("USF Re").
Reinsurance is an arrangement in which a reinsurance company (the "reinsurer"“reinsurer”) agrees to indemnify an insurance company (the "ceding company"“ceding company”) for all or a portion of the insurance risks underwritten by the ceding company under one or more insurance policies. Reinsurance can benefit a ceding company in a number of ways, including reducing exposure on individual risks, providing catastrophe protections from large or multiple losses, and assisting in maintaining acceptable capital levels as well as financial and operating leverage ratios. Reinsurance can also provide a ceding company with additional underwriting capacity by permitting it to accept larger risks and underwrite a greater number of risks without a correspondingcommensurate increase in its capital or surplus. Reinsurers may also purchase reinsurance, known as retrocessional reinsurance, to cover their own risks assumed from primary ceding companies. Reinsurance companies often enter into retrocessional agreements for many of the same reasons that ceding companies enter into reinsurance agreements.
Reinsurance is generally written on a treaty or facultative basis. Treaty reinsurance is an agreement whereby the reinsurer assumes a specified portion or category of risk under all qualifying policies issued by the ceding company during the term of the agreement, usually one year. In theWhen underwriting of treaty reinsurance, the reinsurer does not evaluate each individual risk and generally accepts the original underwriting decisions made by the ceding insurer.company. Treaty reinsurance is typically written on either a quota share or excess of loss basis. A quota share reinsurance treaty is an arrangement whereby a reinsurer assumes a predetermined proportional share of the premiums and losses generated on specified business. An excess of loss treaty is an arrangement whereby a reinsurer assumes losses that exceed an agreeda specific retention of loss by the ceding company. Facultative reinsurance, on the other hand, is underwritten on a risk-by-risk basis, which allows the reinsurer to determine pricing for each exposure.
A significant period of time normally elapses between the receipt of reinsurance premiums and the payment of reinsurance claims. While premiums are generally paid to the reinsurer upon inception of coverage, the claims process is delayed and generally begins upon the occurrence of an event causing an insured loss followed by: (1) the reporting of the loss by the insured to the ceding company; (2) the reporting of the loss by the ceding company to the reinsurer; (3) the ceding company'scompany’s adjustment and payment of the loss; and (4) the payment to the ceding company by the reinsurer. During this time, reinsurance companiesreinsurers generate investment income on premium receipts, consisting primarily of interest earned on fixed maturity investments and dividends earned on equity securities. The period of time between the receipt of premiums and the payment of claims is typically longer for a reinsurer than for a primary insurer. This delay is less significant for companies that write large volumes of short-tailed coverage, such as property.
White Mountains Re writes three main classes of reinsurance: property, liability property and accident and health.specialty. White Mountains Re'sRe’s net written premiums by class of business for the years ended December 31, 2004, 20032006, 2005 and 20022004 were as follows:
| | Year Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Business class (Millions) | ||||||||||
| 2004 | 2003 | 2002 | ||||||||
| Liability | $ | 524.5 | $ | 450.7 | $ | 344.2 | ||||
| Property | 432.1 | 314.6 | 252.2 | |||||||
| Accident and Health | 151.6 | 88.4 | 68.1 | |||||||
| Other | 138.1 | 32.0 | 23.7 | |||||||
| Total | $ | 1,246.3 | $ | 885.7 | $ | 688.2 | ||||
White Mountains Re writes both treaty
Business class |
| Year Ended December 31, |
| |||||||
Millions |
| 2006 |
| 2005 |
| 2004 |
| |||
Property |
| $ | 572.6 |
| $ | 567.4 |
| $ | 432.1 |
|
Liability |
| 293.1 |
| 403.4 |
| 524.5 |
| |||
Specialty(1) |
| 424.2 |
| 333.3 |
| 289.7 |
| |||
Total |
| $ | 1,289.9 |
| $ | 1,304.1 |
| $ | 1,246.3 |
|
(1) Includes primarily accident & health, marine and facultative reinsurance, as well as directaviation business.
The majority of White Mountains Re'sRe’s premiums are derived from treaty reinsurance contracts both on a quota share and an excess of loss basis, which in 20042006 amounted to 55%47% and 34%38%, respectively, of its total net written premiums, while directprimary business represented 11%15% of total net written premium.
During the years ended December 31,December31, 2006, 2005 and 2004, 2003 and 2002, White Mountains Re received no more than 10% of its gross reinsurance premiums from any individual ceding company. During the years ended December 31, 2004, 20032006, 2005 and 2002,2004, White Mountains Re received approximately 51%52%, 58%40% and 57%51%, respectively, of its gross reinsurance written premiums from three major, third-party reinsurance brokersintermediaries as follows: (1) AON Re—22%Re — 24%, 25%18% and 28%22%, respectively; (2) Benfield—Benfield — 16%, 19%14% and 14%16%, respectively; and (3) Guy Carpenter—13%Carpenter — 12%, 14%8% and 15%13%, respectively.
White Mountains Re'sRe’s net written premiums by geographic region for the years ended December 31, 2004, 20032006, 2005 and 20022004 were as follows:
| | Year Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Geographic region (Millions) | ||||||||||
| 2004 | 2003 | 2002 | ||||||||
| United States | $ | 846.7 | $ | 702.5 | $ | 529.8 | ||||
| Europe | 303.5 | 114.0 | 88.0 | |||||||
| Canada, the Caribbean and Latin America | 42.4 | 53.6 | 58.8 | |||||||
| Asia and Other | 53.7 | 15.6 | 11.6 | |||||||
| Total | $ | 1,246.3 | $ | 885.7 | $ | 688.2 | ||||
Geographic region |
| Year Ended December 31, |
| |||||||
Millions |
| 2006 |
| 2005 |
| 2004 |
| |||
United States |
| $ | 864.7 |
| $ | 878.9 |
| $ | 846.7 |
|
Europe |
| 314.4 |
| 315.6 |
| 303.5 |
| |||
Canada, the Caribbean and Latin America |
| 37.8 |
| 47.2 |
| 42.4 |
| |||
Asia and Other |
| 73.0 |
| 62.4 |
| 53.7 |
| |||
Total |
| $ | 1,289.9 |
| $ | 1,304.1 |
| $ | 1,246.3 |
|
Marketing
White Mountains Re, which conducts its reinsurance business through Folksamerica Re and Sirius International, obtains most of its reinsurance business from reinsurance brokers.intermediaries. Business submissions come from intermediaries that represent the ceding company or through submissions recommended by WMU. White Mountains Re considers both the intermediary and the ceding company to be its clients in any placement. White Mountains Re has developed strong business relationships over a long period of time with the management of many of its ceding companies.WMRUS. The process of placing an intermediary reinsurance program typically begins when a ceding company enlists the aid of a reinsurance intermediary in structuring a reinsurance program. Often theThe ceding company and the brokerintermediary will often consult with one or more lead reinsurers as to the pricing and contract terms for the reinsurance protection being sought. Once the ceding company has approved the terms quoted by the lead reinsurer, the brokerintermediary will offer participation to qualified reinsurers until the program is fully subscribed. White Mountains Re considers both the intermediary and the ceding company to be its clients in any placement and as such has developed strong business relationships over a long period of time with the management of many of its ceding companies.
White Mountains Re pays ceding companies a ceding commission under most quota share reinsurance treaties and some excess of loss reinsurance treaties. The ceding commission is generally based on the ceding company'scompany’s cost of acquiring and administering the business being reinsured (commissions,(e.g., commissions, premium taxes and certain miscellaneous expenses). Additionally, White Mountains Re pays reinsurance intermediaries commissions based on negotiated percentages of the premium they produce. The reinsurance intermediary'sintermediaries’ commissions constitute a significant portion of White Mountains Re'sRe’s total acquisition costs.
As mentioned above, Underwriting and Pricing
White Mountains Re also writes direct program business through Sirius America, which began its program insurance operations in 1999. Sirius America works with managing general agents to produce U.S. based liability, property and accident & health insurance programs for small and mid-sized commercial accounts. Sirius America establishes strict underwriting guidelines,
closely monitors all exposures and performs periodic on-site audits of the managing general agents to confirm compliance with established guidelines and procedures.
White Mountains Re derives its business from a broad spectrum of ceding insurers including national, regional, specialty and excess and surplus lines writers, both in the United States and internationally. White Mountains Re determines which risks it accepts based on the anticipated underwriting results of the transaction, which are evaluated on a variety of factors including types of risk, the quality of the reinsured, the attractiveness of the reinsured's insurance rates and policy conditions and the adequacy of the proposed reinsurance terms.
White Mountains Re's underwriters and pricing actuaries perform reviews of the underwriting, pricing, and general underwriting controls of potential clients before quoting contract terms for its reinsurance products. White Mountains Re prices its products by assessing the desired return on the expected capital needed to write a given contract and by estimating future loss and LAE costs. White Mountains Re accepts contracts that are anticipated to generate expected returns on capital and an underwriting profit. White Mountains Re's pricing indications are based on a number of underwriting factors including historical results, analysis of exposure and estimates of future loss costs, a review of other programs displaying similar exposure characteristics, the primary insurer's underwriting and claims experience and the primary insurer's financial condition. Folksamerica's underwriters and claims personnel perform regular audits on certain classes of business to monitor the ceding company's pricing and claim handling discipline. Sirius International's underwriters frequently communicate with ceding companies to discuss current terms and conditions. Additionally, White Mountains Re's finance staff reviews the financial stability and creditworthiness of certain ceding companies. Such reviews provide important input to support underwriting decisions.
White Mountains Re and other reinsurance companies have sought to mitigate the risk associated with future terrorist attacks in a similar manner as primary insurers. Since the Attacks, reinsurers have attained significant price increases across all lines of reinsurance in response to greater perceived policy exposures. Reinsurers do not have the stringent regulations with respect to contract terms and policy exclusions which are generally imposed on primary writers. For example, the Terrorism Act is not applicable to reinsurers. As a result, exclusions are more often dictated by the marketplace than by regulation. White Mountains Re evaluates terrorism exposure to its ceding company clients and applies exclusions as appropriate. For example, reinsurance written on commercial risks subsequent to the Attacks generally contain clauses that exclude certified acts of terrorism. Reinsurance on personal risks written subsequent to the Attacks generally contain exclusions related to nuclear, biological and chemical attacks.
White Mountains Re maintains a staff of experienced reinsurance claim specialists that work closely with reinsurance intermediaries to obtain specific claims information from its customers. Folksamerica's claims staff also regularly perform on site claim reviews to assess and suggest improvements regarding the reinsured's claim handling ability and reserving techniques. In addition, all of White Mountains Re's claims specialists review loss information provided by the reinsured for adequacy. The results of these claim reviews are shared with the actuaries and underwriters to ensure that they are making the correct assumptions in pricing products and that all relevant information is used in establishing loss reserves.
White Mountains Re also uses TPAs for certain other claims, including the direct program business written by Sirius America and run-off claims related to the Sierra and PCA acquisitions. White
Mountains Re's claims staff performs on-site claim audits of certain TPAs to ensure the propriety of the controls and processes over claims serviced by the TPA.
In general, White Mountains Re competes for reinsurance business with other major global reinsurers, local reinsurers in certain markets and reinsurance divisions of direct insurance companies. Competition in the worldwide reinsurance market is influenced by a variety of factors, including financial strength ratings, prior history and relationships, as well as expertise and the speed at which the company has historically paid claims.
Through Folksamerica, White Mountains Re competes with all of the larger U.S. reinsurance companies. As reported by the Reinsurance Association of America ("RAA") for the nine month period ending September 30, 2004, (the most recent data available), Folksamerica wrote approximately 6% of gross written premiums of all reinsurance companies that are viewed as direct competition. The reinsurance companies writing the largest portion of gross premiums in this period were: XL Reinsurance America (18%), Transatlantic Reinsurance Company (16%) and Everest Reinsurance Company (15%).
Through Sirius International, the largest reinsurance company domiciled in Scandinavia (based upon gross written premiums), White Mountains Re competes with many of the larger European and international reinsurance companies, including Munich Re, Swiss Re, Hannover Re, Lloyds, Partner Re and Everest Re.
White Mountains Re, through its operating subsidiaries, has a long history of close relationships with ceding companies and maintainsmaintaining a disciplined underwriting strategy which, among other things,while considering overall exposure, focuses on writing more business when market terms and conditions are favorable and reducing business volume during soft markets when terms and conditions become less favorable. White Mountains Re also employs a multi-line approach, offering clients a wide range of reinsurance products to satisfy their risk management needs.
White Mountains Re derives its business from a broad spectrum of ceding companies, including national, regional, specialty and excess and surplus lines writers, both in the United States and internationally. White Mountains Re’s underwriters and pricing actuaries perform reviews of the underwriting, pricing, and general underwriting controls of potential ceding companies before quoting contract terms for its reinsurance products. White Mountains Re prices its products by assessing the desired return on the expected capital needed to write a given contract and on the expected underwriting results of the contract. White Mountains Re’s pricing indications are based on a number of underwriting factors including historical results, analysis of exposure and estimates of future loss costs, a review of other programs displaying similar exposure characteristics and the ceding company’s underwriting and claims experience. White Mountains Re’s underwriters, actuaries and claims personnel perform audits to monitor certain ceding companies’ risk selection, pricing and claim handling discipline. Additionally, White Mountains Re's acquisition strategy has contributedRe’s finance staff reviews the financial stability and creditworthiness of certain ceding companies. Such reviews provide important input to its growth. Since 1995, support underwriting decisions.
White Mountains Re and other reinsurance companies have sought to mitigate the risks associated with future terrorist attacks in a similar manner as primary insurers. Reinsurers do not have the stringent regulations with respect to contract terms and policy exclusions that are generally imposed on primary insurers. For example, the Terrorism Act is not applicable to reinsurers. As a result, terrorism exclusions on reinsurance contracts are dictated by the marketplace. White Mountains Re evaluates terrorism exposure from its ceding companies and applies exclusions as it deems appropriate. Reinsurance on commercial risks written by White Mountains Re subsequent to the Attacks generally contains clauses that exclude acts of terrorism certified under the Terrorism Act. Reinsurance on personal risks written by White Mountains Re subsequent to the Attacks generally contains exclusions related to nuclear, biological and chemical attacks.
Following the 2004 and 2005 catastrophe activity, White Mountains Re enhanced its catastrophe underwriting process by significantly raising its provision for demand surge (i.e., the rise in costs from shortages of material and labor in regions affected by a catastrophe) and by employing a more conservative methodology to evaluate exposure than those that result from standard actuarial and modeling techniques. Additionally, Folksamerica Re non-renewed its excess off-shore energy and marine business in the Gulf of Mexico effective January 1, 2006.
Claims Management
White Mountains Re maintains a staff of experienced reinsurance claim specialists that work closely with reinsurance intermediaries to obtain specific claims information from its customers. White Mountains Re’s claims staff also regularly perform on-site claim reviews to assess certain reinsured’s claim handling ability and reserving techniques. In addition, White Mountains Re’s claims specialists review loss information provided by the reinsured for adequacy. The results of these claim reviews are shared with the underwriters and actuaries to assist them in pricing products and establishing loss reserves.
White Mountains Re also uses TPAs for certain other claims, including run-off claims related to certain acquisitions. White Mountains Re’s claims staff performs on-site claim audits of certain TPAs to ensure the propriety of the controls and processes over claims serviced by the TPA.
Competition
The worldwide reinsurance market is highly competitive. Competition in the types of reinsurance that White Mountains Re underwrites is influenced by a variety of factors, including price and other terms and conditions offered, financial strength ratings, prior history and relationships, as well as expertise and the speed at which the company has completed ten acquisitionshistorically paid claims.
White Mountains Re competes for reinsurance business in the United States, Bermuda, Europe, and other international reinsurance markets with numerous global competitors. White Mountains Re’s competitors include reinsurance companies, and underwriting syndicates at Lloyd’s. Some of other insurancethe companies that White Mountains Re competes directly with include ACE Limited, Arch Capital Group Ltd., Endurance Specialty Holdings Ltd., Everest Re Group, Ltd., Hannover Ruckversicherung AG, Lloyd’s of London, Munich Re Group, Partner Re Ltd., Platinum Underwriters Holdings Ltd., Renaissance Re Holdings Ltd., Swiss Re Group, Transatlantic Holdings, Inc. and reinsurance organizations. In virtually all cases the acquired entities were fundamentally sound, but were owned by organizations that no longer considered them core businesses.XL Capital Ltd.
Catastrophe Risk ManagementReinsurance Protection
White Mountains Re has exposure to losses caused by hurricanes, earthquakes, winter storms, windstorms, terrorist acts and other catastrophic events. In the normal course of business, White Mountains Re seeks to reduce the risk of loss that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance and reinsurance enterprises and by closely monitoring aggregate property exposures and related PMLs. To manage and analyze aggregate exposures and PML, White Mountains Re utilizes a variety of tools and analyses, including catastrophe modeling software packages. White Mountains Re regularly assessesmanages its concentration of underwriting exposures in catastrophe prone areas and develops strategies to manage this exposure,catastrophic events, primarily throughby limiting accumulationconcentrations of exposure to what it deems acceptable levels and, if deemed necessary, purchasing reinsurance. In addition, White Mountains Re seeks terrorism exclusions in its reinsurance contracts, where applicable. White Mountains Re also uses third party global catastrophe models that calculate its expected probable maximum loss (“PML”) from several possible catastrophes. White Mountains Re believes that its largest natural catastrophe exposures, net of reinsurance and based on a 250-year PML single event scenario, are European winter storm, California earthquake, United States Atlantic Coast windstorm (i.e., Delaware to Florida) and United States Gulf Coast windstorm (i.e., Florida to Texas).
White Mountains Re’s catastrophe pricing models are based on third party software models and internally developed models. White Mountains Re models and assesses each property contract it writes for catastrophe exposure.
Catastrophe exposure modeling is inherently uncertain due to process risk (the probability and magnitude of the purchaseunderlying event, e.g. earthquake) and parameter risk (the probability of making inaccurate modeling assumptions). In particular, geographic and policy coverage data on the primary policies reinsured by White Mountains Re is essential. Accordingly, White Mountains Re’s ability to accurately predict its catastrophe exposure is dependent on the quality and accuracy of data obtained from its clients.
Additionally, catastrophe modeling is dependent upon several broad economic and scientific assumptions, such as storm surge (i.e., the water that is pushed toward the shore by the force of a windstorm), demand surge and zone density (i.e., the percentage of insured perils that would be affected in a region by a catastrophe).
While catastrophe models can be effective tools in assisting with the pricing and managing of property catastrophe exposures, White Mountains Re does not believe that they can be strictly relied upon to measure its exposure to catastrophic risk. For example, losses arising from Hurricane Katrina for both the industry and White Mountains Re were substantially in excess of losses previously predicted by third party models from such an event, due to issues such as inadequate storm surge and demand surge assumptions in the models as well as flood due to the levees breaking, which was not fully contemplated in these models. Correspondingly, White Mountains Re assesses catastrophe risk by monitoring total limits exposed to a catastrophe event in key zones. White Mountains Re has enhanced its operations in Bermuda to advise the group in the underwriting, pricing and managing of catastrophe reinsurance.risks assumed.
Folksamerica's primaryReinsurance Protection
White Mountains Re’s reinsurance protection is provided through Folksamerica Re’s quota share retrocessional arrangements with Olympus.Olympus and Helicon and through excess of loss protection purchased by Sirius to cover Sirius’ property catastrophe and aviation exposures. These arrangementsreinsurance protections are designed to increase Folksamerica'sWhite Mountains Re’s underwriting capacity, to capitalize on the improved pricing trends that accelerated after the Attackswhere appropriate, and to reduce its potential loss exposure to any large or series of smaller property catastrophe events.
20
Under White Mountains Re’s 2006 arrangements with Olympus and Helicon, Folksamerica Re ceded 35% of its quota share agreements2006 underwriting year short-tailed excess of loss business, mainly property and marine. Olympus and Helicon shared approximately 56% and 44%, respectively, in the 2006 underwriting year cession. Under White Mountains Re’s 2005 arrangements with Olympus, Folksamerica cedesRe ceded up to 75% of substantially all of its 2005 underwriting year short-tailed excess of loss business, mainly property and marine, and 50% of its 2005 underwriting year proportional property business to Olympus and receives an override commission on the premiums ceded to Olympus.
Under its prior ownership, Sirius' threshold for risk exposure and earnings volatility was extremely low. As a consequence, Sirius purchased many reinsurance protections at significant costs. These protections were purchased primarily to reduce the company's property catastrophe exposure on both a treaty and facultative basis. Under White Mountains Re's ownership, Sirius' reinsurance purchasing is coordinated with that of Folksamerica on a group-wide basis. Selective purchases are made primarily for property catastrophe protection. Effective April 1, 2004, Sirius International entered into a quota share reinsurance agreement with Olympus. Under this agreement, Sirius International cedesceded 25% of its 2005 underwriting year short-tailed proportional and excess of loss business to Olympus.business. White Mountains Re receives an override commissionreceived fee income based on the premiums ceded to Olympus.Olympus and Helicon. During 2007, Folksamerica Re will continue to cede 35% of its 2007 underwriting year short-tailed excess of loss business, mainly property and marine, with Olympus and Helicon sharing approximately 55% and 45%, respectively, in 2007.
White Mountains Re is also entitled to receive a profit commission with respect to the profitability of the business placed with Olympus and Helicon. However, this profit commission arrangement is subject to a deficit carryforward whereby net underwriting losses from one year carryover to future years. As a result of hurricanes Katrina, Rita and Wilma and several other significant loss events during 2005, Olympus recorded substantial net underwriting losses. Accordingly, White Mountains Re did not record a profit commission from Olympus or Helicon during 2006 or 2005 and does not expect to record profit commissions from Olympus or Helicon for the foreseeable future.
Reinsurance contracts do not relieve White Mountains Re of its obligation to its ceding companies. Therefore, collectibility of balances due from its retrocessional reinsurers is critical to White Mountains Re'sRe’s financial strength. SeeNote 4—"Third4 - “Third Party Reinsurance"Reinsurance” to the accompanying Consolidated Financial Statements for a discussion of White Mountains Re'sRe’s top reinsurers.
Loss and Loss Adjustment Expense Reserves
White Mountains Re establishes reserves that are estimates of future amounts needed to pay claims and related expenses for insured events that have already occurred. See "“CRITICAL ACCOUNTING ESTIMATES"ESTIMATES” in"Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations"Operations” for a full discussion regarding White Mountains Re'sRe’s loss reserving process.
The following information presents (1) White Mountains Re'sRe’s reserve development over the preceding ten years and (2) a reconciliation of reserves on a regulatory basis to reserves determined in accordance with GAAP, each as prescribed by Securities Act Industry Guide No. 6.
Section I of the ten10 year table shows the estimated liability that was recorded at the end of each of the indicated years for all current and prior accident year unpaid lossesloss and LAE. The liability represents the estimated amount of lossesloss and LAE for claims that were unpaid at the balance sheet date, including IBNR reserves. In accordance with GAAP, the liability for unpaid lossesloss and LAE is recorded in the balance sheet gross of the effects of reinsurance with an estimate of reinsurance recoverables arising from reinsurance contracts reported separately as an asset. The net balance represents the estimated amount of unpaid lossesloss and LAE outstanding as of the balance sheet date, reduced by estimates of amounts recoverable under reinsurance contracts.
Section II shows the cumulative amount of net loss and LAE paid relating to recorded liabilities as of the end of each succeeding year. Section III shows the re-estimated amount of the previously recorded net liability as of the end of each succeeding year. Estimates of the liability for unpaid lossesloss and LAE are increased or decreased as payments are made and more information regarding individual claims and trends, such as overall frequency and severity patterns, becomes known. Section IIIIV shows the cumulative net (deficiency)/redundancy representing the aggregate change in the liability from original balance sheet dates and the re-estimated liability through December 31, 2006. Section V shows the re-estimated gross liability and re-estimated reinsurance recoverables through December 31, 2006. Section VI shows the cumulative gross (deficiency)/redundancy representing the aggregate change in the liability from original balance sheet dates and the re-estimated liability through December 31, 2004. Section IV shows the re-estimated gross liability and re-estimated reinsurance recoverables through December 31, 2004. Section V shows the cumulative amount of net losses and LAE paid relating to recorded liabilities as of the end of each succeeding year.2006.
�� The following table includes the complete loss development history for all periods presented for all companies acquired by White Mountains Re as if the companies had been combined from their inception.
This table includes development on reserves reported by acquired companies before those companies were acquired by White Mountains Re
| | White Mountains Re Loss and LAE(1),(2),(3)(4) Years Ended December 31, | ||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ($ in millions) | |||||||||||||||||||||||||||||||||||
| 1994 | 1995 | 1996 | 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | |||||||||||||||||||||||||
| I. Liability for unpaid losses and LAE: | |||||||||||||||||||||||||||||||||||
| Gross balance | $ | 1,642.7 | $ | 1,895.7 | $ | 2,448.2 | $ | 2,386.1 | $ | 2,524.2 | $ | 2,299.6 | $ | 3,175.1 | $ | 3,917.3 | $ | 3,925.1 | $ | 3,910.4 | $ | 4,170.3 | |||||||||||||
| Less: reins. recoverables on unpaid losses and LAE | (299.2 | ) | (336.6 | ) | (524.7 | ) | (513.3 | ) | (592.9 | ) | (651.0 | ) | (1,148.5 | ) | (1,353.7 | ) | (1,277.6 | ) | (1,214.6 | ) | (1,346.6 | ) | |||||||||||||
| Net balance | $ | 1,343.5 | $ | 1,559.1 | $ | 1,923.5 | $ | 1,872.8 | 1,931.3 | $ | 1,648.6 | $ | 2,026.6 | $ | 2,563.6 | $ | 2,647.5 | $ | 2,695.8 | $ | 2,823.7 | ||||||||||||||
| II. Net liability re-estimated as of: | |||||||||||||||||||||||||||||||||||
| 1 year later | 1,411.7 | 1,470.8 | 1,937.9 | 1,855.4 | 2,001.3 | 1,908.2 | 2,491.9 | 2,617.0 | 2,844.0 | 2,718.4 | — | ||||||||||||||||||||||||
| 2 years later | 1,372.1 | 1,482.1 | 1,871.0 | 1,889.2 | 2,036.4 | 2,169.0 | 2,500.7 | 2,844.8 | 2,881.9 | ||||||||||||||||||||||||||
| 3 years later | 1,382.3 | 1,423.4 | 1,909.2 | 1,862.8 | 2,011.9 | 2,175.0 | 2,744.5 | 2,907.7 | |||||||||||||||||||||||||||
| 4 years later | 1,326.0 | 1,499.0 | 1,903.8 | 1,834.3 | 2,012.5 | 2,369.9 | 2,793.7 | ||||||||||||||||||||||||||||
| 5 years later | 1,408.0 | 1,483.4 | 1,870.1 | 1,817.6 | 2,065.9 | 2,388.3 | |||||||||||||||||||||||||||||
| 6 years later | 1,395.6 | 1,445.3 | 1,842.7 | 1,837.0 | 2,079.0 | ||||||||||||||||||||||||||||||
| 7 years later | 1,364.0 | 1,416.8 | 1,854.5 | 1,842.1 | |||||||||||||||||||||||||||||||
| 8 years later | 1,345.3 | 1,426.7 | 1,857.4 | ||||||||||||||||||||||||||||||||
| 9 years later | 1,360.6 | 1,426.5 | |||||||||||||||||||||||||||||||||
| 10 years later | 1,365.3 | ||||||||||||||||||||||||||||||||||
| III. Cumulative net (deficiency)/redundancy | $ | (21.8 | ) | $ | 132.6 | $ | 66.1 | $ | 30.7 | $ | (147.7 | ) | $ | (739.7 | ) | $ | (767.1 | ) | $ | (344.1 | ) | $ | (234.4 | ) | $ | (22.6 | ) | — | |||||||
| Percent (deficient)/ redundant | (1.6 | )% | 8.5 | % | 3.4 | % | 1.6 | % | (7.6 | )% | (44.9 | )% | (37.9 | )% | (13.4 | )% | (8.9 | )% | (.8 | )% | — | % | |||||||||||||
| IV. Reconciliation of net liability re-estimated as of the end of the latest re-estimation period (see II. above): | |||||||||||||||||||||||||||||||||||
| Gross re-estimated liability | 1,691.6 | 1,753.4 | 2,402.0 | 2,402.8 | 2,738.2 | 3,052.2 | 4,135.2 | 4,412.4 | 4,256.3 | 4,005.6 | — | ||||||||||||||||||||||||
| Less: gross re-estimated reinsurance recoverable | (326.3 | ) | (326.9 | ) | (544.6 | ) | (560.7 | ) | (659.2 | ) | (663.9 | ) | (1,341.5 | ) | (1,504.7 | ) | (1,374.4 | ) | (1,287.2 | ) | — | ||||||||||||||
| Net re-estimated liability | $ | 1,365.3 | $ | 1,426.5 | $ | 1,857.4 | $ | 1,842.1 | $ | 2,079.0 | $ | 2,388.3 | $ | 2,793.7 | $ | 2,907.7 | $ | 2,881.9 | $ | 2,718.4 | — | ||||||||||||||
| V. Cumulative net amount of liability paid through: | |||||||||||||||||||||||||||||||||||
| 1 year later | 479.7 | 463.5 | 504.5 | 498.7 | 542.9 | 420.5 | 689.2 | 729.8 | 994.0 | 720.9 | — | ||||||||||||||||||||||||
| 2 years later | 710.1 | 665.3 | 771.2 | 830.9 | 741.1 | 860.2 | 1,167.4 | 1,429.6 | 1,394.5 | ||||||||||||||||||||||||||
| 3 years later | 836.0 | 788.4 | 1,007.0 | 975.3 | 1,008.0 | 1,142.4 | 1,731.1 | 1,720.3 | |||||||||||||||||||||||||||
| 4 years later | 905.3 | 940.9 | 1,147.4 | 1,129.5 | 1,181.6 | 1,516.1 | 1,936.7 | ||||||||||||||||||||||||||||
| 5 years later | 1,012.8 | 1,018.6 | 1,258.2 | 1,242.9 | 1,382.7 | 1,658.7 | |||||||||||||||||||||||||||||
| 6 years later | 1,062.6 | 1,088.7 | 1,351.0 | 1,317.4 | 1,487.3 | ||||||||||||||||||||||||||||||
| 7 years later | 1,111.0 | 1,158.8 | 1,405.6 | 1,384.2 | |||||||||||||||||||||||||||||||
| 8 years later | 1,162.4 | 1,200.7 | 1,457.7 | ||||||||||||||||||||||||||||||||
| 9 years later | 1,195.1 | 1,246.1 | |||||||||||||||||||||||||||||||||
| 10 years later | 1,235.2 | ||||||||||||||||||||||||||||||||||
White Mountains Re Loss and LAE (1), (2), (3), (4), (5)
Years Ended December 31,
($ in millions) |
| 1996 |
| 1997 |
| 1998 |
| 1999 |
| 2000 |
| 2001 |
| 2002 |
| 2003 |
| 2004 |
| 2005 |
| 2006 |
| |||||||||||
I. Liability for unpaid losses and LAE: |
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Gross balance |
| $ | 2,364.1 |
| $ | 2,303.5 |
| $ | 2,439.7 |
| $ | 2,278.0 |
| $ | 3,151.2 |
| $ | 3,865.2 |
| $ | 3,819.4 |
| $ | 3,716.3 |
| $ | 3,864.3 |
| $ | 4,308.8 |
| $ | 3,708.8 |
|
Less: reins. recoverables on unpaid losses and LAE |
| (466.5 | ) | (457.2 | ) | (535.8 | ) | (634.2 | ) | (1,137.9 | ) | (1,317.0 | ) | (1,209.8 | ) | (1,095.2 | ) | (1,149.8 | ) | (1,633.6 | ) | (1,142.4 | ) | |||||||||||
Net balance |
| $ | 1,897.6 |
| $ | 1,846.3 |
| $ | 1,903.9 |
| $ | 1,643.8 |
| $ | 2,013.3 |
| $ | 2,548.2 |
| $ | 2,609.6 |
| $ | 2,621.1 |
| $ | 2,714.5 |
| $ | 2,675.2 |
| $ | 2,566.4 |
|
II. Cumulative net amount of liability paid through: |
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1 year later |
| 496.5 |
| 491.6 |
| 520.0 |
| 427.8 |
| 686.1 |
| 725.7 |
| 977.3 |
| 702.7 |
| 941.0 |
| 949.4 |
| — |
| |||||||||||
2 years later |
| 760.2 |
| 809.6 |
| 727.0 |
| 865.8 |
| 1,164.0 |
| 1,421.4 |
| 1,370.9 |
| 1,271.8 |
| 1,369.4 |
|
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3 years later |
| 986.7 |
| 963.7 |
| 993.3 |
| 1,148.0 |
| 1,725.3 |
| 1,710.9 |
| 1,840.2 |
| 1,547.5 |
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4 years later |
| 1,135.8 |
| 1,117.3 |
| 1,166.7 |
| 1,519.6 |
| 1,930.6 |
| 2,108.9 |
| 2,037.2 |
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5 years later |
| 1,246.2 |
| 1,230.5 |
| 1,365.8 |
| 1,662.0 |
| 2,236.6 |
| 2,300.8 |
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6 years later |
| 1,338.8 |
| 1,303.0 |
| 1,470.2 |
| 1,875.6 |
| 2,385.5 |
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7 years later |
| 1,391.5 |
| 1,369.6 |
| 1,563.4 |
| 1,996.7 |
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8 years later |
| 1,443.5 |
| 1,430.0 |
| 1,627.8 |
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9 years later |
| 1,488.1 |
| 1,478.5 |
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10 years later |
| 1,522.0 |
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III. Net liability re-estimated as of: |
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1 year later |
| 1,911.1 |
| 1,828.4 |
| 1,974.4 |
| 1,904.1 |
| 2,479.5 |
| 2,601.2 |
| 2,803.4 |
| 2,642.6 |
| 2,771.9 |
| 2,893.2 |
| — |
| |||||||||||
2 years later |
| 1,844.3 |
| 1,864.0 |
| 2,011.3 |
| 2,166.1 |
| 2,488.5 |
| 2,827.8 |
| 2,836.8 |
| 2,704.5 |
| 2,802.9 |
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3 years later |
| 1,885.5 |
| 1,840.2 |
| 1,988.8 |
| 2,172.1 |
| 2,732.1 |
| 2,891.1 |
| 2,911.7 |
| 2,742.8 |
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4 years later |
| 1,882.7 |
| 1,813.7 |
| 1,989.3 |
| 2,367.1 |
| 2,782.6 |
| 2,969.3 |
| 2,969.6 |
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5 years later |
| 1,850.3 |
| 1,797.0 |
| 2,042.7 |
| 2,386.7 |
| 2,898.6 |
| 3,033.8 |
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6 years later |
| 1,822.8 |
| 1,816.3 |
| 2,057.1 |
| 2,446.9 |
| 2,958.7 |
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7 years later |
| 1,834.7 |
| 1,822.6 |
| 2,120.6 |
| 2,479.2 |
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8 years later |
| 1,838.7 |
| 1,884.5 |
| 2,136.1 |
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9 years later |
| 1,895.9 |
| 1,886.6 |
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10 years later |
| 1,883.5 |
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IV. Cumulative net (deficiency)/ redundancy |
| $ | 14.1 |
| $ | (40.3 | ) | $ | (232.2 | ) | $ | (835.4 | ) | $ | (945.4 | ) | $ | (485.6 | ) | $ | (360.0 | ) | $ | (121.7 | ) | $ | (88.4 | ) | $ | (218.0 | ) | — |
| |
Percent (deficient)/ redundant |
| 0.7 | % | (2.2 | )% | (12.2 | )% | (50.8 | )% | (47.0 | )% | (19.1 | )% | (13.8 | )% | (4.6 | )% | (3.3 | )% | (8.1 | )% | — |
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V. Reconciliation of net liability re-estimated as of the end of the latest re-estimation period (see III. above): |
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Gross re-estimated liability |
| 2,433.5 |
| 2,453.8 |
| 2,813.7 |
| 3,211.0 |
| 4,387.0 |
| 4,604.2 |
| 4,353.2 |
| 3,982.6 |
| 4,094.3 |
| 4,665.5 |
| — |
| |||||||||||
Less: gross re-estimated reinsurance recoverable |
| (550.0 | ) | (567.2 | ) | (677.6 | ) | (731.8 | ) | (1,428.3 | ) | (1,570.4 | ) | (1,383.6 | ) | (1,239.8 | ) | (1,291.4 | ) | (1,772.3 | ) | — |
| |||||||||||
Net re-estimated liability |
| $ | 1,883.5 |
| $ | 1,886.6 |
| $ | 2,136.1 |
| $ | 2,479.2 |
| $ | 2,958.7 |
| $ | 3,033.8 |
| $ | 2,969.6 |
| $ | 2,742.8 |
| $ | 2,802.9 |
| $ | 2,893.2 |
| — |
| |
VI. Cumulative gross (deficiency)/redundancy |
| $ | (69.4 | ) | $ | (150.3 | ) | $ | (374.0 | ) | $ | (933.0 | ) | $ | (1,235.8 | ) | $ | (739.0 | ) | $ | (533.8 | ) | $ | (266.3 | ) | $ | (230.0 | ) | $ | (356.7 | ) | — |
| |
Percent (deficient)/redundant |
| (2.9 | )% | (6.5 | )% | (15.3 | )% | (41.0 | )% | (39.2 | )% | (19.1 | )% | (14.0 | )% | (7.2 | )% | (6.0 | )% | (8.3 | )% | — |
| |||||||||||
(1)The table includes the complete loss development history for all periods presented for all companies acquired by Folksamerica through an instrument of transfer and assumption approved by the appropriate insurance regulators. Under the instrument, insurance regulators require that Folksamerica report reserve development as if the companies had been combined from their inception.
(2)
(3)
(4)
(5) White Mountains Re acquired $38.3 million in net loss and LAE reserves when it acquired Stockbridge during 2006. For periods prior to December 31, 2006, loss and LAE reserves for Tryg BalticaStockbridge are $134.5 million asnot included due to lack of December 31, 2004.
The cumulative net (deficiency)/redundancy in the table above reflects adverse development recorded by Scandinavian Re, which was acquired by White Mountains Re as part of the Sirius Acquisition in 2004, and has been in run-offrun off since 2002. This hasScandinavian Re was a writer of non-traditional reinsurance products from 1988 to 2001. The cumulative net (deficiency)/redundancy in the effect of significantly increasingtable above also includes adverse development from A&E claims. White Mountains Re's cumulative
deficiency for each of the years presentedexposure to A&E claims results mainly from asbestos claims arising from treaty and facultative contracts written prior to 1985 at two companies acquired by Folksamerica - MONY Reinsurance in 1991 and Christiania General in 1996. As a result, the table including the yearsabove reflects reserve development on Scandinavian Re prior to White Mountains Re's acquisition of Sirius.Re’s ownership and on A&E business that was not underwritten by White Mountains Re. The table presented below represents White Mountains Re'sRe’s cumulative net (deficiency)/redundancy excluding Scandinavian Re:Re and A&E claims:
| | Years Ended December 31, |
| Years Ended December 31, |
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ($ in millions) |
| 1996 |
| 1997 |
| 1998 |
| 1999 |
| 2000 |
| 2001 |
| 2002 |
| 2003 |
| 2004 |
| 2005 |
| 2006 |
| ||||||||||||||||||||||||||||||||||||||||||||
| 1994 | 1995 | 1996 | 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cumulative net (deficiency) /redundancy, excluding Scandinavian Re | $ | (6.3 | ) | $ | 159.2 | $ | 90.6 | $ | 42.1 | $ | (64.6 | ) | $ | (244.8 | ) | $ | (74.0 | ) | $ | (20.8 | ) | $ | (30.6 | ) | $ | 13.7 | $ | — | |||||||||||||||||||||||||||||||||||||||
Cumulative net (deficiency) redundancy, excluding Scandinavian Re and A&E |
| $ | 175.3 |
| $ | 101.7 |
| $ | (26.7 | ) | $ | (233.9 | ) | $ | (90.5 | ) | $ | (56.5 | ) | $ | (61.2 | ) | $ | (26.1 | ) | $ | (17.9 | ) | $ | (230.8 | ) | — |
| ||||||||||||||||||||||||||||||||||
| Percent (deficient) / redundant | (0.5 | )% | 10.4 | % | 4.8 | % | 2.3 | % | (3.6 | )% | (17.8 | )% | (5.5 | )% | (1.5 | )% | (1.9 | )% | 0.7 | % | — | % |
| 7.7 | % | 4.6 | % | (1.2 | )% | (12.0 | )% | (3.7 | )% | (2.1 | )% | (2.2 | )% | (0.9 | )% | (0.6 | )% | (6.0 | )% | — |
| ||||||||||||||||||||||
In general, many of Scandinavian Re's contracts were large and contained high limits. During the soft market period of 1999 to 2001, when pricing, terms and conditions were not very favorable, many of the contracts Scandinavian Re entered into were underpriced, resulting in much higher incurred losses than expected. These factors caused a significant amount of adverse development to be reported by Scandinavian Re, nearly all of which was recorded prior to White Mountains Re's ownership. As a result, including Scandinavian Re's results in the ten year table presents a distorted picture of the historic loss reserve adequacy of White Mountains Re's ongoing businesses.
White Mountains Re's net incurred losses from A&E claims have totaled $145 million over the past ten years. Although losses arising from A&E claims were on contracts that were not underwritten by White Mountains Re, White Mountains Re is liable for any additional losses arising from such contracts. Accordingly, White Mountains Re cannot guarantee that it will not incur additional A&E losses in the future. Refer to “CRITICAL ACCOUNTING ESTIMATES” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further details of White Mountains Re's A&E reserves.
The following table reconciles loss and LAE reserves determined on a regulatory basis to loss and LAE reserves determined in accordance with GAAP at December 31, as follows:
| | December 31, |
| December 31, |
| |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Millions) | |||||||||||||||||||
| 2004 | 2003 | 2002 | |||||||||||||||||
Millions |
| 2006 |
| 2005 |
| 2004 |
| ||||||||||||
| Regulatory reserves | $ | 3,092.0 | $ | 1,325.9 | $ | 1,148.8 |
| $ | 2,866.3 |
| $ | 3,109.7 |
| $ | 3,092.0 |
| |||
| Reinsurance recoverable on unpaid losses and LAE(1) | 948.2 | 480.5 | 513.2 | ||||||||||||||||
Reinsurance recoverable on unpaid losses and LAE (1) |
| 875.6 |
| 1,513.1 |
| 948.2 |
| ||||||||||||
| Discount on loss reserves | 245.2 | — | — |
| 141.6 |
| 184.5 |
| 245.2 |
| |||||||||
| Reserves allocated to other segments | (91.2 | ) | (31.5 | ) | — |
| (123.6 | ) | (105.6 | ) | (91.2 | ) | |||||||
| Purchase accounting and other | (23.9 | ) | 2.3 | 2.3 |
| (51.1 | ) | (21.4 | ) | (23.9 | ) | ||||||||
| GAAP reserves | $ | 4,170.3 | $ | 1,777.2 | $ | 1,664.3 |
| $ | 3,708.8 |
| $ | 4,680.3 |
| $ | 4,170.3 |
| |||
(1)Represents adjustments made to add back reinsurance recoverables included with the presentation of reserves under regulatory accounting. The Esurance group of companies, which is headquarteredhas its United States headquarters in San Francisco, havehas been part of White Mountains since October 2000. Esurance markets personal auto insurance directly to customers and through select online agents. Most customer interaction with the company takes place through Esurance'sEsurance’s website, www.esurance.com. Through the website, customers can get real-time quotes, compare quotes from other companies, purchase their policies, report claims and manage their accounts. At December 31, 2006, Esurance’s in-force policy count had grown to over 370,000 policies, as compared to 43,000 policies at the end of 2002. Esurance'sEsurance’s underwriting companies, Esurance Insurance Company and Esurance Property and Casualty Insurance Company are both rated "A"“A” (Excellent, the third highest of fifteen ratings) by A.M. Best. Additionally,Over the past several years, Esurance has ceded a large percentage of its business to certain other subsidiaries of White Mountains, primarily for capital management purposes. The Esurance segment also includes insurance ceded by Esurance to its affiliate, Folksamerica.subsidiaries of White Mountains. At December 31, 2006 and 2005, Esurance had $723.6 million and $414.2 million of total assets and $308.5 million and $176.7 million of shareholder’s equity, respectively.
As of December 31, 2004,2006, Esurance is writingwrites business in 17twenty-four states. These states represent 66%approximately 79% of the premium volume for the entire U.S. personal automobileauto insurance market. For the years ended December 31, 2006, 2005 and 2004, 2003Esurance had net written premiums of $596 million, $349 million and 2002, Esurance's business was$199 million, respectively, which were produced in the following states:
| | | Year Ended December 31, |
| Year Ended December 31, |
| ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net written premiums by state | |||||||||||||||
| 2004 | 2003 | 2002 |
| 2006 |
| 2005 |
| 2004 |
| ||||||
| California | California | 25 | % | 32 | % | 43 | % |
| 19 | % | 20 | % | 25 | % | |
| Florida | Florida | 24 | 24 | 14 |
| 17 |
| 20 |
| 24 |
| ||||
New York |
| 9 |
| 8 |
| 5 |
| ||||||||
| Texas | Texas | 11 | 15 | 12 |
| 6 |
| 9 |
| 11 |
| ||||
| Michigan | Michigan | 7 | 5 | 1 |
| 6 |
| 7 |
| 7 |
| ||||
New Jersey |
| 5 |
| 3 |
| — |
| ||||||||
| Pennsylvania | Pennsylvania | 5 | 7 | 7 |
| 5 |
| 4 |
| 5 |
| ||||
| New York | 5 | 2 | 4 | ||||||||||||
Washington |
| 4 |
| 3 |
| 1 |
| ||||||||
| Other | Other | 23 | 15 | 19 |
| 29 |
| 26 |
| 22 |
| ||||
| Total | 100 | % | 100 | % | 100 | % | |||||||||
Total |
| 100 | % | 100 | % | 100 | % | ||||||||
Esurance distributes approximately 80% of its business directly to customers online and over the phone. For this business, Esurance does not pay agent commissions on either new or renewal policies. The remaining 20% of Esurance's business is distributed through large online agents. Marketing
Esurance targets convenience-focused, technology savvytechnology-savvy consumers who userely on the Internet for most ofinternet to manage their financial services transactions.needs. Prior to 2004, Esurance had advertised its products and services primarily online. Beginning in 2004, Esurance began to advertise on local television networks with the “Erin Esurance” brand campaign, featuring an animated female secret-agent character. The campaign is designed to communicate Esurance’s unique, technology-focused approach to auto insurance. During 2006, Esurance shifted its television advertising focus to national cable television networks, which has proven to be more effective and cost efficient than local television advertising.
Erin Esurance attracts its target customers through a continuously optimized mixnow appears in nearly all of onlinethe company’s offline and offlineonline advertising. Esurance advertises offline on television, radio, and through direct mail. Esurance also has sponsor relationships with professional and college sports teams, as well as various environmental and community organizations. Esurance advertises online through paid search (e.g., Google and Yahoo! Search), and on a wide variety of insurance, finance, and automotive sites, along with major portals (e.g., MSNweb sites.
The launch of offline advertising and Yahoo!)the “Erin Esurance” campaign have resulted not only in continued significant business growth, but also in substantial increases in brand awareness for the company, particularly among its target customer base of web-savvy individuals. Esurance is the third largest issuer of auto insurance quotes on the Internet, behind only Progressive and search advertisers, like Google. Esurance also advertises on television, radio and through direct mail.GEICO.
Esurance uses a rigorous, analytical marginal cost methodology to allocate its marketing budget across the various media channels it uses. This methodology enables the company to focus its marketing resources on attracting and retaining customers that have the best expected lifetime premium and/or combined ratio.
Underwriting and Pricing
With its web-enabled technology, Esurance collects and verifies detailed underwriting information in real-time while customers transact with the company online. This real-timeReal-time access to customer information allows Esurance to continually develop and refine its highly segmented, tiered pricing models. Esurance believes that its tiered pricing models have a greater statistical correlation with historical loss experience than traditional pricing models have shown. As a result, Esurance canis able to quote rates to customers that most closely correspond to the individual risk characteristics of the customer, enabling Esurance to focus on keeping insurance rates competitive without compromising the company'scompany’s loss ratio targets.
Competition
Esurance competes with national and regional personal automobileauto insurance companies, though Esurance'sEsurance’s main competition iscomes from other direct writers like Progressive, GEICO, and 21st Century.
Esurance leveragesBy leveraging web-enabled technology, allowing it toEsurance can capture data real-time and reactrespond to market shifts. With an array of customer information at its disposal,changing loss trends. Esurance is continually able to refine pricing, enhance its auto product and optimize dollars spent on marketing. Technologymarketing with the array of customer information that is at its disposal. Web technology also allows Esurance to provide high quality,24/ 24/7 customer service and claims handling for a competitive price.
Esurance'sEsurance’s paperless business process allowallows the company to significantly reduce operating costs typically associated with policy processing, verification and endorsement activities. As a result, the company is able to achieve efficient, low-cost acquisition and operating expense structures.
Esurance handles its claims through regional claim centers in California, Florida, Texas and New York. Esurance takes the initial notice of lossclaims at the company's customer service center,company’s loss reporting unit in South Dakota, which is available for customers 24 hours a day, 365 days a year. The loss reporting unit then assignstransfers claims to the regional claim centers.offices in Arizona, California, Florida, Georgia, New Jersey, New York, and Texas where claims are handled and adjusted.
Esurance'sEsurance’s claims organization leverages technology to reduce cycle times.times and achieve strict claims performance metrics. Rapid response to and resolution of claims creates a stronger relationship with customers, while also decreasing ancillary claims costs, such as rental car fees. Additionally, Esurance maintains a special investigative unit designed to detect insurance fraud, and actively supports efforts by regulatory bodies and trade associations to curtail the cost of insurance fraud.
Esurance'sEsurance’s sole line of business is personal automobileauto insurance that covers liabilities and physical damage arising from the operation of automobiles. The majority of Esurance'sEsurance’s customers elect coverage for physical damage (85%(81%), resulting in exposure to catastrophe losses at Esurance for hurricanes, hailstorms, earthquakes and other acts of nature. Generally, catastrophe costs are low for personal auto in relation to other lines of business, such as homeowners and commercial property. Additionally, Esurance'sEsurance’s broad geographic distribution limits its concentration of risk and the potential for losses to accumulate from a single event. Esurance estimates that its PML for a single event is less than 1% of net written premium.
Loss and Loss Adjustment Expense Information
Esurance establishes loss and LAE reserves that are estimates of amounts needed to pay claims and related expenses in the future for insured events that have already occurred. The process of estimating reserves for Esurance is similar to the process described in"Loss and Loss Adjustment Expense Reserves" in the"ONEBEACON" discussioninvolves a considerable degree of judgment by management and, as of any given date, is inherently uncertain. As described previously, uncertaintiesUncertainties in projecting estimates of ultimate loss and LAE are magnified by the time lag between when a claim actually occurs and when it is reported and settled i.e.,(i.e. the "claim-tail."claim-tail). Esurance writes primarily "short-tail"short-tail personal automobileauto insurance policies, which reduces the uncertainty inherent in its loss and LAE reserves when compared to insurance companies that write "long-tail"long-tail policies, such as workers compensation.
Management believes that Esurance'sEsurance’s loss and LAE reserves as of December 31, 20042006 are adequate; however, ultimate loss and LAE may deviate, perhaps materially, from the amounts currently reflected in the reserve balance. Adverse development, if any, would impact the Company'sCompany’s future results of operations.
The following information presents (1) Esurance'sEsurance’s reserve development over the fourfive years since inception and (2) a reconciliation of reserves on a Statutory basis to reserves determined in accordance with GAAP, each as prescribed by Securities Act Industry Guide No. 6.
Section I of the 10 year table shows the estimated liability that was recorded at the end of each of the indicated years for all current and prior accident year unpaid lossesloss and LAE. The liability represents the estimated amount of lossesloss and LAE for claims that were unpaid at the balance sheet date, including IBNR reserves. In accordance with GAAP, the liability for unpaid lossesloss and LAE is recorded in the balance sheet gross of the effects of reinsurance with an estimate of reinsurance recoverables arising from reinsurance contracts reported separately as an asset. The net balance represents the
estimated amount of unpaid lossesloss and LAE outstanding as of the balance sheet date, reduced by estimates of amounts recoverable under reinsurance contracts.
Section II shows the cumulative amount of net loss and LAE paid relating to recorded liabilities as of the end of each succeeding year. Section III shows the re-estimated amount of the previously recorded net liability as of the end of each succeeding year. Estimates of the liability for unpaid lossesloss and LAE are increased or decreased as payments are made and more information regarding individual claims and trends, such as overall frequency and severity patterns, becomes known. Section IIIIV shows the cumulative net (deficiency)/redundancy representing the aggregate change in the liability from original balance sheet dates and the re-estimated liability through December 31, 2004.2006. Section IVV shows the re-estimated gross liability and re-estimated reinsurance recoverables through December 31, 2004.2006. Section VVI shows the cumulative amount of net lossesgross (deficiency)/redundancy representing the aggregate change in the liability from original balance sheet dates and LAE paid relating to recorded liabilities as of the end of each succeeding year.re-estimated liability through December 31, 2006.
| | Esurance Loss and LAE(1),(2) Years Ended December 31, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ($ in millions) | ||||||||||||||
| 2001 | 2002 | 2003 | 2004 | |||||||||||
| I. Liability for unpaid losses and LAE: | ||||||||||||||
| Gross balance | $ | 4.0 | $ | 15.5 | $ | 39.1 | $ | 63.0 | ||||||
| Less: reinsurance recoverables on unpaid losses and LAE | — | — | — | 0.1 | ||||||||||
| Net balance | $ | 4.0 | $ | 15.5 | $ | 39.1 | $ | 62.9 | ||||||
| II. Net liability re-estimated as of: | ||||||||||||||
| 1 year later | 4.0 | 16.0 | 34.0 | — | ||||||||||
| 2 years later | 4.4 | 15.3 | ||||||||||||
| 3 years later | 4.3 | |||||||||||||
| III. Cumulative net (deficiency)/ redundancy | $ | (0.3 | ) | $ | 0.2 | $ | 5.1 | $ | — | |||||
| Percent (deficient)/redundant | (6.7 | )% | 1.3 | % | 13.0 | % | — | % | ||||||
| IV. Reconciliation of net liability re-estimated as of the end of the latest re-estimation period (see II. above): | ||||||||||||||
| Gross re-estimated liability | 4.3 | 15.3 | 34.2 | — | ||||||||||
| Less: gross re-estimated reinsurance recoverable | 0.2 | |||||||||||||
| Net re-estimated liability | $ | 4.3 | $ | 15.3 | $ | 34.0 | $ | — | ||||||
| V. Cumulative net amount of liability paid through: | ||||||||||||||
| 1 year later | 2.5 | 9.3 | 18.9 | — | ||||||||||
| 2 years later | 3.3 | 12.2 | ||||||||||||
| 3 years later | 3.9 | |||||||||||||
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| Esurance Loss and LAE (1) (2) |
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| Years Ended December 31, |
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($ in millions) |
| 2001 |
| 2002 |
| 2003 |
| 2004 |
| 2005 |
| 2006 |
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I. Liability for unpaid loss and LAE: |
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Gross balance |
| $ | 4.0 |
| $ | 15.5 |
| $ | 39.1 |
| $ | 63.0 |
| $ | 94.1 |
| $ | 167.4 |
|
Less: reinsurance recoverables on unpaid loss and LAE |
| — |
| — |
| — |
| (.1 | ) | (.1 | ) | (.5 | ) | ||||||
Net balance |
| $ | 4.0 |
| $ | 15.5 |
| $ | 39.1 |
| $ | 62.9 |
| $ | 94.0 |
| $ | 166.9 |
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II. Cumulative net amount of net liability paid through: |
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1 year later |
| 2.5 |
| 9.3 |
| 18.9 |
| 35.8 |
| 62.4 |
| — |
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2 years later |
| 3.3 |
| 12.2 |
| 24.5 |
| 47.4 |
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3 years later |
| 3.9 |
| 13.7 |
| 28.2 |
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4 years later |
| 4.1 |
| 14.6 |
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5 years later |
| 4.1 |
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III. Net liability re-estimated as of: |
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1 year later |
| 4.0 |
| 16.0 |
| 34.0 |
| 54.9 |
| 97.2 |
| — |
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2 years later |
| 4.4 |
| 15.3 |
| 29.4 |
| 55.5 |
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3 years later |
| 4.3 |
| 14.4 |
| 29.5 |
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4 years later |
| 4.2 |
| 14.6 |
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5 years later |
| 4.1 |
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IV. Cumulative net (deficiency)/ redundancy |
| $ | (.1 | ) | $ | .9 |
| $ | 9.6 |
| $ | 7.4 |
| $ | (3.2 | ) | — |
| |
Percent (deficient)/redundant |
| (3.7 | )% | 6.0 | % | 24.5 | % | 11.9 | % | (3.4 | )% | — |
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V. Reconciliation of net liability re-estimated as of the end of the latest re-estimation period (see III. above): |
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Gross unpaid loss and LAE latest re-estimate |
| $ | 4.1 |
| $ | 14.6 |
| $ | 29.8 |
| $ | 56.3 |
| $ | 97.8 |
| — |
| |
Reinsurance recoverable latest re-estimate |
| — |
| — |
| (.3 | ) | (.8 | ) | (.6 | ) | — |
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Net unpaid loss and LAE latest re-estimate |
| $ | 4.1 |
| $ | 14.6 |
| $ | 29.5 |
| $ | 55.5 |
| $ | 97.2 |
| — |
| |
VI. Cumulative Gross redundancy (deficiency) |
| $ | (.1 | ) | $ | .9 |
| $ | 9.3 |
| $ | 6.7 |
| $ | (3.7 | ) | — |
| |
Percent deficient |
| (2.5 | )% | 5.8 | % | 23.8 | % | 10.6 | % | (3.9 | )% | — |
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(1)The table consists of reserve information for Esurance Insurance Company, Esurance Property & Casualty Insurance Company, and business ceded by Esurance to Folksamerica.
(2)
The following table reconciles loss and LAE reserves determined on a Statutory basis to loss and LAE reserves determined in accordance with GAAP at December 31, as follows:
| | December 31, |
| December 31, |
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|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Millions) | |||||||||||||||||||
| 2004 | 2003 | 2002 | |||||||||||||||||
Millions |
| 2006 |
| 2005 |
| 2004 |
| ||||||||||||
| Statutory reserves | $ | 16.2 | $ | 7.6 | $ | 15.5 |
| $ | 43.3 |
| $ | 30.1 |
| $ | 16.2 |
| |||
| Reserves allocated from other segments | 46.7 | 31.5 | — |
| 123.6 |
| 64.0 |
| 46.7 |
| |||||||||
| Reinsurance recoverable on unpaid losses and LAE(1) | .1 | — | — | ||||||||||||||||
Reinsurance recoverable on unpaid losses and LAE (1) |
| .5 |
| — |
| .1 |
| ||||||||||||
| GAAP reserves | $ | 63.0 | $ | 39.1 | $ | 15.5 |
| $ | 167.4 |
| $ | 94.1 |
| $ | 63.0 |
| |||
(1)Represents adjustments made to add back reinsurance recoverables included with the presentation of reserves under regulatory accounting.
WM Advisors
WM Advisors is a registered investment adviser that manages White Mountains’ investments in fixed income and equity securities, including hedge funds, limited partnerships and private equities. WM Advisors also has investment management agreements with third parties, most notably with Symetra and Montpelier Re. At December 31, 2006, WM Advisors had approximately $32 billion in assets under management, $10 billion of which related to consolidated subsidiaries of White Mountains.
WM Advisors has a sub-advisory agreement with Prospector Partners LLC (“Prospector”), a registered investment adviser, under which Prospector manages most of White Mountains’ publicly-traded common equity and convertible securities. Prospector also provides consulting and advisory services to White Mountains through a separate agreement with WM Advisors on matters such as capital management, asset allocation, private equity investments and mergers and acquisitions.
Galileo
During 2006, White Mountains entered into the weather risk management business through its newly formed subsidiary, Galileo. Galileo sells its weather risk management products as derivatives that are designed to assist corporate and governmental customers, primarily energy companies, utilities and construction companies, in managing their economic exposure to variations in weather conditions. Galileo then manages its weather derivative portfolio through the employment of a variety of risk management strategies to preserve its expected margins. These strategies include geographical diversification of risk exposures and economic hedging through the use of derivatives traded in both the over-the-counter and exchange-traded derivative markets. Additionally, Galileo economically hedges its risk exposure by buying and selling similar weather risk contracts with different counterparties. For example, Galileo may sell an option to protect a customer if it becomes too cold in a certain location and then purchase an option from another counterparty that pays Galileo if it becomes too cold in that same location. Galileo also diversifies its risk exposure by entering into contracts that protect different clients with opposite exposures to the same quantifiable weather element. For example, Galileo may sell an option to protect a customer if it becomes too cold in a certain location and then sell another option that protects a different customer if it becomes too warm in that same location. Risk management is undertaken on a portfolio-wide basis in order to maintain a portfolio that Galileo believes is well diversified and that remains within the aggregate risk tolerance established by senior management.
The CompanyWeather derivatives, which usually take the form of swaps or options, are contracts with financial settlements based on the performance of an index linked to a quantifiable weather element, such as temperature, precipitation, snowfall or windspeed. Typical contracts span several months such as a summer or winter season. A weather swap is a contract that requires one of the contractual parties to make a payment to the other contractual party when a weather index rises above or falls below a specified level, or “strike”. Therefore, upon settlement of a weather swap, Galileo may make or receive a payment. A weather call option is a contract that entitles the purchaser to receive a payment when the weather index exceeds a specified strike, and a weather put option is a contract that entitles the purchaser to receive a payment when the weather index is less than a specified strike. Every weather derivative is defined by a series of terms, including strike, location, notional payout rate (per unit or event), maximum payout, time period and reference index, which is calculated from weather data collected from a specified weather station.
WM Life Re
During 2006, White Mountains entered into the variable annuity reinsurance business through its Intermediate Holding Companies
The Company's intermediate holding companies include Fund Americannewly formed subsidiary, WM Life Re. WM Life Re reinsures death and Fund American Enterprises Holdings, Inc. ("FAEH"), both U.S.-domiciled companies,living benefit guarantees associated with certain variable annuities issued in Japan, commencing September 1, 2006. WM Life Re has assumed the risk related to a shortfall between the account value and the guaranteed value that must be paid by the ceding company to an annuitant or to an annuitant’s beneficiary in accordance with the underlying annuity contracts. Generally, the liabilities associated with these guarantees increase with declines in the equity markets, interest rates and currencies against the Japanese Yen, as well as various intermediate holding companies domiciledwith increases in market volatilities. The liability is also affected by annuitant-related actuarial assumptions, including surrender and mortality rates.
WM Life Re purchases derivative instruments, which currently include put option and futures contracts on major equity indices, currency pairs and futures contracts on bonds, to mitigate the risks associated with changes in the United States, Barbados, Luxembourg, Swedenfair value of the reinsured variable annuity guarantees. WM Life Re measures its net exposure to changes in relevant interest rates, foreign exchange rates and Bermuda. equity markets on a daily basis and adjusts its economic hedge positions within risk guidelines established by senior management. WM Life Re also monitors the effects of annuitant-related experience against actuarial assumptions (including surrender and mortality rates) on a weekly basis and adjusts relevant assumptions and economic hedge positions if required.
Tuckerman Capital, LP and Tuckerman Capital II, LP
White Mountains arrangesowns approximately 96% of Tuckerman Capital, LP and approximately 50% of Tuckerman Capital II, LP (collectively, the majority of its financing through the Company and these intermediate holding companies.
In May 2003, Fund American issued $700 million face value of senior unsecured debt through a public offering, at an issue price of 99.7% (the "Senior Notes"“Tuckerman Funds”). The Tuckerman Funds are managed by Tuckerman Capital, a private investment firm that focuses on acquisitions of small manufacturing companies, and are consolidated within White Mountains’ financial statements. Tuckerman Capital focuses its acquisition efforts on companies with enterprise values ranging from $5 million to $25 million and with established track records of success. The companies owned by the Tuckerman Funds are manufacturers of highly engineered, non-commodity products across a broad range of industries.
At December 31, 2006 and 2005, the Tuckerman Funds had $101 million and $64 million of total assets and accounted for $38 million and $34 million of White Mountains’ net proceeds from the issuanceassets, respectively.
Prospector Offshore Fund, Ltd.
White Mountains owns approximately 42% of the Senior Notes were used to repay allProspector Offshore Fund, Ltd. (“Prospector Fund”). The Prospector Fund is managed by Prospector, a registered investment advisor, and is consolidated within White Mountains’ financial statements. The Prospector Fund is an open-ended mutual fund that pursues investment opportunities in a variety of equity and equity-related instruments, with a principal focus on the term loansfinancial services sector and a portion ofspecial emphasis on the revolving loan (withinsurance industry.
At December 31, 2006 and 2005, the remainder repaid with cash on hand) underProspector Fund American's previous bank facility.
In September 2003, Fund American terminated its old revolving credit facility, which then consisted solely of an undrawn $175 million revolving credit line, and replaced it with a new $300 million revolving credit facility (the "Bank Facility"), under which both Fund American and the Company are permitted borrowers. In August 2004, Fund American restructured and re-syndicated the Bank Facility to increase the availability under the revolving credit facility to $400had $211 million and to extend the maturity from September 2006 to August 2009. As$177 million of December 31, 2004, the Bank Facility was undrawn.total assets and accounted for $59 million and $55 million of White Mountains’ net assets, respectively.
As part of the financing for the OneBeacon Acquisition, Berkshire Hathaway, Inc. ("Berkshire") invested a total of $300 million in cash, of which (1) $225 million was for the purchase of preferred stock of Fund American (the "Berkshire Preferred Stock"), which has a $300 million redemption value; and (2) $75 million was for the purchase of warrants to acquire 1,724,200 Common Shares of the Company (the "Warrants"). The Berkshire Preferred Stock is entitled to a dividend of no less than 2.35% per quarter and is mandatorily redeemable on May 31, 2008. During 2004, Berkshire exercised its warrants for $294 million in cash.
Also as part of the financing of the OneBeacon Acquisition, Zenith Insurance Company ("Zenith") purchased $20 million in cumulative non-voting preferred stock of FAEH (the "Zenith Preferred Stock"). The Zenith Preferred Stock is entitled to a dividend of no less than a 2.5% per quarter through June 30, 2007 and a dividend of no less than 3.5% per quarter thereafter. The Zenith Preferred Stock is mandatorily redeemable on May 31, 2011. At the Company's option, the Zenith Preferred Stock may be redeemed on June 30, 2007.
In October 1999, White Mountains acquired the group of companies included in the International American Group, which included American Centennial, British Insurance Company and Peninsula.Peninsula Insurance Company (“Peninsula”).
Delaware-domiciled American Centennial and Cayman Island-domiciled British Insurance Company are property and casualty insurance and reinsurance companies in run-off. At December 31, 20042006 and 2003,2005, American Centennial had $61.3$80 million and $61.1$77 million of total assets and $21.0$13 million and $22.6$17 million of shareholder'sshareholder’s equity, respectively. At December 31, 20042006 and 2003,2005, British Insurance Company had $33.4$37 million and $25.7$38 million of total assets and $4.5$8 million and $5.6$6 million of shareholder'sshareholder’s equity, respectively.
In January 2004, White Mountains sold Peninsula, which is a Maryland-domiciled property and casualty insurer, for $23.3$23 million. AtFor the year ended December 31, 2003, Peninsula had $60.6 million of total assets and $21.7 million of shareholder's equity, respectively. For the years ended December 31, 2003 and 2002, Peninsula had $34.1 million and $29.5$34 million of net written premiums, respectively.premiums.
WTM Bank Facility
The Company and White Mountains Re Group, Ltd. are both permitted borrowers under a $500 million revolvingINVESTMENTS
credit facility (the “WTM Bank Facility”), which matures in November 2011. As of December 31, 2006, White Mountains had $320 million of debt outstanding under the WTM Bank Facility.
White Mountains’ investment portfoliosphilosophy is to maximize its after-tax total risk-adjusted return over the long term. Under this approach, each dollar of after-tax investment income and realized and unrealized gains and losses is valued equally. White Mountains' insurance and reinsurance operations consist primarilyMountains’ investment portfolio mix as of December 31, 2006 consisted in large part of high-quality, fixed maturity investments but also consist, in part, ofand short-term investments, commonas well as equity securitiesinvestments and other investments, (principally investments insuch as hedge funds, limited partnership interests).partnerships and private equities. White Mountains'Mountains’ management believes that prudent levels of investments in common equity securities and other investments within its investment portfolio are likely to enhance long-term after-tax total returns without significantly increasing the risk profile of the portfolio when considered over long periods of time and balanced with leverage and insurance risk considerations. White Mountains seeks to maximize after-tax risk-adjusted returns over the long term.portfolio.
At December 31, 2004, approximately 99% of White Mountains' fixed maturity investments received an investment grade rating from Standard and Poor's ("S&P") or from Moody's Investor Services ("Moody's") if a given security is unrated by S&P. S&P and Moody's are two third party rating agencies that assess the credit quality of companies that have publicly issued debt. An investment grade rating, which is indicative of a strong credit profile of an issuer, is defined as "BBB-" (Adequate, the 10th highest of 24 ratings) or better by S&P and "Baa3" (Adequate, the 10th highest of 21 ratings) or better by Moody's. White Mountains expects to continue to invest primarily in high quality, fixed maturity investments. Nearly all the fixed maturity investments currently held by White Mountains are publicly traded, and as such are considered to be liquid.
At December 31, 2004 White Mountains' consolidated investment portfolio consisted of $7,900.0 million (75%) of fixed maturity investments, $1,058.2 million (10%) of short-term investments, $1,043.9 million (10%) of common equity securities and $527.4 million (5%) of other investments. White Mountains' fixed maturity investments at December 31, 2004 consisted principally of corporate debt securities (49%), U.S. government and agency securities (30%), foreign government obligations (10%), mortgage-backed securities (9%) and preferred equity securities and municipal bonds (2%).
White Mountains' investment philosophy is to invest all assets with a view towards maximizing its after-tax total return over extended periods of time. Under this approach, each dollar of after-tax investment income, realized and unrealized gains and losses is valued equally. White Mountains'Mountains’ overall fixed maturity investment strategy is to purchase securities that are attractively priced in relation to perceived credit risks. White Mountains generallyalso actively manages the interest rate risk associated with holding fixed maturity investments by actively monitoring and maintaining the average duration of the portfolio, with a view towards achieving an adequateabout 2 years at December 31, 2006, including short-term investments, to seek the highest after-tax, risk-adjusted total returns.
Prospector’s equity investment strategy is to maximize absolute risk-adjusted total return without subjectingthrough investments in a variety of equity and equity-related instruments, using bottom-up, value discipline. Preservation of capital is of the utmost importance. Using a value orientation, White Mountains invests in relatively concentrated positions in the United States and other developed markets.
Trust account investments
In connection with the OneBeacon Offering, Fund American and FAEH each established an irrevocable grantor trust. The assets of each trust is solely dedicated to the satisfaction of the payment of dividends and redemption amounts on, respectively, $300 million liquidation preference of Fund American’s Berkshire Preferred Stock, and $20 million liquidation preference of FAEH’s Zenith Preferred Stock. Fund American and FAEH funded their respective trusts with cash and purchased a portfolio to an unreasonable level of interest rate risk. At December 31, 2004, the duration of White Mountains' fixed maturity investmentssecurities issued by the U.S. government and short-term investments was approximately 3 years.government sponsored enterprises, the scheduled interest and principal payments of which are sufficient to pay when due all amounts required under the terms of the Berkshire Preferred Stock and the Zenith Preferred Stock, respectively (including the mandatory redemption of the Berkshire Preferred Stock in May 2008 and the optional redemption of the Zenith Preferred Stock in June 2007, which White Mountains will exercise). See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources.”
Montpelier Re
Montpelier Re Holdings Ltd. ("Montpelier")
In December 2001, White Mountains, the Benfield Group plc and several other private investors established Montpelier Re and its wholly ownedwholly-owned subsidiary Montpelier Reinsurance Ltd. ("Montpelier Re"). Montpelier Re is a Bermuda-domiciled insurance and reinsurance company that was formed with approximately $1.0 billion in capital to respond to the then favorable underwriting and pricing environment in the reinsurance industry. Montpelier Re has initially focused on property reinsurance business. Montpelier Re is rated "A" (Excellent, the third highest of fifteen ratings) by A.M. Best. On October 15, 2002, Montpelier Re successfully completed an initial public offering and its common shares are listed on the New York Stock Exchange. White Mountains initially invested $180 million in Montpelier Re in exchange for 10.8 million common shares and warrants to acquire 4.8 million additional common shares of Montpelier.Montpelier Re.
During the first quarter of 2004, White Mountains purchased additional warrants to acquire 2.4 million common shares of Montpelier Re from an existing warrant holder for $54 million in cash, thereby raising the total number of Montpelier Re warrants owned by White Mountains to 7.2 million.
Also during the first quarter of 2004, White Mountains sold 4.5 million common shares of Montpelier Re to third parties. As a result of this sale, as well as changes to the composition of the Board of Directors of both Montpelier Re and White Mountains, White Mountains changed the method of accounting for its remaining common share investment in Montpelier Re as of March 31, 2004 from an equity method investment in an unconsolidated affiliate to a common equity security classified as available for sale and carried at fair value. Also during
During the firstthird quarter of 2004,2006, White Mountains purchasedsold an additional warrants to acquire 2.45.4 million common shares of its common share investment in Montpelier from an existing warrant holder for $54.1 million in cash,Re to third parties, thereby raisingreducing the total number of such warrantsMontpelier Re common shares owned by White Mountains to 7.20.9 million. The
At December 31, 2006 and 2005, White Mountains’ investment in Montpelier Re warrants have an exercise price of $16.67 per share (as adjusted for stock splits) and are exercisable until December 2011.common shares totaled $67 million and $167 million, respectively.
Investments in Unconsolidated Affiliates
Symetra Financial Corporation ("Symetra")
On August 2, 2004, White Mountains, Berkshire and several other private investors capitalized Symetra in order to purchase the life and investment operations of Safeco Corporation for $1.35 billion. The acquired companies, which are now operating under the Symetra brand, focus mainly on group insurance, individual life insurance, structured settlements and retirement services. Symetra had an initial capitalization of approximately $1.4 billion, consisting of $1,065 million of common equity andequityand $315 million of debt. White Mountains invested $194.7$195 million in Symetra in exchange for 2.0 million common shares of Symetra. In addition, White Mountains and Berkshire each received warrants to acquire an additional 1.1 million common shares of Symetra at $100 per share. White Mountains owns approximately 19% of the outstanding common shares of Symetra and approximately 24% of Symetra on a fully-converted basis including the warrants. Three White Mountains designees serve on Symetra'sSymetra’s eight member board of directors.
Symetra'sSymetra’s total revenues and net income for the years ended December 31, 2006 and 2005 were $1,564 million and $159 million, respectively, and $1,628 million and $146 million, respectively and for the five months ended December 31, 2004 were $701.9$702 million and $54.3$58 million, respectively. Symetra'sSymetra’s total assets and shareholders'shareholders’ equity as of December 31, 20042006 and 2005 were $22.1$20.1 billion and $1.3 billion, respectively, and $21.0 billion and $1.4 billion, respectively. Symetra’s principal insurance operating subsidiaries are rated “A” (Excellent, the third highest of fifteen ratings) by A.M. Best and “A-” (Strong, the seventh highest of twenty-one ratings) by Standard & Poor’s.
As of December 31, 2004,2006 and 2005, White
Mountains' Mountains’ total investment in Symetra was $248.4$307 million and $288 million, respectively, excluding $56.6($4) million and $24 million, respectively, of equity in unrealized (losses) and gains from Symetra'sSymetra’s fixed maturity investments. During 2006, White Mountains received cash dividends from Symetra of $16 million on its common share investment and $9 million on its warrant investment.
Delos
On August 3, 2006, White Mountains Re sold Sirius America to Delos. As part of the transaction, White Mountains invested $32 million, representing an equity interest of approximately 18% of Delos, which is accounted for as an equity method investment in an unconsolidated affiliate. As of December 31, 2006, White Mountains’ total investment in Delos was $32 million.
Main Street America Holdings, Inc. ("MSA"(“MSA”)
MSA is a subsidiary of National GrangeMain Street America Group Mutual Insurance Company ("NGM"Holdings, Inc. (“Main Street Group”), a New Hampshire-domiciledFlorida-domiciled mutual property and casualty insurance holding company, which insures risks located primarily in New York, Massachusetts, Connecticut, Pennsylvania, New Hampshire, Virginia and Florida. White Mountains owns owned 50% of the outstanding common stock of MSA and accounts for this investment using the equity method.from March 1998 until October 2006, when White Mountains'Mountains received a $70 million cash dividend from MSA, following which White Mountains sold its 50% common stock investment in MSA was $161.6 million and $142.8 million at December 31, 2004 and December 31, 2003, respectively. MSA's net written premiums totaled $454.5 million, $427.6 million and $357.3 million and its net income (loss) was $29.6 million, $29.3 million and ($13.2)to Main Street America Group, Inc. (“MSA Group”) for (i) $70.0 million in 2004, 20039.0% non-voting cumulative perpetual preferred stock of MSA Group, and 2002. MSA's total assets(ii) 4.9% of the common stock of MSA Group. As a result of this transaction, White Mountains no longer accounts for its investment in MSA under the equity method as of December 31, 2004 and 2003 were $978.1 million and $875.1 million and its shareholders' equity was $323.3 million and $290.4 million. The principal insurance operating subsidiaries of NGM and MSA are rated "A" (Excellent, the third highest of fifteen ratings) by A.M. Best.an investment in an unconsolidated affiliate.
United States
White Mountains'Mountains’ U.S.-based insurance and reinsurance operating subsidiaries are subject to regulation and supervision in each of the states where they are domiciled and licensed to conduct business. Generally, regulatory authorities have broad supervisory and administrative powers over such matters as licenses, standards of solvency, premium rates, policy forms, investments, security deposits, methods of accounting, form and content of financial statements, reserves for unpaid loss and LAE, reinsurance, minimum capital and surplus requirements, dividends and other distributions to shareholders, periodic examinations and annual and other report filings. In general, such regulation is for the protection of policyholders rather than shareholders. White Mountains believes that it is in compliance with all applicable laws and regulations pertaining to its business that would have a material effect on its financial position in the event of non-compliance.
Over the last several years most states have implemented laws that establish standards for current, as well as continued, state accreditation. In addition, the NAIC has adopted risk-based capital ("RBC"(“RBC”) standards for property and casualty insurers as a means of monitoring certain aspects affecting the overall financial condition of insurance companies. The current RBC ratios of White Mountains'Mountains’ active insurance and reinsurance operating subsidiaries are satisfactory and such ratios are not expected to result in any adverse regulatory action. White Mountains is not aware of any current recommendations by regulatory authorities that would be expected to have a material effect on its results of operations or liquidity.
As a condition of its license to do business in certain states, White Mountains'Mountains’ insurance operating subsidiaries are required to participate in mandatory shared market mechanisms. Each state dictates the types of insurance and the level of coverage that must be provided. The most common type of shared market mechanism in which White Mountains is required to participate is an assigned risk plan. Many states operate assigned risk plans. The NYAIP and New Jersey commercial automobile insurance plans are two such shared market mechanisms in which OneBeacon is required to participate. These plans require insurers licensed within the applicable state to accept the applications for insurance policies of individuals who are unable to obtain insurance in the voluntary market. The total number of such policies an insurer is required to accept is based on its market share of voluntary business in the state. Underwriting results related to assigned risk plans are typically adverse. Accordingly, OneBeacon may be required to underwrite policies with a higher risk of loss than it would otherwise accept.
Reinsurance facilities are another type of shared market mechanism. Reinsurance facilities require an insurance company to accept all applications submitted by certain state designated agents. The
reinsurance facility then allows the insurer to cede some of its business to the reinsurance facility so that the facility will reimburse the insurer for claims paid on ceded business. Typically, however, reinsurance facilities operate at a deficit, which is funded through assessments against the same insurers. The Massachusetts Commonwealth Automobile Reinsurers is one such reinsurance facility in which OneBeacon is compelled to participate. As a result, OneBeacon could be required to underwrite policies with a higher risk of loss than it would otherwise voluntarily accept.
The insurance laws of many states generally provide that property and casualty insurers doing business in those states belong to a statutory property and casualty guaranty association. The purpose of these guaranty associations is to protect policyholders by requiring that solvent property and casualty insurers pay certain insurance claims of insolvent insurers. These guaranty associations generally pay these claims by assessing solvent insurers
proportionately based on the insurer'sinsurer’s share of voluntary written premiums in the state. While most guaranty associations provide for recovery of assessments through rate increases, surcharges or premium tax credits, there is no assurance that insurers will ultimately recover these assessments. At December 31, 2004,2006, the reserve for such assessments at OneBeacon totaled $18.3$17 million.
Many states have laws and regulations that limit an insurer'sinsurer’s ability to exit a market. For example, certain states limit a private passenger automobile insurer'sinsurer’s ability to cancel and non-renew policies. Furthermore, certain states prohibit an insurer from withdrawing from one or more lines of insurance business in the state, unless the state regulators approve the company'scompany’s withdrawal plans. State regulators may refuse to approve such plans on the grounds that they could lead to market disruption. Such laws and regulations may restrict White Mountains'Mountains’ ability to exit unprofitable markets.
Nearly all states have insurance laws requiring personal property and casualty insurers to file price schedules, policy or coverage forms, and other information with the state'sstate’s regulatory authority. In most cases, such price schedules and/or policy forms must be approved prior to use. While pricing laws vary from state to state, their objectives are generally to ensure that prices are adequate, not excessive and not discriminatory. For example, Massachusetts, a state where OneBeacon has a sizable presence, sets virtually all aspects of automobile insurance rates, including agent commissions. Such regulations often challenge an insurers ability to adequately price its product, which often leads to unsatisfactory underwriting results.
White Mountains'Mountains’ U.S. insurance and reinsurance operating subsidiaries are subject to state laws and regulations that require investment portfolio diversification and that limit the amount of investment in certain categories. Non-compliance may cause non-conforming investments to be non-admitted in measuring statutory surplus and, in some instances, may require divestiture. White MountainsMountains’ investment portfolio at December 31, 20042006 complied with such laws and regulations in all material respects.
One of the primary sources of cash inflows for the Company and certain of its intermediary holding companies is dividends received from its insurance and reinsurance operating subsidiaries. Under the insurance laws of the states under which White Mountains'Mountains’ U.S.-based insurance and reinsurance subsidiaries are domiciled, an insurer is restricted with respect to the timing or the amount of dividends it may pay without prior approval by regulatory authorities. See "“Dividend Capacity"Capacity” in the "“LIQUIDITY AND CAPITAL RESOURCES"RESOURCES” section of Item 7 for further discussion.
White Mountains is subject to regulation under certain state insurance holding company acts. These regulations contain reporting requirements relating to the capital structure, ownership, financial condition and general business operations of White Mountains'Mountains’ insurance and reinsurance operating subsidiaries. These regulations also contain special reporting and prior approval requirements with respect to certain transactions among affiliates. Since the Company is an insurance holding company, the domiciliary states of its insurance and reinsurance operating subsidiaries impose regulatory application and approval requirements on acquisitions of Common SharesWhite Mountains’ common shares which may be deemed to
confer control over those subsidiaries, as that concept is defined under the applicable state laws. Acquisition of 10% of White Mountains’ common shares, or in some states as little as 10% of White Mountains' Common Shares5%, may be deemed to confer control under the insurance laws of some jurisdictions, and the application process for approval can be extensive and time consuming.
While the federal government does not directly regulate the insurance business, federal legislation and administrative policies affect the insurance industry. In addition, legislation has been introduced from time to time in recent years that, if enacted, could result in the federal government assuming a more direct role in the regulation of the insurance industry. A federal law enacted in 2002 and extended in 2005, the Terrorism Act, provides a "back-stop"“back-stop” to property and casualty insurers in the event of future terrorist acts perpetrated by foreign agents or interests. The law limits the industry's aggregate liability by requiring the federal government to share 90 percent of certified losses once a company meets a specific retention or deductible as determined by its prior year's direct written premiums and limits the aggregate liability to be paid by the government and industry without further action by Congress at $100 billion. In exchange for this "back-stop"“back-stop”, primary insurers are required to make coverage available to commercial insureds for losses from acts of non-domestic terrorism as specified in the Terrorism Act. OneBeacon is actively complying with the requirements of the Terrorism Act in order to ensure its ability to be reimbursed by the federal government for any losses it may incur as a result of future terrorist acts. (See "Terrorism" “Terrorism” in the "ONEBEACON" `section“ONEBEACON” section of this Item for a further discussion of the Terrorism Act.)Act). A number of additional enacted and pending legislative measures could lead to increased consolidation and increased competition for business and for capital in the financial services industry. White Mountains cannot predict whether any state or federal measures will be adopted to change the nature or scope of the regulation of the insurance business or what effect such measures may have on its insurance and reinsurance operations.
Environmental cleanup of polluted waste sites is subject to both federal and state regulation. The Comprehensive Environmental Response Compensation and Liability Act of 1980 ("Superfund"(“Superfund”) and comparable state statutes govern the cleanup and restoration of waste sites by potentially responsible parties ("PRPs"(“PRPs”). These laws can impose liability for the entire cost of clean-up upon any responsible party, regardless of fault. The insurance industry in general is involved in extensive litigation regarding coverage issues arising out of the cleanup of waste sites by insured PRPs and as a result has disputed many such claims. From time to time, comprehensive Superfund reform proposals are introduced in Congress, but none has yet been enacted. At this time, it remains unclear as to whether Superfund reform legislation will be enacted or that any such legislation will provide for a fair, effective and cost-efficient system for settlement of Superfund related claims. The NICO Cover includes coverage for such exposures at OneBeacon; however, there can be no assurance that the coverage provided under the NICO Cover will ultimately prove to be adequate.
Sweden
Sirius International is subject to regulation and supervision by the Swedish Financial Supervisory Authorities (the “FSA”). As Sweden is a member of the European Union (the “EU”), this supervision covers all locations within the EU. Generally, the FSA has broad supervisory and administrative powers over such matters as licenses, standard of solvency, investments, method of accounting, form and content of financial statements, minimum capital and surplus requirements, annual and other report filings. In general, such regulation is for the protection of policyholders rather than shareholders. White Mountains believes that it is in compliance with all applicable laws and regulations pertaining to its business that would have a material effect on its financial position in the event on non-compliance.
In accordance with provisions of Swedish law, Sirius International can voluntarilyis permitted to transfer up to the full amount ofits pretax earnings, or a portion thereof,pre-tax income, subject to certain limitations, into an untaxed reserve referred to as a safety reserve. The safety reserve, is a Swedish regulatory concept that has no equivalent under GAAP. Accordingly, underwhich equaled $1.3 billion at December 31, 2006. Under GAAP, an amount equal to Sirius International'sthe safety reserve, of $1.1 billion at December 31, 2004, net of the related deferred tax liability established at the statutory Swedish tax rate of 28%, is classified as shareholders’ equity. Generally, this deferred tax liability is only required to be paid by Sirius International if it fails to maintain predetermined levels of premium writings and loss reserves in future years. As a result of the indefinite deferral of these taxes, Swedish regulatory authorities do not apply any taxes to the safety reserve when calculating solvency capital under Swedish insurance regulations.
RATINGS
Accordingly, under local statutory requirements, an amount equal to the deferred tax liability on Sirius International’s safety reserve ($351 million at December 31, 2006) is included in solvency capital.
Insurance and reinsurance companies are evaluated by various rating agencies in order to measure each company'scompany’s financial strength. Higher ratings generally indicate financial stability and a stronger ability to pay claims. A.M. Best currently rates OneBeacon's, White Mountains Re's and Esurance's principal operating insurance subsidiaries "A" (Excellent, the third highest of fifteen ratings) and NFU "A-" (Excellent, the fourth highest of fifteen ratings). White Mountains believes that strong ratings are important factors in the marketing of insurance and reinsurance products to agents and consumers and ceding companies.
Rating agencies also evaluate the general creditworthiness of debt securities issued by companies. Their ratings are then used by existing or potential investors to assess the likelihood of repayment on a particular debt issue. White Mountains believes that strong debt ratings are important factors that provide better financial flexibility when issuing new debt or restructuring existing debt.
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The following table presents the financial strength ratings assigned to White Mountains’ principal insurance and reinsurance operating subsidiaries and the debt ratings for Fund American’s Senior Notes as of February 28, 2007:
Sirius | Fund American | ||||||||||
OneBeacon | Folksamerica Re | International | Esurance | Senior Notes (5) | |||||||
A.M. Best | |||||||||||
Rating (1) | “A” (Excellent) | “A-” (Excellent) | “A” (Excellent) | “A” (Excellent) | “bbb” (Very Good) | ||||||
Outlook | Stable | Stable | Stable | Stable | Stable | ||||||
Standard & Poor’s | |||||||||||
Rating (2) | “A” (Strong) | “A-” (Strong) | “A-” (Strong) | No Rating | “BBB” (Adequate) | ||||||
Outlook | Stable | Stable | Stable | N/A | Stable | ||||||
Moody’s | |||||||||||
Rating (3) | “A2” (Good) | “A3” (Good) | “A3” (Good) | “A2” (Good) | “Baa2” (Medium Grade) | ||||||
Outlook | Stable | Stable | Stable | Stable | Stable | ||||||
Fitch | |||||||||||
Rating (4) | “A” (Strong) | “A-” (Strong) | “A-” (Strong) | “A” (Strong) | “BBB” (Good) | ||||||
Outlook | Stable | Stable | Stable | Stable | Stable |
(1) “A” is the third highest of fifteen financial strength ratings, “A-” is the fourth highest of fifteen financial strength ratings and “bbb” is the EMPLOYEES
ninth highest of twenty-two creditworthiness ratings assigned by A.M. Best.
(2) “A” is the sixth and “A-” is the seventh highest of twenty-one financial strength ratings and “BBB” is the ninth highest of twenty-two creditworthiness ratings assigned by Standard & Poor’s.
(3) “A2” is the sixth and “A3” is the seventh highest of twenty-one financial strength ratings and “Baa2” is the ninth highest of twenty-one creditworthiness ratings assigned by Moody’s.
(4) “A” is the sixth and “A-” is the seventh highest of twenty-four financial strength ratings and “BBB” is the ninth highest of twenty-three creditworthiness ratings assigned by Fitch.
(5) The Senior Notes issued by Fund American are fully and unconditionally guaranteed as to the payment of principal and interest by the Company.
As of December 31, 2004,2006, White Mountains employed 5,0305,292 persons (consisting of 6536 persons at the Company and its intermediate holding companies, 3,8683,243 persons at OneBeacon, 542546 persons at White Mountains Re, 5421,415 persons at Esurance, 29 persons at WM Advisors, 5 persons at WM Life Re, 5 persons at Galileo and 13 persons at the International American Group companies). Management believes that White Mountains has satisfactory relations with its employees.
The Company is subject to the informational reporting requirements of the Exchange Act. In accordance therewith, the Company files reports, proxy statements and other information with the SEC. These documents are available at www.whitemountains.comwww.whitemountains.com. shortly after such material is electronically filed with or furnished to the SEC. In addition, the Company'sCompany’s code of business conduct and ethics as well as the various charters governing the actions of certain of the Company'sCompany’s Committees of its Board of Directors, including its Audit Committee, Compensation Committee and its Nominating and Governance Committee, are available at www.whitemountains.com.
The Company will provide to any shareholder, upon request and without charge, copies of these documents (excluding any applicable exhibits unless specifically requested). Written or telephone requests should be directed to the Corporate Secretary, White Mountains Insurance Group, Ltd., 80 South Main Street, Hanover, New Hampshire 03755, telephone number (603) 640-2200. Additionally, all such documents are physically available at the Company'sCompany’s registered office at Clarendon House, 2 Church Street, Hamilton, HM 11 Bermuda.
The information contained in this report may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21 E of the Securities Exchange Act of 1934. See “FORWARD-LOOKING STATEMENTS” (page 88) for specific important factors that could cause actual results to differ materially from those contained in forward-looking statements. The Company’s actual future results and trends may differ materially depending on a variety of factors including, but not limited to, the risks and uncertainties discussed below.
Unpredictable catastrophic events could adversely affect our financial condition or results of operations.
We write insurance and reinsurance policies that cover catastrophic events. Our policies cover unpredictable natural and other disasters, such as hurricanes, windstorms, earthquakes, floods, fires and explosions. In recent years, the frequency of major weather-related catastrophes has increased. Our exposure to catastrophic windstorm damage in the Northeastern United States is the largest single natural risk to our business. We also have significant exposure to a major California earthquake and windstorm damage in Northern Europe, the United States Atlantic Coast (i.e., Delaware to Florida) and the United States Gulf Coast region (i.e., Florida to Texas). In addition, we are exposed to losses from terrorist attacks, such as the attacks on the United States on September 11, 2001.
The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event. Increases in the value of insured property, the effects of inflation and changes in cyclical weather patterns may increase the severity of claims from catastrophic events in the future. Claims from catastrophic events could reduce our earnings and cause substantial volatility in our results of operations for any fiscal quarter or year and adversely affect our financial condition. Our ability to write new insurance and reinsurance policies could also be impacted as a result of corresponding reductions in our surplus levels.
We manage our exposure to catastrophic losses by limiting the aggregate insured value of policies in geographic areas with exposure to catastrophic events and by estimating a PML for many different catastrophe scenarios and by buying reinsurance. To manage and analyze aggregate insured values and PML, we use a variety of tools and analyses, including catastrophe modeling software packages. Our estimates of PML are dependent on many variables, including assumptions about the demand surge and storm surge, loss adjustment expenses, insurance-to-value and storm intensity in the aftermath of weather-related catastrophes utilized to model the event, the relationship of the actual event to the modeled event and the quality of data provided to us by ceding companies (in the case of our reinsurance operations). Accordingly, if our assumptions about the variables are incorrect, the losses we might incur from an actual catastrophe could be materially higher than our expectation of losses generated from modeled catastrophe scenarios and our financial condition and results of operations could be materially adversely affected.
We may not be able to successfully alleviate risk through reinsurance and retrocessional arrangements. Additionally, we may be unable to collect all amounts due from our reinsurers under our existing reinsurance and retrocessional arrangements.
We attempt to limit our risk of loss through reinsurance and retrocessional arrangements. Retrocessional arrangements refer to reinsurance purchased by a reinsurer to cover its own risks assumed from primary ceding companies. The availability and cost of reinsurance and retrocessional protection is subject to market conditions, which are outside of our control. As a result, we may not be able to successfully alleviate risk through these arrangements, which could have a material adverse effect on our financial condition and results of operations.
We are not relieved of our obligation to our policyholders or ceding companies by purchasing reinsurance. Accordingly, we are subject to credit risk with respect to our reinsurance and retrocessions in the event that a reinsurer is unable to pay amounts owed to us as a result of a deterioration in its financial condition. A number of reinsurers in the industry experienced such a deterioration in the aftermath of the 2001 terrorist attacks and the active 2005 hurricane season. It is possible that one or more of our reinsurers will be significantly adversely affected by future significant loss events, causing them to be unable to pay amounts owed to us. We also may be unable to recover amounts due under our reinsurance and retrocessional arrangements if our reinsurers choose to withhold payment due to a dispute or other factors beyond our control.
Our loss reserves maybe inadequate to cover our ultimate liability for losses and as a result our financial results could be adversely affected.
We are required to maintain adequate reserves to cover our estimated ultimate liabilities for loss and loss adjustment expenses. Loss and LAE reserves are typically comprised of (1) case reserves for claims reported and (2) IBNR reserves for losses that have occurred but for which claims have not yet been reported, or IBNR, which include a provision for expected future development on case reserves. These reserves are estimates based on actuarial and statistical projections of what we believe the settlement and administration of claims will cost based on facts and circumstances then known to us. Because of the uncertainties that surround estimating loss and LAE reserves, we cannot be certain that our reserves are adequate and actual claims and claim expenses paid might exceed our reserves due to the uncertainties that surround estimating loss and LAE reserves. If we determine in the future that our reserves are insufficient to cover our actual loss and LAE, we would have to strengthen our reserves, which could have a material adverse effect on our financial condition and results of operations.
For further discussion of our loss and LAE, including our asbestos and environmental reserves, see “Loss and Loss Adjustment Expenses” in “CRITICAL ACCOUNTING ESTIMATES” in Item 7.
We may not maintain favorable financial strength or creditworthiness ratings which could adversely affect our ability to conduct business.
Third party rating agencies assess and rate the financial strength, including claims-paying ability, of insurers and reinsurers. These ratings are based upon criteria established by the rating agencies and are subject to revision at any time at the sole discretion of the agencies. Some of the criteria relate to general economic conditions and other circumstances outside the rated company’s control. These financial strength ratings are used by policyholders, agents and brokers as an important means of assessing the suitability of insurers as business counterparties and have become an increasingly important factor in establishing the competitive position of insurance companies. These financial strength ratings do not refer to our ability to meet non-insurance obligations and are not a recommendation to purchase or discontinue any policy or contract issued by us or to buy, hold or sell our securities.
Rating agencies periodically evaluate us to confirm that we continue to meet the criteria of the ratings previously assigned to us. See “RATINGS” in Item 1 for a summary of financial strength ratings on our significant subsidiaries and creditworthiness ratings on our Senior Notes. A downgrade or withdrawal of our financial strength ratings could severely limit or prevent our insurance subsidiaries from writing new insurance or reinsurance policies or renewing existing insurance policies, which could have a material adverse effect on our financial condition and results of operations. A downgrade or withdrawal of our creditworthiness ratings could severely limit our ability to raise new debt or could make new debt more costly and/or have more restrictive conditions.
Additionally, the majority of White Mountains Re’s assumed reinsurance contracts contain optional cancellation, commutation and/or funding provisions that would be triggered if A.M. Best and/or S&P were to downgrade the financial strength ratings of either Folksamerica Re or Sirius International below “A-”. A client may choose to exercise these rights depending on, among other things, the reasons for such a downgrade, the extent of the downgrade, the prevailing market conditions, the degree of unexpired coverage, and the pricing and availability of replacement reinsurance coverage. We cannot predict in advance how many of our clients would actually exercise such rights or what effect such cancellations would have on our financial condition, results of operations and/or liquidity, but such an effect could be materially adverse.
Our debt, preferred stock and related service obligations could adversely affect our business.
As of December 31, 2006, we had approximately $1,108 million face value of indebtedness and $320 million face value of mandatorily redeemable preferred stock outstanding. In connection with the OneBeacon Offering, we established and funded trusts that are solely dedicated to the payment of dividends and redemption amounts of our outstanding mandatorily redeemable preferred stock with a deposit of U.S. government securities.
Our ability to meet our debt and related service obligations will depend on our future performance, which will be affected by financial, business, economic and other factors. We will not be able to control many of these factors, such as economic conditions and governmental regulation. We cannot be certain that our earnings will be sufficient to allow us to pay the principal and interest on our debt and meet our other obligations. If we do not have enough cash, we may be required to refinance all or part of our existing debt, sell assets, borrow more cash or sell equity. We cannot assure you that we will be able to accomplish any of these alternatives on terms acceptable to us, if at all.
We could incur additional indebtedness and issue additional preferred stock in the future. To the extent new debt, new preferred stock and other obligations are added to our and our subsidiaries’ current debt and preferred stock levels, the risks described in the previous paragraph would increase.
Our investment portfolio may suffer reduced returns or losses which could adversely affect our results of operations and financial condition. Any increase in interest rates or volatility in the equity and debt markets could result in significant losses in the fair value of our investment portfolio.
Our investment portfolio consists of fixed maturity securities, short-term investments, common equity securities and other investments such as hedge funds, limited partnerships and private equities. Our investment selections are designed to maximize after-tax, total risk-adjusted return over the long term; however, investing entails substantial risks. We cannot assure you that we will achieve our investment objectives, and our investment performance may vary substantially over time.
Investment returns are an important part of our growth in book value, and fluctuations in the fixed income or equity markets could impair our results of operations or financial condition. A significant period of time normally elapses between the receipt of insurance premiums and the disbursement of insurance claims. During this time, we generate investment income, consisting primarily of interest earned on fixed maturity investments and dividends earned on equity securities, by investing our capital as well as insurance premiums allocated to support unpaid loss and LAE reserves. We also recognize unrealized investment gains and losses on the securities we hold in our investment portfolio and we generate investment gains and losses from sales of securities from our investment portfolio.
The investment income and fair market value of our investment portfolio are affected by general economic and market conditions, including fluctuations in interest rates and volatility in the stock market. Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control. Although we attempt to manage the risks of investing in a changing interest rate environment, we may not be able to effectively mitigate interest rate sensitivity. In particular, a significant increase in interest rates could result in significant losses, realized or unrealized, in the fair value of our investment portfolio and, consequently, could have an adverse affect on our results of operations. In addition, we are exposed to changes in the level or volatility of equity prices that affect the value of securities or instruments that derive their value from a particular equity security, a basket of equity securities or a stock index. These conditions are outside of our control and could adversely affect the value of our investments and our results of operations and financial condition.
The property and casualty insurance and reinsurance industries are highly competitive and we may not be able to compete effectively in the future.
The property and casualty insurance and reinsurance industries are highly competitive and have, from time to time, experienced severe price competition. OneBeacon competes with numerous regional and national insurance companies, including The St. Paul Travelers Companies, Inc., Zurich Financial Services Group, CNA Financial Corporation, Hartford Financial Services Group, Inc., The Hanover Insurance Group, Inc., W.R. Berkley Corporation, The Chubb Corporation, The Progressive Corporation, Allstate Insurance Company, Liberty Mutual, American International Group, Inc. and the regional Farm Bureaus. White Mountains Re competes with numerous reinsurance companies throughout the world, including ACE Limited, Arch Capital Group Ltd., Endurance Specialty Holdings Ltd., Everest Re Group, Ltd., Hannover Ruckversicherung AG, Lloyd’s of London, Munich Re Group, Partner Re Ltd., Platinum Underwriters Holdings Ltd., Renaissance Re Holdings Ltd., Swiss Re Group, Transatlantic Holdings, Inc., XL Capital Ltd and General Reinsurance Corporation. Esurance competes with national and regional personal automobile insurance companies, though Esurance’s main competition comes from other direct writers like Progressive, GEICO, and 21st Century. Many of these competitors have greater financial, marketing and management resources than we do and have established long-term and continuing business relationships throughout the insurance industry, which can be a significant competitive advantage for them.
The agents upon whom OneBeacon relies compete with direct writers of insurance, who are often able to offer substantial discounts in pricing as compared to OneBeacon’s insurance products. If OneBeacon’s agents experience increased competition from direct writers of insurance, we in turn could be adversely affected if OneBeacon’s agents are unable to maintain a competitive position in their respective markets. In addition, substantial new capital and competitors have entered the reinsurance market in recent months, and we expect to face further competition in the future. If we are unable to maintain our competitive position, our insurance and reinsurance businesses may be adversely affected and we may not be able to compete effectively in the future.
We may suffer losses from unfavorable outcomes from litigation and other legal proceedings.
In the ordinary course of business, we are subject to litigation and other legal proceedings as part of the claims process, the outcomes of which are uncertain. We maintain reserves for these legal proceedings as part of our loss and LAE reserves. We also maintain separate reserves for legal proceedings that are not related to the claims process. In the event of an unfavorable outcome in one or more legal matters, our ultimate liability may be in excess of amounts we have currently reserved for and such additional amounts may be material to our results of operations and financial condition. For a description of our material legal proceedings, see “Item 3. Legal Proceedings.”
As industry practices and legal, judicial, social and other conditions change, unexpected and unintended issues related to claims and coverage may emerge. These issues may adversely affect our financial condition and results of operations by either extending coverage beyond our underwriting intent or by increasing the number and size of claims. In some instances, these changes may not become apparent until some time after we have issued insurance and reinsurance contracts that are affected by the changes.
Regulation may restrict our ability to operate.
The insurance and reinsurance industries are subject to extensive regulation under U.S., state and foreign laws. Governmental agencies have broad administrative power to regulate many aspects of the insurance business, which include premium rates, marketing practices, advertising, policy forms and capital adequacy. These governmental agencies are concerned primarily with the protection of policyholders rather than shareholders. Insurance laws and regulations impose restrictions on the amount and type of investments, prescribe solvency standards that must be met and maintained and require the maintenance of reserves. In our insurance underwriting, we rely heavily upon information gathered from third parties such as credit report agencies and other data aggregators. The use of this information is also highly regulated and any changes to the current regulatory structure could materially affect how we underwrite and price premiums.
Changes in laws and regulations may restrict our ability to operate and/or have an adverse effect upon the profitability of our business within a given jurisdiction. For example, legislation has been recently passed in Florida that significantly changes the reinsurance protection provided by the Florida Hurricane Catastrophe Fund to companies that write business in Florida. The new legislation also contains a provision that will disallow insurers that write homeowners insurance elsewhere in the United States to write automobile insurance in Florida unless they also write homeowners insurance in Florida. The impact of the new legislation, which could be adverse, upon White Mountains’ insurance and reinsurance business in Florida cannot be determined until regulations interpreting the legislation are promulgated. In addition, state and Federal legislation has been proposed to establish catastrophe funds and underwriting in coastal areas which could impact our business.
Government authorities are continuing to investigate the insurance and reinsurance industries, which may adversely affect our business.
Recently, the insurance industry has been heavily scrutinized by various regulatory bodies, including State Attorneys General and state insurance departments, for alleged illegal conduct surrounding a number of topics, including producer compensation arrangements and the sale and use of finite reinsurance.
During 2005 and 2004, OneBeacon received subpoenas from the Attorneys General of Massachusetts, New York and Connecticut requesting documents and seeking information relating to the conduct of business between insurance brokers and OneBeacon. Some of our other subsidiaries have also received information requests from various state insurance departments regarding producer compensation arrangements. We have cooperated with all of these subpoenas and information requests. We believe these requests to be part of the industry-wide investigation regarding industry sales practices. These investigations of the insurance and reinsurance industries, whether involving our companies specifically or not, together with any legal or regulatory proceedings related settlement, or industry reforms, may materially adversely affect our business and future prospects.
In recent years we have successfully created shareholder value through acquisitions and dispositions of insurance and reinsurance entities. We may not be able to continue to create shareholder value through such transactions in the future.
In the past several years, we have completed numerous acquisitions and dispositions of insurance and reinsurance entities, many of which have contributed significantly to our growth in tangible book value. Failure to identify and complete future acquisition and disposition opportunities could limit our ability to achieve our target returns. Even if we were to identify and complete future acquisition opportunities, there is no assurance that such acquisitions will ultimately achieve their anticipated benefits.
We may become subject to taxes in Bermuda after 2016.
We may become subject to taxes in Bermuda after 2016. We have received a standard assurance from the Bermuda Minister of Finance, under Bermuda’s Exempted Undertakings Tax Protection Act 1966, that if any legislation is enacted in Bermuda that would impose tax computed on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then the imposition of any such tax will not be applicable to us or to any of our operations or our shares, debentures or other obligations until March 28, 2016. Given the limited duration of the Minister of Finance’s assurance, we cannot be certain that we will not be subject to any Bermuda tax after March 28, 2016. In the event that we become subject to any Bermuda tax after such date, it would have a material adverse effect on our financial condition and results of operations.
Changes in tax laws or tax treaties may cause more of the income of certain non-U.S. companies in our group to become subject to taxes in the United States.
The taxable income of our U.S. subsidiaries is subject to U.S. Federal, state and local income tax and other taxes. The income of the non-U.S. companies in our group is generally not subject to tax in the United States other than withholding taxes on interest and dividends. Certain of our non-U.S. companies are eligible for the benefits of tax treaties between the United States and other countries. We believe our non-U.S. companies will continue to be eligible for treaty benefits. However, it is possible that factual changes or changes to U.S. tax laws or changes to tax treaties that presently apply to our non-U.S. companies could impact income subject to tax in the United States. Similarly, changes to the applicable tax laws, treaties or regulations of other countries could subject the income of members of our group to higher rates of tax outside the United States.
We have significant foreign operations that expose us to certain additional risks, including foreign currency risks and political risk.
White Mountains Re, in particular Sirius International, conducts a significant portion of its business outside of the United States. As a result, a substantial portion of our assets, liabilities, revenues and expenses are denominated in currencies other than the U.S. dollar and are therefore subject to foreign currency risk. Our foreign currency risk cannot be eliminated entirely and significant changes in foreign exchange rates may adversely affect our financial condition or our results of operations.
Our foreign operations are also subject to legal, political and operational risks that may be greater than those present in the United States. As a result, our operations at these foreign locations could be temporarily or permanently disrupted.
We depend on our key personnel to manage our business effectively and they may be difficult to replace.
Our performance substantially depends on the efforts and abilities of our management team and other executive officers and key employees. Furthermore, much of our competitive advantage is based on the expertise, experience and know-how of our key management personnel. We do not have fixed term employment agreements with any of our key employees nor key man life insurance and the loss of one or more of these key employees could adversely affect on our business, results of operations and financial condition. Our success also depends on the ability to hire and retain additional personnel. Difficulty in hiring or retaining personnel could adversely affect our results of operations and financial condition.
Bermuda law differs from the laws in effect in the United States and may afford less protection to shareholders.
We are organized under the laws of Bermuda, and a portion of our assets will be located outside the United States. As a result, it may not be possible for our shareholders to enforce court judgments obtained in the United States against us based on the civil liability provisions of the Federal or state securities laws of the United States, either in Bermuda or in countries other than the United States where we will have assets. In addition, there is some doubt as to whether the courts of Bermuda and other countries would recognize or enforce judgments of U.S. courts obtained against us or our directors or officers based on the civil liabilities provisions of the Federal or state securities laws of the United States or would hear actions against us or those persons based on those laws.
Our corporate affairs are governed by the Companies Act 1981 of Bermuda, or the Companies Act. The Companies Act differs in some material respects from laws generally applicable to U.S. corporations and shareholders, including the provisions relating to interested directors, amalgamations, mergers and acquisitions, takeovers, shareholder lawsuits and indemnification of directors. Generally, the duties of directors and officers of a Bermuda company are owed to the company only. Shareholders of Bermuda companies generally do not have rights to take action against directors or officers of the company and may only do so in limited circumstances. Class actions and derivative actions are generally not available to shareholders under Bermuda law. The Bermuda courts, however, would ordinarily be expected to permit a shareholder to commence an action in the name of a company to remedy a wrong to the company where the act complained of is alleged to be beyond the corporate power of the company or illegal, or would result in the violation of the company’s memorandum of association or bye-laws. Furthermore, consideration would be given by a Bermuda court to acts that are alleged to constitute a fraud against the minority shareholders or, for instance, where an act requires the approval of a greater percentage of the company’s shareholders than that which actually approved it.
When the affairs of a company are being conducted in a manner that is oppressive or prejudicial to the interests of some part of the shareholders, one or more shareholders may apply to the Supreme Court of Bermuda, which may make such order as it sees fit, including an order regulating the conduct of the company’s affairs in the future or ordering the purchase of the shares of any shareholders by other shareholders or by the company. Additionally, under our bye-laws and as permitted by Bermuda law, each shareholder has waived any claim or right of action against our directors or officers for any action taken by directors or officers in the performance of their duties, except for actions involving fraud or dishonesty. In addition, the rights of our shareholders and the fiduciary responsibilities of our directors under Bermuda law are not as clearly established as under statutes or judicial precedent in existence in jurisdictions in the United States, particularly the State of Delaware. Therefore, our shareholders may have more difficulty protecting their interests than would shareholders of a corporation incorporated in a jurisdiction within the United States.
Item 1B. Unresolved Staff Comments
As of the date of this report, the Company had no unresolved comments from the Commission staff regarding its periodic or current reports under the Exchange Act.
The Company maintains two professional offices in Hamilton, Bermuda which serve as its headquarters and its registered office. The Company’s principal executive office is in Hanover, New Hampshire. In addition, the Company maintains a professional office in Guilford, Connecticut, which houses its investment and corporate finance functions.
The United States headquarters of OneBeacon is located in Canton, Massachusetts, while its principal executive office is located in Minnetonka, Minnesota. OneBeacon also maintains branch offices in various cities throughout the United States.
White Mountains Re'sRe’s headquarters is in Hamilton, Bermuda with an additionaland its principal executive office is located in New Jersey.Guilford, Connecticut. Folksamerica is headquartered in New York, New York with branch offices in various cities throughout the United States.States and in Toronto, Canada. Sirius International is headquartered in Stockholm, Sweden with various branch offices in Europe and Asia. WMUWMRUS maintains offices in Dublin, Ireland and Hamilton, Bermuda. The home office of OneBeacon is located in Boston, Massachusetts, with branch offices in various cities throughout the United States. Esurance is headquartered in San Francisco, California with various offices throughout the United States. In addition, the Company maintains a professional office in Hanover, New Hampshire which serves as its principal executive office, and an office in Guilford, Connecticut, which houses its investment and corporate finance functions.
The Company'sCompany’s headquarters, registered office, principal executive office and investment and corporate finance officeoffices are leased. Sirius International'sInternational’s home office in Sweden and substantially all of its branch offices, as well as WMU'sWMRUS’s offices in Ireland and Bermuda, are leased. Folksamerica'sFolksamerica’s home office and its branch offices are leased as well. TheOneBeacon owns its home officeoffice. Most of OneBeacon and most of itsOneBeacon’s branch offices are leased with the exception of branch offices located in New York, whichYork. Esurance’s home office and its branch offices are owned by OneBeacon. Certain leased and owned OneBeacon office locations have been leased or subleased to
Liberty Mutual in connection with the Liberty Agreement for a period of no more than three years.leased. Management considers its office facilities suitable and adequate for its current level of operations.
White Mountains, and the insurance and reinsurance industry in general, are subject to litigation and arbitration in the normal course of business. Other than those items listed below, White Mountains was not a party to any material litigation or arbitration other than as routinely encountered in claims activity, none of which is expected by management to have a material adverse effect on its financial condition and/or cash flows.
On November 1, 2001, OneBeacon transferred its regional agency business, agents and operations in 42 states and the District of Columbia to Liberty Mutual Insurance Group (“Liberty Mutual”) pursuant to a renewal rights agreement (the “Liberty Agreement”), which expired on October 31, 2003. OneBeacon is in a dispute with Liberty Mutual over certain costs Liberty Mutual claims it incurred in connection with the Liberty Agreement. Liberty Mutual asserts that these costs are part of unallocated loss adjustment expenses (“ULAE”) due Liberty Mutual under the Liberty Agreement. Liberty Mutual further asserts that ULAE on charges previously billed to and settled by OneBeacon since the inception of the Liberty Agreement should be retroactively recast in addition to changing the calculation of ULAE charges for the period not yet settled. OneBeacon believes that the recast charges, which are significantly higher than prior ULAE calculations, and the calculation of ULAE charges for the period not yet settled are inconsistent with the terms of the Liberty Agreement and with standard industry definitions of ULAE. The amount of additional ULAE Liberty Mutual claims that it incurred under the Liberty Agreement totals approximately $68 million. Liberty Mutual has netted amounts billed under the ULAE dispute against amounts otherwise payable to OneBeacon. As of December 31, 2006, OneBeacon has recorded in its loss and LAE reserves an estimate of ULAE expenses due Liberty Mutual on a basis that it believes is consistent with the terms of the Liberty Agreement and with standard industry definitions of ULAE. In November 2004, January 2006, Liberty Mutual initiated an arbitration proceeding against OneBeacon with respect to this dispute, the ULAE Arbitration. The initial organizational meeting on the ULAE arbitration was held in February 2007 and the final hearing is scheduled for April 2008.
In September 2006, OneBeacon initiated an arbitration against Liberty Mutual (and Peerless Insurance Company) seeking payment of approximately $57 million relating to reinsurance premiums, ceding commissions, recoveries and commutations due to OneBeacon from Liberty Mutual pursuant to the terms and conditions of the rewritten indemnity reinsurance agreement. To date, Liberty Mutual has refused to pay, asserting that it is entitled to an offset against the ULAE amounts disputed by OneBeacon and subject to the ULAE arbitration. The parties are in the process of selecting an arbitration panel and the dates for the arbitration hearing have not yet been scheduled. In January 2007, this arbitration was consolidated into the ULAE arbitration.
OneBeacon Insurance Group received a subpoena fromLLC and OBIC also have asserted claims against Liberty Mutual (and Peerless Insurance Company) in the Attorney GeneralCourt of Common Pleas for Philadelphia County, Pennsylvania, or the Court, in which they assert that Liberty Mutual (and Peerless Insurance Company) breached the Pre-Closing Administrative Services Agreement, handled claims files negligently, breached fiduciary duties and were unjustly enriched. The Court has stayed those claims pending the resolution of the Statearbitration between OBIC and Liberty Mutual for breach of New York requesting documentscontract. The arbitration hearing commenced in November 2006 and seeking information relatingwill continue in May 2007.
OneBeacon believes that its loss and LAE reserves are sufficient to the conductcover reasonably anticipated outcomes of business between insurance brokers and OneBeacon. Subsidiaries of the Company have also received information requests from various state insurance departments regarding producer compensation arrangements. White Mountains believes these requests are part of the ongoing, industry-wide investigation regarding industry sales practices.
On May 15, 2002, The Robert Plan Corporation and several of its subsidiaries filed a lawsuit against the Company, certain of its subsidiaries and several individuals employed by the subsidiaries. The suit alleges that the defendants misappropriated confidential information of the plaintiffs and used such information to enter into the New York automobile assigned risk business in direct competitionall related disputes with the plaintiffs. The plaintiffs have recently increased their damages demand from $66 million to approximately $185 million, which they allege represents two years of their lost profits in the subject business. White Mountains, its named subsidiaries and employees do not believe they engaged in any improper or actionable conduct. White Mountains and its subsidiaries have no reason to believe they have any liability to The Robert Plan Corporation and intend to vigorously defend the lawsuit. In addition, OneBeacon has brought a counterclaim against the plaintiffs that it believes to be meritorious. OneBeacon is seeking compensatory damages of $9 million as a result of the breach by the plaintiffs of the LAD servicing contract that OneBeacon had entered into with them.Liberty Mutual.
On January 30, 2001, an action was filed in Los Angeles on behalf of Sierra National Life Insurance Holdings, Inc. ("Sierra Holdings", which is not related to the Sierra Group, as previously defined), a dissolved corporation in which White Mountains held a 28.8% interest, against Credit Lyonnais, S.A. and other parties who were the successful bidders for the assets of Executive Life Insurance Company ("ELIC"), a California insurer, in the 1991 sale of those assets conducted by the California Commissioner of Insurance. Sierra Holdings alleged that defendants' acquisition violated both federal and state law and that, but for defendants' wrongful acts, it would have been chosen to purchase ELIC's assets. Sierra Holdings settled its claims against Credit Lyonnais and certain other defendants for a total of $87 million. After expenses, White Mountains share of the settlement proceeds was approximately $15 million. In addition, a default judgment regarding liability was entered at trial against another defendant, Maaf Assurances, SA, a French mutual insurer. Sierra Holdings is reviewing its options in pursuing damages against Maaf. Finally, in certain circumstances, Sierra Holdings may be entitled to additional amounts from any settlements or judgments resulting from the ongoing lawsuit by the California Commissioner of Insurance against another defendant, Artemis SA.
In August 2000, Aramarine Brokerage, Inc. ("Aramarine"), a former insurance broker of OneBeacon's, filed a lawsuit alleging that OneBeacon had wrongfully terminated its business relationship with Aramarine. The suit originally claimed $410 million in compensatory damages for lost commissions, although Aramarine has recently reduced its demand to $158 million. OneBeacon does not believe it has engaged in any actionable conduct. During 2004, OneBeacon prevailed on a motion for summary judgment to dismiss the plaintiff's claim. OneBeacon expects the plaintiff to appeal the summary judgment upon resolution of OneBeacon's counterclaim for return commission.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's 2004 Annual General Meeting of Members, which was held on October 21, 2004 in Hamilton, Bermuda, the Company's Members approved proposals (as further described in the Company's 2004 Proxy Statement) calling for the Election of fiveThere were no matters submitted to a vote of the Company's directors to Class I ("Proposal I"),Company’s shareholders during the Electionfourth quarter of Directors of Sirius International Insurance Corporation ("Proposal II"), the Election of Directors of Fund American Reinsurance Company, Ltd. and Scandinavian Reinsurance Company Ltd. ("Proposal III"), the Election of Directors of any new non-United States operating subsidiary ("Proposal IV") and the Approval of Appointment of PricewaterhouseCoopers as the Company's Independent Registered Accounting Firm ("Proposal V"). As of August 27, 2004, the "Record Date" for the 2004 Annual Meeting, a total of 10,769,451 Common Shares were eligible to vote.2006.
With respect to Proposals I, II, III and IV, 6,386,624 votes, 6,559,440 votes, 6,557,514 and 6,597,508 votes were cast in favor of the proposals, respectively, and 264,527 votes, 91,711 votes, 93,637 votes and 53,643 votes were withheld, respectively. With respect to Proposal V, 7,800,774 votes were cast in favor of the proposal, 5,971 votes were cast against the proposal and 5,952 votes abstained. These results represent the number of Common Shares voted after taking into consideration the voting cut-back of all holders with 10% or more voting control in accordance with Bye-law 47 of the Company's Bye-laws
In connection with Proposal I, Bruce R. Berkowitz, Steven E. Fass, Edith E. Holiday, Joseph S. Steinberg and Lowndes A. Smith were elected to the Company's Board of Directors with terms ending in 2007. In connection with Proposal II, Messrs. Lars Ek, Fass, Gert Lindberg and Goran Thorstensson were elected to the Board of Directors of Sirius International Insurance Corporation. In connection with Proposal III, Messrs. Fass, Anders Henriksson, Mark Kaplen, Michael E. Maloney, Thorstensson and Michael E. Tyburski were elected to the Board of Directors of Fund American Reinsurance Company, Ltd. and Scandinavian Reinsurance Company Ltd. In connection with Proposal IV, Messrs. Barrette and Fass were elected to any new non-United States operating subsidiary that may be formed by the Company in the future.
Executive Officers of the Registrant and its Subsidiaries (As of March 1, 2005)
February 28 2007)
| Name | Position | Age | Executive officer since |
| Position |
| Age |
| Executive officer since |
| |||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Raymond Barrette | President and CEO | 54 | 1997 |
| Chairman and CEO |
| 56 |
| 2007 |
| |||
| John P. Cavoores | Managing Director, President and CEO of OneBeacon | 47 | 2002 | ||||||||||
| Charles B. Chokel | Managing Director of White Mountains Capital, Inc. | 51 | 2002 |
| Managing Director and Chief Financial Officer of White Mountains Re |
| 53 |
| 2002 |
| |||
| Steven E. Fass | President and CEO of White Mountains Re | 59 | 2002 | ||||||||||
| David T. Foy | Executive Vice President and Chief Financial Officer | 38 | 2003 |
| Executive Vice President and Chief Financial Officer |
| 40 |
| 2003 |
| |||
| John D. Gillespie | President of WM Advisors | 45 | 2001 | ||||||||||
G. Thompson Hutton |
| President and CEO of White Mountains Re |
| 51 |
| 2006 |
| ||||||
| Robert R. Lusardi | Executive Vice President and Managing Director of White Mountains Capital, Inc. | 47 | 2005 |
| Executive Vice President and Managing Director of White Mountains Capital, Inc. |
| 50 |
| 2005 |
| |||
T. Michael Miller |
| President and CEO of OneBeacon |
| 48 |
| 2005 |
| ||||||
| J. Brian Palmer | Chief Accounting Officer | 32 | 2001 |
| Chief Accounting Officer |
| 34 |
| 2001 |
| |||
| Robert L. Seelig | Vice President and General Counsel | 36 | 2002 |
| Vice President and General Counsel |
| 38 |
| 2002 |
| |||
Gary C. Tolman |
| President and CEO of Esurance |
| 55 |
| 2005 |
| ||||||
All executive officers of the Company and its subsidiaries are elected by the Board for a term of one-yearone year or until their successors have been elected and have duly qualified. Information with respect to the principal occupation and relevant business experience of the Executive Officers follows:
Mr. Barrettehas served as Chairman and CEO of the Company since January 2007. He served as a director of the Company from 2000 to 2005 and was appointedre-appointed as a director in August 2006. He previously served as President and CEO of the Company on January 1,from 2003 and has been a director since 2000. Mr. Barrette wasto 2005, as CEO of OneBeacon from June 2001 to December 2002, as President of the Company from 2000 to 2001 and remains its Chairman. Mr. Barrette joined White Mountains Insurance Group in November 1997 as Executive Vice President and Chief Financial Officer. He was PresidentOfficer of the Company from January 20001997 to June 2001. Prior to joining White Mountains, Mr. Barrette had 23 years of experience in the insurance
business, mostly at Fireman's Fund Insurance Company. He is also Chairman of Esurance, Lead Director of Montpelier and a director of several White Mountains subsidiaries.2000.
Mr. CavooresChokel was appointedhas served as Managing Director and PresidentChief Financial Officer of OneBeacon in December 2001 and was appointed CEO of OneBeacon in September 2003. Mr. Cavoores formerly served as a Managing Director of Fund American from 2000 to June 2001 and as a Managing Director of OneBeacon from June 2001 to December 2001.White Mountains Re since August 2006. Prior to joining White Mountains in 2001, Mr. Cavoores served as Chief Operating Officer of Reliance Insurance Group from April 2000 to October 2000, and as President and CEO of National Union Fire Insurance Company (a wholly-owned subsidiary of American International Group) from May 1998 to April 2000. He was with Chubb Corporation from 1979 to 2000 in a variety of capacities, most recently as their Chief Underwriting Officer of worldwide specialty business.
Mr. Chokel hasthat he served as Managing Director of White Mountains Capital, Inc. since September 2003. Prior to that he served2003, as Managing Director and Chief Administrative Officer of OneBeacon since January 2003 and as Managing Director of OneBeacon since March 2002. Prior to joining OneBeacon, Mr. Chokel served as Executive Vice President and Chief Financial Officer of Conseco, Inc. from March 2001 to March 2002 and as Co-CEO of The Progressive Corporation from January 1999 to January 2001. Mr. Chokel was withjoined Progressive sincein 1978. He is also a director of other White Mountains subsidiaries.
Mr. Fass has been a director of the Company since 2000. Mr. Fass has served as President and CEO of White Mountains Re since May 2004. Mr. Fass previously served as President and CEO of Folksamerica and its subsidiaries from 1984 to 2004. He joined Folksamerica as its Vice President, Treasurer and Chief Financial Officer in 1980. Mr. Fass also serves as Chairman of Folksamerica, a director of White Mountains Re and is a director of other White Mountains subsidiaries.
Mr. Foywas appointed Executive Vice President and Chief Financial Officer of the Company in April 2003. Prior to joining White Mountains in 2003, Mr. Foy served as Senior Vice President and Chief Financial Officer of Hartford Life Inc. and joined that company in 1993. Prior to joining Hartford Life, Mr. Foy was with Milliman and Robertson, an actuarial consulting firm. Mr. Foy also serves as the Chairman of Symetra.
Mr. Gillespie has served as a Deputy Chairman of the Company since January 2003Symetra and serves as Chairman and President of WM Advisors. Mr. Gillespie served as Managing Director of OneBeacon from June 2001 to March 2003 and has been a director of the Company since 1999. He is also the founder and Managing Partner of his own investment firm, Prospector Partners, LLC ("Prospector"). Prior to forming Prospector, Mr. Gillespie was President of the T. Rowe Price Growth Stock Fund and the New Age Media Fund, Inc. Mr. Gillespie serves as a director of Montpelier, SymetraOneBeacon Ltd.
Mr. Hutton was appointed President and certainCEO of White Mountains subsidiaries.Re in February 2006. Prior to joining White Mountains, since 2000 Mr. Gillespie's father, George Gillespie, is ChairmanHutton served as a board member and consultant to private equity investors and their portfolio companies, first as a Venture Partner with Trident Capital and then as Managing Partner of the Company.Thompson Hutton, LLC. From 1990-2000, Mr. Hutton served as President and CEO of Risk Management Solutions, Inc. and was formerly a management consultant at McKinsey and Company, Inc.
Mr. Lusardiwas appointed Executive Vice President and Managing Director of White Mountains Capital, Inc. in February 2005. Prior to joining White Mountains, Mr. Lusardi was an Executive Vice President of XL Capital Ltd, most recently as Chief Executive of Financial Products and Services. Prior to joining XL Capital Ltd, Mr. Lusardi was a Managing Director at Lehman Brothers, where he was employed from 1980 to 1998. Mr. Lusardi also serves as a director of OneBeacon Ltd., Symetra and Primus Guaranty, Ltd.
Mr. Miller was appointed President and CEO of OneBeacon in July 2005 and joined OneBeacon as its Chief Operating Officer in April 2005. Prior to joining White Mountains, Mr. Miller spent 10 years at St. Paul Travelers, most recently as Co-Chief Operating Officer. Prior to joining St. Paul Travelers, Mr. Miller spent 14 years with The Chubb Corporation.
Mr. Palmerhas served as Chief Accounting Officer since June 2001 and previously served as Controller of a subsidiary of White Mountains from 1999 to 2001. Prior to joining White Mountains in 1999, Mr. Palmer was with PricewaterhouseCoopers LLP.
Mr. Seeligis Vice President and General Counsel of the Company. Prior to joining White Mountains in September 2002, Mr. Seelig was with the law firm of Cravath, Swaine & Moore.
Mr. Tolman has served as President and CEO of Esurance since 2000. Prior to joining Esurance, Mr. Tolman was with Talegen Holdings for 6 years, serving most recently as its President. Prior to joining Talegen, Mr. Tolman was with Fireman’s Fund Corporation for more than 15 years.
Item 5. Market for the Company'sCompany’s Common Equity, Related Shareholder Matters and Issuer Purchase of Equity Securities
As of February 15, 2005,28, 2007, there were 394368 registered holders of Common Shares,White Mountains’ common shares, par value $1.00 per share.
During each of 20042006 and 20032005, the Company declared and paid cash dividends on common shares of $8.00 and $8.00 per common share, respectively.
Common Shares of $1.00 per Common Share. The Company's dividend payment policy provides for an annual dividend payable in the first quarter of each year, dependent on the Company's financial position and the regularity of its cash flows.
Common Sharesshares are listed on the New York Stock Exchange (symbol WTM) and the Bermuda Stock Exchange (symbol WTM-BH). The quarterly range of the daily closinghigh and low sales price for Common Sharescommon shares during 20042006 and 20032005 is presented below:
| | 2004 | 2003 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | High | Low | High | Low | |||||||||
| Quarter ended: | |||||||||||||
| December 31 | $ | 659.00 | $ | 501.00 | $ | 461.00 | $ | 413.00 | |||||
| September 30 | 526.00 | 467.00 | 416.75 | 362.00 | |||||||||
| June 30 | 553.80 | 476.10 | 420.50 | 340.00 | |||||||||
| March 31 | 524.50 | 453.50 | 340.00 | 311.70 | |||||||||
|
| 2006 |
| 2005 |
| ||||||||
|
| High |
| Low |
| High |
| Low |
| ||||
Quarter ended: |
|
|
|
|
|
|
|
|
| ||||
December 31 |
| $ | 603.00 |
| $ | 496.00 |
| $ | 638.99 |
| $ | 555.00 |
|
September 30 |
| 537.00 |
| 447.00 |
| 711.99 |
| 583.60 |
| ||||
June30 |
| 591.00 |
| 465.01 |
| 677.50 |
| 564.50 |
| ||||
March 31 |
| 594.50 |
| 517.00 |
| 695.00 |
| 582.00 |
| ||||
As permitted
No repurchases of common shares were made by the agreement governing the Company's outstanding options to acquire Common Shares ("Options"),or on behalf of the Company accepted 97during the fourth quarter of 2006.
For information on securities authorized for issuance under the Company’s equity compensation plans, see “Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”
The following graph shows the five-year cumulative total return for a shareholder who invested $100 in common shares in partial satisfaction(NYSE symbol “WTM”) as of January 1, 2002, assuming re-investment of dividends. Cumulative returns for the strike price relating tofive-year period ended December 31, 2006 are also shown for the exerciseStandard & Poor’s 500 Stocks (Property & Casualty) Capitalization Weighted Index (“S&P P&C”) and the Standard & Poor’s 500 Stocks Capitalization Weighted Index (“S&P 500”) for comparison.
Five-Year Cumulative Total Return
(value of 435 Options during the 2004 fourth quarter. The Common Shares received by the Company were valued at the applicable New York Stock Exchange closing price on the day of exercise ($629.75 per Common Share).$100 invested January 1, 2002)
Item 6. Selected Financial Data
Selected consolidated income statement data and ending balance sheet data for each of the five years ended December 31, 2004,December31, 2006, follows:
| | Year Ended December 31, | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| $ in millions, except share and per share amounts | |||||||||||||||||
| 2004 | 2003 | 2002 | 2001(a)(l) | 2000(l) | |||||||||||||
| Income Statement Data: | |||||||||||||||||
| Revenues | $ | 4,553 | $ | 3,794 | $ | 4,208 | $ | 3,234 | $ | 851 | |||||||
| Expenses | 4,305 | 3,422 | 4,089 | 3,662 | 493 | ||||||||||||
| Pretax earnings (loss) | 248 | 372 | 119 | (428 | ) | 358 | |||||||||||
| Income tax (provision) benefit | (47 | ) | (127 | ) | (11 | ) | 179 | (43 | ) | ||||||||
| Accretion and dividends on preferred stock of subsidiaries | — | (21) | (j) | (41 | ) | (23 | ) | — | |||||||||
| Equity in earnings (loss) of unconsolidated affiliates | 37 | 57 | 14 | 1 | (2 | ) | |||||||||||
| Net income (loss) from continuing operations | 238 | 281 | 81 | (271 | ) | 313 | |||||||||||
| Net income from discontinued operations | — | — | — | — | 95 | (b) | |||||||||||
| Cumulative effect of changes in accounting principles | — | — | 660 | (i) | — | — | |||||||||||
| Extraordinary gains | 181 | (k) | — | 7 | 12 | — | |||||||||||
| Net income (loss) | $ | 419 | $ | 281 | $ | 748 | $ | (259 | ) | $ | 408 | ||||||
| Net income (loss) from continuing operations per share: | |||||||||||||||||
| Basic | $ | 24.05 | $ | 26.48 | $ | 7.47 | $ | (86.52 | ) | $ | 53.08 | ||||||
| Diluted | $ | 22.67 | $ | 23.63 | $ | 6.80 | $ | (86.52 | ) | $ | 52.84 | ||||||
| Balance Sheet Data: | |||||||||||||||||
| Total assets | $ | 19,015 | $ | 15,882 | $ | 17,267 | $ | 18,410 | $ | 3,545 | |||||||
| Short-term debt | — | — | 33 | 358 | — | ||||||||||||
| Long-term debt | 783 | 743 | 760 | 767 | 96 | ||||||||||||
| Deferred credits | — | — | — | (i) | 683 | (c) | 92 | ||||||||||
| Convertible preference shares | — | — | 219 | — | — | ||||||||||||
| Mandatorily redeemable preferred stock of subsidiaries | 212 | 195 | (j) | 181 | 170 | — | |||||||||||
| Common shareholders' equity(d) | 3,884 | 2,979 | 2,408 | 1,445 | 1,046 | ||||||||||||
| Book value per share(e) | $ | 349.60 | $ | 293.15 | $ | 254.52 | $ | 160.36 | $ | 177.07 | |||||||
| Fully converted tangible book value per share(f) | $ | 342.52 | $ | 291.27 | $ | 258.82 | $ | 225.81 | $ | 187.65 | |||||||
| Share Data: | |||||||||||||||||
| Cash dividends paid per Common Share | $ | 1.00 | $ | 1.00 | $ | 1.00 | $ | 1.00 | $ | 1.20 | |||||||
| Ending Common Shares (000's)(g) | 10,773 | 9,007 | 8,351 | 8,245 | 5,880 | ||||||||||||
| Ending equivalent Common Shares (000's)(h) | 47 | 1,775 | 2,455 | 1,803 | 81 | ||||||||||||
| Ending Common and equivalent Common Shares (000's) | 10,819 | 10,782 | 10,806 | 10,048 | 5,961 | ||||||||||||
|
| Year Ended December 31, |
| |||||||||||||
$ in millions, except share and per share amounts |
| 2006 |
| 2005 |
| 2004 |
| 2003 |
| 2002 |
| |||||
Income Statement Data: |
|
|
|
|
|
|
|
|
|
|
| |||||
Revenues |
| $ | 4,794 |
| $ | 4,632 |
| $ | 4,555 |
| $ | 3,794 |
| $ | 4,208 |
|
Expenses |
| 4,064 |
| 4,327 |
| 4,297 |
| 3,420 |
| 4,089 |
| |||||
Pre-tax earnings (loss) |
| 730 | (h) | 305 |
| 258 |
| 374 |
| 119 |
| |||||
Income tax (provision) benefit |
| (99 | ) | (37 | ) | (47 | ) | (127 | ) | (11 | ) | |||||
Minority interest |
| (16 | ) | (12 | ) | (11 | ) | (2 | ) | — |
| |||||
Equity in earnings of unconsolidated affiliates |
| 37 |
| 34 |
| 38 |
| 57 |
| 14 |
| |||||
Accretion and dividends on preferred stock of subsidiaries |
| — |
| — |
| — |
| (21 | )(b) | (41 | ) | |||||
Net income from continuing operations |
| 652 |
| 290 |
| 238 |
| 281 |
| 81 |
| |||||
Cumulative effect of changes in accounting principles |
| — |
| — |
| — |
| — |
| 660 | (a) | |||||
Extraordinary gains |
| 21 |
| — |
| 181 | (c) | — |
| 7 |
| |||||
Net income |
| $ | 673 |
| $ | 290 |
| $ | 419 |
| $ | 281 |
| $ | 748 |
|
Net income from continuing operations per share: |
|
|
|
|
|
|
|
|
|
|
| |||||
Basic |
| $ | 62.51 |
| $ | 26.96 |
| $ | 24.05 |
| $ | 26.48 |
| $ | 7.47 |
|
Diluted |
| $ | 62.32 |
| $ | 26.56 |
| $ | 22.67 |
| $ | 23.63 |
| $ | 6.80 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
| |||||
Total assets |
| $ | 19,444 |
| $ | 19,418 |
| $ | 19,015 |
| $ | 15,882 |
| $ | 17,267 |
|
Short-term debt |
| — |
| — |
| — |
| — |
| 33 |
| |||||
Long-term debt |
| 1,107 |
| 779 |
| 783 |
| 743 |
| 760 |
| |||||
Convertible preference shares |
| — |
| — |
| — |
| — |
| 219 |
| |||||
Mandatorily redeemable preferred stock of subsidiaries |
| 262 |
| 234 |
| 212 |
| 195 | (b) | 181 |
| |||||
Minority interest |
| 603 | (h) | 96 |
| 59 |
| 5 |
| — |
| |||||
Common shareholders’ equity |
| 4,455 |
| 3,833 |
| 3,884 |
| 2,979 |
| 2,408 |
| |||||
Book value per share (d) |
| $ | 408.62 |
| $ | 347.00 |
| $ | 349.60 |
| $ | 293.15 |
| $ | 254.52 |
|
Fully converted tangible book value per share (e) |
| $ | 406.00 |
| $ | 342.51 |
| $ | 342.52 |
| $ | 291.27 |
| $ | 258.82 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Share Data: |
|
|
|
|
|
|
|
|
|
|
| |||||
Cash dividends paid per common share |
| $ | 8.00 |
| $ | 8.00 |
| $ | 1.00 |
| $ | 1.00 |
| $ | 1.00 |
|
Ending common shares (000’s) (f) |
| 10,783 |
| 10,779 |
| 10,773 |
| 9,007 |
| 8,351 |
| |||||
Ending equivalent common shares (000’s) (g) |
| 29 |
| 34 |
| 46 |
| 1,775 |
| 2,455 |
| |||||
Ending common and equivalent common shares (000’s) |
| 10,812 |
| 10,813 |
| 10,819 |
| 10,782 |
| 10,806 |
| |||||
(a)Includes the acquisition of OneBeacon on June 1, 2001 and its results of operations from that date through December 31, 2001. In connection with the OneBeacon Acquisition, White Mountains issued $1,085 million in debt. White Mountains also issued preferred stock of subsidiaries, warrants to acquire Common Shares and Convertible Preference Shares for total proceeds of $758 million.
In accordance with its adoption of Statement of Financial Accounting Standard (b)Relates to a tax reserve release associated with the 1991 sale of Fireman's Fund Insurance Company.(c)Deferred credits added during 2001 resulted from the purchase of OneBeacon.(d)Increase in 2001 included effects of capital raising activities undertaken in connection with the OneBeacon Acquisition. Increase in 2002 included the recognition of $660 million in net deferred credits as a result of a change in accounting principles. See Note 1.(e)Includes the dilutive effects of outstanding Options and, for years prior to 2004, warrants to acquire Common Shares.(f)Book value per share plus unamortized deferred credits less goodwill and the equity in net unrealized gains from Symetra's fixed income portfolio per Common and equivalent Common Share. The 2002 fully converted tangible book value per share assumes outstanding convertible preference shares to be equivalent Common Shares.(g)During 2003, 677,966 Common Shares were issued in satisfaction of Convertible Preference Shares. During 2004, 1,724,200 Common Shares were issued in satisfaction of warrants exercised.(h)Includes outstanding Convertible Preference Shares, Options and warrants to acquire Common Shares, when applicable.(i)("SFAS"(“SFAS”) No. 141, "Business Combinations" ("SFAS 141")“Business Combinations”,the Company recognized all of its outstanding deferred credits on January 1, 2002. See Note 1.
(b)In accordance with its adoption of SFAS No. 150, "Accounting“Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("Equity” (“SFAS 150"150”), on July 1, 2003,1,2003, the Company reclassified its outstanding mandatorily redeemable preferred stock from mezzanine equity to liabilities on its balance sheet and, beginning in the third quarter of 2003, White Mountains began presenting all accretion and dividends on its mandatorily redeemable preferred stock as interest expense. See Note 1.
(c)Extraordinary gains in 2004 resulted from the excess of the fair value over the cost of net assets acquired in the Sirius, Symetra, Tryg-Baltica and Sierra transactions.
(d) Includes the dilutive effects of the historical factors affecting OneBeacon's lossoutstanding incentive options to acquire common shares (“Options”) and, LAE reservesfor years prior to 2004, warrants to acquire common shares.
(e) Book value per share plus unamortized deferred credits less goodwill and the equity in net unrealized gains from Symetra’s fixed income portfolio per common and equivalent common share. The 2002 fully converted tangible book value per share assumes outstanding convertible preference shares to be equivalent common shares.
(f) During 2003, 677,966 common shares were issued in satisfaction of Convertible Preference Shares. During 2004, 1,724,200 common shares were issued in satisfaction of warrants exercised.
(g) Includes outstanding Convertible Preference Shares, Options and warrants to acquire common shares, when applicable.
(h) In connection with the OneBeacon Acquisition, see "Non-AsbestosOffering, White Mountains recognized a $171 million gain in other revenues and Environmental Reserves" under the caption "Loss and Loss Adjustment Expense Reserves" in the "OneBeacon" section of the business description contained within the Company's Amendment No. 6 to Form S-3 dated July 17, 2003 (the "Form S-3"). Such portion of the Form S-3 is incorporated by reference into this Form 10-K.
43
Item 7. Management's Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion contains "forward-looking statements"“forward-looking statements”. White Mountains intends statements whichthat are not historical in nature, andwhich are hereby identified as forward-looking statements, to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. White Mountains cannot promise that its expectations in such forward-looking statements will turn out to be correct. White Mountains'Mountains’ actual results could be materially different from and worse than its expectations. See "“FORWARD-LOOKING STATEMENTS"STATEMENTS” for specific important factors that could cause actual results to differ materially from those contained in forward-looking statements.
The following discussion also includes twothree non-GAAP financial measures, adjusted comprehensive net income and(loss), fully converted tangible book value per common and equivalent share and tangible capital, that have been reconciled to their most comparable GAAP financial measures (see page 55)59). White Mountains believes these measures to be more relevant than comparable GAAP measures in evaluating White Mountains'Mountains’ financial performance.performance and condition.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2004, 20032006, 2005 and 2002
2004
White Mountains ended 20042006 with a fully converted tangible book value per Common Sharecommon share of $343,$406, which representsrepresented an increase of 18%21% (including dividends) over the fully converted tangible book value per Common Sharecommon share of $291$343 as of December 31, 2003. During 2003,2005. This increase reflects favorable weather conditions and strong investment results when compared to 2005. Additionally, during the fourth quarter of 2006, White Mountains recognized an after-tax gain of $171 million, or $16 per common share, on the sale of 27.6% of its interest in OneBeacon through an initial public offering.
White Mountains ended 2005 with a fully converted tangible book value per Common Share increased by 13%common share of $343, which represented an increase of 2% (including dividends) from $259$343 as of December 31, 2002.
Adjusted comprehensive net income was $539 million for 2004, compared to $360 million2004. During 2005, White Mountains experienced significant losses from hurricanes Katrina, Rita and Wilma, and from the Company’s investment in 2003. Net income for 2004 was $419 million, compared to $281 million in 2003.
The growth inMontpelier Re that adversely impacted fully converted tangible book value was driven by strong investment results, particularly equities which returned 20%, and $180 million in transaction gains. This more than offset the impact of higher than expected losses from catastrophes and prior year reserve development. The growth in earnings was primarily driven by the transaction gains as both 2004 and 2003 had strong investment results.per common share.
All three business segments performed well. OneBeacon's combined ratio in 2004 was 99%, the second consecutive year it was below 100%, and Esurance earned a profit for the first time in 2004. White Mountains Re had a combined ratio of 104% due to 11 points from catastrophes. However, the segment contributed $140 million in transaction gains and therefore was a significant contributor to the Company's growth in book value for the year.
Fully Converted Tangible Book Value Per Share
The following table presents the Company'sCompany’s tangible book value per share for the years ended December 31, 2004, 2003,2006, 2005, and 20022004 and reconciles this non-GAAP measure to the most comparable GAAP measure.measure:
| | | December 31, |
| December 31, |
|
| ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | 2004 | 2003 | 2002 |
| 2006 |
| 2005 |
| 2004 |
|
| ||||||||||
| Book value per share numerators (in millions): | Book value per share numerators (in millions): |
|
|
| �� |
|
|
|
| |||||||||||||
| Common shareholders' equity | $ | 3,883.9 | $ | 2,979.2 | $ | 2,407.9 | ||||||||||||||||
| Proceeds from assumed exercise of outstanding warrants | — | 300.0 | 300.0 | |||||||||||||||||||
| Benefits to be received from share obligations under employee benefit plans | 6.7 | 7.0 | 8.8 | |||||||||||||||||||
| Remaining accretion of subsidiary preferred stock to face value | (108.1 | ) | (125.5 | ) | (139.1 | ) | ||||||||||||||||
Common shareholders’ equity |
| $ | 4,455.3 |
| $ | 3,833.2 |
| $ | 3,883.9 |
|
| |||||||||||
Benefits to be received from share obligations under employee benefit plans |
| 4.7 |
| 5.1 |
| 6.7 |
|
| ||||||||||||||
Remaining accretion of subsidiary preferred stock to face value |
| (41.8 | )(1) | (86.0 | ) | (108.1 | ) |
| ||||||||||||||
| Book value per share numerator | Book value per share numerator | 3,782.5 | 3,160.7 | 2,577.6 |
| 4,418.2 |
| 3,752.3 |
| 3,782.5 |
|
| ||||||||||
| Equity in net unrealized gains from Symetra's fixed maturity portfolio | (56.6 | ) | — | — | ||||||||||||||||||
| Assumed conversion of convertible preference shares to Common Shares | — | — | 219.0 | |||||||||||||||||||
| Unamortized goodwill of consolidated limited partnerships | (20.0 | ) | (20.3 | ) | — | |||||||||||||||||
Equity in net unrealized (gains) losses from Symetra’s fixed maturity portfolio |
| 4.1 |
| (24.2 | ) | (56.6 | ) |
| ||||||||||||||
Goodwill |
| (32.5 | ) | (24.4 | ) | (20.0 | ) |
| ||||||||||||||
| Fully converted tangible book value per common and equivalent share numerator | Fully converted tangible book value per common and equivalent share numerator | $ | 3,705.9 | $ | 3,140.4 | $ | 2,796.6 |
| $ | 4,389.8 |
| $ | 3,703.7 |
| $ | 3,705.9 |
|
| ||||
| Book value per share denominators (in millions): | ||||||||||||||||||||||
| Common Shares outstanding | 10,772.8 | 9,007.2 | 8,351.4 | |||||||||||||||||||
| Common Shares issuable upon exercise of outstanding warrants | — | 1,724.2 | 1,714.3 | |||||||||||||||||||
| Share obligations under employee benefit plans | 46.6 | 50.6 | 61.9 | |||||||||||||||||||
| Book value per share denominator | 10,819.4 | 10,782.0 | 10,127.6 | |||||||||||||||||||
| Assumed conversion of convertible preference shares to Common Shares | — | — | 678.0 | |||||||||||||||||||
| Fully converted tangible book value per common and equivalent share denominator | 10,819.4 | 10,782.0 | 10,805.6 | |||||||||||||||||||
Book value per share denominators (in thousands of shares): |
|
|
|
|
|
|
|
| ||||||||||||||
Common shares outstanding |
| 10,782.8 |
| 10,779.2 |
| 10,772.8 |
|
| ||||||||||||||
Share obligations under employee benefit plans |
| 29.5 |
| 34.3 |
| 46.5 |
|
| ||||||||||||||
Fully converted tangible book value per common and equivalent share |
| 10,812.3 |
| 10,813.5 |
| 10,819.3 |
|
| ||||||||||||||
| Book value per share | Book value per share | $ | 349.60 | $ | 293.15 | $ | 254.52 |
| $ | 408.62 |
| $ | 347.00 |
| $ | 349.60 |
|
| ||||
| Fully converted tangible book value per common and equivalent share | Fully converted tangible book value per common and equivalent share | 342.52 | 291.27 | 258.82 |
| 406.00 |
| 342.51 |
| 342.52 |
|
| ||||||||||
(1) 72.4% of remaining adjustment of subsidiary preferred stock to face value, which is representative of White Mountains’ ownership interest in OneBeacon.
Review of Consolidated Results
A tabular summary of White Mountains'Mountains’ consolidated financial results for the years ended December 31, 2006, 2005 and 2004 2003 and 2002 follows:
| | | Year Ended December 31, |
| Year Ended December 31, |
| |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Millions | Millions |
| 2006 |
| 2005 |
| 2004 |
| ||||||||||||||
| 2004 | 2003 | 2002 | ||||||||||||||||||||
| Gross written premiums | $ | 4,792.1 | $ | 3,823.4 | $ | 4,421.6 | ||||||||||||||||
| Net written premiums | $ | 3,904.8 | $ | 3,007.7 | $ | 3,293.5 | ||||||||||||||||
Gross written premiums |
| $ | 4,312.4 |
| $ | 4,601.6 |
| $ | 4,792.1 |
| ||||||||||||
Net written premiums |
| $ | 3,843.5 |
| $ | 3,776.1 |
| $ | 3,904.8 |
| ||||||||||||
| Revenues | Revenues |
|
|
|
|
|
|
| ||||||||||||||
| Earned insurance and reinsurance premiums | $ | 3,820.5 | $ | 3,137.7 | $ | 3,576.4 | ||||||||||||||||
| Net investment income | 360.9 | 290.9 | 366.0 | |||||||||||||||||||
| Net realized investment gains | 181.1 | 162.6 | 156.0 | |||||||||||||||||||
| Other revenue | 190.5 | 202.6 | 109.5 | |||||||||||||||||||
| Total revenues | 4,553.0 | 3,793.8 | 4,207.9 | |||||||||||||||||||
Earned insurance and reinsurance premiums |
| $ | 3,712.7 |
| $ | 3,798.6 |
| $ | 3,820.5 |
| ||||||||||||
Net investment income |
| 435.5 |
| 491.5 |
| 360.9 |
| |||||||||||||||
Net realized investment gains |
| 272.7 |
| 112.6 |
| 181.1 |
| |||||||||||||||
Gain on sale of OneBeacon shares |
| 171.3 |
| — |
| — |
| |||||||||||||||
Other revenue |
| 202.0 |
| 229.2 |
| 192.8 |
| |||||||||||||||
Total revenues |
| 4,794.2 |
| 4,631.9 |
| 4,555.3 |
| |||||||||||||||
| Expenses | Expenses |
|
|
|
|
|
|
| ||||||||||||||
| Losses and LAE | 2,591.1 | 2,138.1 | 2,638.2 | |||||||||||||||||||
| Insurance and reinsurance acquisition expenses | 743.5 | 615.0 | 804.3 | |||||||||||||||||||
| Other underwriting expenses | 521.3 | 347.1 | 401.7 | |||||||||||||||||||
| General and administrative expenses | 309.3 | 201.8 | 92.7 | |||||||||||||||||||
| Accretion of fair value adjustment to loss and LAE reserves | 43.3 | 48.6 | 79.8 | |||||||||||||||||||
| Interest expense—debt | 49.1 | 48.6 | 71.8 | |||||||||||||||||||
| Interest expense—dividends and accretion on preferred stock subject to mandatory redemption | 47.6 | 22.3 | — | |||||||||||||||||||
| Total expenses | 4,305.2 | 3,421.5 | 4,088.5 | |||||||||||||||||||
| Pretax income | $ | 247.8 | $ | 372.3 | $ | 119.4 | ||||||||||||||||
| Income tax expense | (47.0 | ) | (127.6 | ) | (11.7 | ) | ||||||||||||||||
| Accretion and dividends on mandatorily redeemable preferred stock of subsidiaries | — | (21.5 | ) | (40.9 | ) | |||||||||||||||||
| Equity in earnings of unconsolidated affiliates | 37.4 | 57.4 | 14.0 | |||||||||||||||||||
| Net income before accounting changes and extraordinary items | $ | 238.2 | $ | 280.6 | $ | 80.8 | ||||||||||||||||
| Excess of fair value of acquired net assets over cost | 180.5 | — | 7.1 | |||||||||||||||||||
| Cumulative effect of changes in accounting principles | — | — | 660.2 | |||||||||||||||||||
Losses and LAE |
| 2,452.7 |
| 2,858.2 |
| 2,591.1 |
| |||||||||||||||
Insurance and reinsurance acquisition expenses |
| 754.8 |
| 761.2 |
| 744.4 |
| |||||||||||||||
Other underwriting expenses |
| 505.4 |
| 424.7 |
| 520.4 |
| |||||||||||||||
General and administrative expenses |
| 218.3 |
| 148.8 |
| 301.0 |
| |||||||||||||||
Accretion of fair value adjustment to loss and LAE reserves |
| 24.5 |
| 36.9 |
| 43.3 |
| |||||||||||||||
Interest expense - debt |
| 50.1 |
| 44.5 |
| 49.1 |
| |||||||||||||||
Interest expense - dividends and accretion on preferred stock |
| 58.6 |
| 52.4 |
| 47.6 |
| |||||||||||||||
Total expenses |
| 4,064.4 |
| 4,326.7 |
| 4,296.9 |
| |||||||||||||||
Pre-tax income |
| $ | 729.8 |
| $ | 305.2 |
| $ | 258.4 |
| ||||||||||||
Income tax provision |
| (98.9 | ) | (36.5 | ) | (47.0 | ) | |||||||||||||||
Equity in earnings of unconsolidated affiliates |
| 36.9 |
| 33.6 |
| 37.4 |
| |||||||||||||||
Minority interest |
| (16.0 | ) | (12.2 | ) | (10.6 | ) | |||||||||||||||
Net income before extraordinary items |
| $ | 651.8 |
| $ | 290.1 |
| $ | 238.2 |
| ||||||||||||
Excess of fair value of acquired net assets over cost |
| 21.4 |
| — |
| 180.5 |
| |||||||||||||||
| Net income | Net income | $ | 418.7 | $ | 280.6 | $ | 748.1 |
| $ | 673.2 |
| $ | 290.1 |
| $ | 418.7 |
| |||||
| Other comprehensive income | 176.5 | 79.0 | 202.3 | |||||||||||||||||||
Other comprehensive income (loss) |
| 32.9 |
| (254.1 | ) | 176.5 |
| |||||||||||||||
| Comprehensive net income | Comprehensive net income | $ | 595.2 | $ | 359.6 | $ | 950.4 |
| $ | 706.1 |
| $ | 36.0 |
| $ | 595.2 |
| |||||
| Less: Change in net unrealized gains from Symetra's fixed maturity portfolio | (56.6 | ) | — | — | ||||||||||||||||||
Change in net unrealized (gains) losses from Symetra’s fixed maturity portfolio |
| 28.3 |
| 32.4 |
| (56.6 | ) | |||||||||||||||
| Adjusted comprehensive net income | Adjusted comprehensive net income | $ | 538.6 | $ | 359.6 | $ | 950.4 |
| $ | 734.4 |
| $ | 68.4 |
| $ | 538.6 |
| |||||
Consolidated Results—Results - Year Ended December 31, 20042006 versus Year Ended December 31, 20032005
White Mountains reported adjusted comprehensive net income of $734 million for 2006, compared to $68 million in 2005. Net income was $673 million in 2006, compared to $290 million in 2005. The increase in 2006 adjusted comprehensive net income resulted primarily from the gain on the sale of OneBeacon shares, favorable weather conditions, strong investment returns and a $21 million after-tax gain on the purchase of Mutual Service. In addition, the 2005 results included $288 million in after-tax losses from hurricanes Katrina, Rita and Wilma, while 2006 included $70 million in after-tax losses from adverse development on those storms and a $95 million after-tax loss from the Olympus reimbursement (see description on page 52). 2005 also included $104 million of after-tax comprehensive net loss from the Montpelier Re investment, compared to $10 million in after-tax comprehensive net income in 2006. Adjusted comprehensive net income for 2006 also benefitted from $59 million of after-tax unrealized foreign currency gains, compared to $70 million of after-tax unrealized foreign currency losses in 2005, primarily from currency fluctuations of the U.S. dollar against the Swedish Krona and the Euro.
White Mountains'Mountains’ total revenues increased by 20%4% to $4,794 million in 20042006 compared to 2003. Growth$4,632 million in revenues was driven by the 22% increase in earned premiums2005, mainly due to the Sirius Acquisition$171 million gain on the sale of OneBeacon shares and Atlantic Specialty transactions. Neta $160 million increase in net realized investment income grew 24%gains, primarily due to $165 million of pre-tax losses in 2004the value of the Company’s investment in Montpelier Re realized during 2005, compared to a $5 million pre-tax gain realized in 2006. These increases were
partially offset by a $56 million decrease in net investment income, primarily due to the incomereceipt in 2005 of $74 million special dividend from Montpelier Re, and a 2% decrease in earned on the additional invested assets acquired in the Sirius Acquisition offset by decreased net invested assets at OneBeacon.
White Mountains' total expenses grew 26% for 2004 as loss and LAE, insurance acquisition and underwriting expenses were all up due to the Sirius Acquisition and Atlantic Specialty transactions. General and administrative costs were up 53% in 2004,premiums, primarily due to a decreases at OneBeacon and White Mountains Re, which were partially offset by an increase at Esurance.
White Mountains’ total expenses decreased by 6% to $4,604 million for 2006, primarily due to a $406 million decrease in incentive compensation accruals, which were drivenlosses and LAE, partially offset by a 41% rise in White Mountains' stock price during the year. White Mountains expenses its full cost of all incentive compensation programs. This expense is spread among loss and LAE, other underwriting expense and general and administrative expense for White Mountains' insurance and reinsurance operating subsidiaries, depending upon the function of the employees being compensated. For Other Operations, it is entirely included$70 million increase in general and administrative expenses.
The decrease in losses and LAE was due mainly to lower catastrophe losses in 2006 compared to 2005. In 2005, White Mountains' net income in 2004 also benefitted from $181Mountains reported $422 million in transaction gains: $111pre-tax loss and LAE on hurricanes Katrina, Rita and Wilma, compared to $106 million in loss and LAE from the Sirius Acquisition, $41adverse development on those storms, as well as a $137 million for the Symetra investment, $20 million from the Tryg-Baltica acquisitionloss and $9 million in forgone override commissions from the Sierra Group acquisition.Olympus reimbursement in 2006. The increase in general and administrative expenses in 2006 when compared to 2005 was primarily due to increased incentive compensation expenses.
Consolidated Results—Results - Year Ended December 31, 20032005 versus Year Ended December 31, 20022004
White Mountains' total revenues decreased by 10% in 2003Mountains reported adjusted comprehensive net income of $68 million for 2005, compared to 2002, as an increase$539 million in earned reinsurance premiums at Folksamerica2004. Net income was more than offset by a decrease$290 million in earned insurance premiums at OneBeacon as a result of2005, compared to $419 million in 2004. The reduction in 2005 adjusted comprehensive net income resulted primarily from the business transferred to Liberty Mutual under the Liberty Agreement. Total revenues in 2003 were also impacted by decreased netaforementioned hurricane losses and Montpelier Re investment income due to the run-off of loss reserves from OneBeacon's other businessesdecline, as well as the reduced interest rate environment. The declineimpact of $181 million in transaction gains reported in 2004, primarily from the Sirius Acquisition.
White Mountains’ total revenues increased by 2% in 20032005 compared to 2004, mainly from a $131 million increase in net investment income, primarily due to a $74 million special dividend from Montpelier Re in 2005. Earned premiums decreased by 1% in 2005, primarily due to a decrease at OneBeacon, which was partially offset by increases at White Mountains Re and Esurance. Net realized investment gains decreased by $69 million in 2005, primarily due to losses in the value of the Company’s investment in Montpelier Re during 2005.
White Mountains’ total expenses also increased by 1% for 2005 as a $267 million increase in loss and LAE, primarily due to hurricanes Katrina, Rita and Wilma, was partially offset by an increase in other revenues, primarily as a result of $50$152 million in gains recorded during 2003 related to the sale of several real estate properties previously written-off under purchase accounting for OneBeacon and a $30 million increase in fees and commissions for business placed by WMU.
Total expenses decreased by 16% in 2003 as compared to 2002, as loss and LAE, as well as insurance acquisition and other underwriting expenses, decreased at OneBeacon as a result of improved underwriting performance on its on-going businesses and as the continued run-off of unprofitable business through the Liberty Agreement. In addition, interest expense on debt decreased 32% in 2003 as a result of the repayment of the $260 million of debt in November 2002 and the refinancing of $700 million of debt in May 2003. Also contributing to the decrease in expenses was a decrease in the accretion of the fair value adjustment to the reserves acquired as part of the OneBeacon Acquisition. This accretion will continue to decrease as those acquired reserves are paid over time. Partially offsetting these expense decreases was an increase in general and administrative expense of $109 million in 2003 over 2002,expenses, primarily due to an increase indecreased incentive compensation accruals, which were driven byexpense resulting from a 42% rise14% decline in White Mountains' stockMountains’ share price during 2003.the year.
The Company is domiciled in Bermuda and has subsidiaries domiciled in several countries. The majority of the Company'sCompany’s worldwide operations are taxed in the United States. Income earned or losses incurred by non-U.S. companies will generally be subject to an overall effective tax rate lower than that imposed by the United States.
The income tax provision related to pretax earnings for 2004, 20032006, 2005 and 20022004 represents an effective tax rate of 19.0%13.6%, 34.3%12.0% and 9.8%18.2%, respectively. White Mountains'Mountains’ effective tax raterates for 2006, 2005 and 2004 waswere lower than the U.S. statutory rate of 35% due primarily fromto income generated in jurisdictions other than the United StatesStates. In addition, White Mountains’ effective tax rate for 2006 benefitted from tax benefits recognized in the second quarter of 2006 related to settlements of U.S. Federal income tax audits for years 2001 and 2002 of Fund American Financial Services, Inc. and White Mountains’ effective tax rate for 2004 benefitted from the recognition of foreign tax credits, partially offset by taxes incurred from an internal restructuringreorganization of the company.
During 2005, White Mountains' effective tax rate for 2002Mountains was lower thanadvised that the U.S. statutory rate of 35% primarily from income generated in jurisdictions other thanJoint Committee on Taxation approved the United States.States Internal Revenue Service audit of White Mountains’ 1997-2000 tax years, which contained no significant adjustments to the tax returns filed by White Mountains. This audit included the redomestication of White Mountains to Bermuda in 1999.
I. Summary of Operations By Segment
White Mountains conducts its operations through four segments: (i) "OneBeacon", (ii) "White(1) OneBeacon, (2) White Mountains Re" (consisting primarily of the operations of Folksamerica, SiriusRe, (3) Esurance and WMU), (iii) "Esurance" and (iv) "Other Operations" (consisting of the Company and its intermediate subsidiary holding companies, White Mountains' investments in its Montpelier and Symetra warrants and the International American Group).(4) Other Operations. White Mountains manages all of its investments through its wholly ownedwholly-owned subsidiary, White MountainsWM Advisors, LLC ("WM Advisors"), therefore, a discussion of White Mountains'Mountains’ consolidated investment operations is included after the discussion of operations by segment. White Mountains'Mountains’ segment information is presented in Note 13 - “Segment Information” to the Consolidated Financial Statements.
OneBeacon
OneBeacon
Financial results for OneBeacon for the years ended December 31, 2006, 2005 and 2004 2003 and 2002 follows:follow:
| | Year Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Millions | |||||||||||
| 2004 | 2003 | 2002 | |||||||||
| Gross written premiums | $ | 2,657.5 | $ | 2,250.9 | $ | 3,351.6 | |||||
| Net written premiums | $ | 2,459.1 | $ | 1,972.5 | $ | 2,522.8 | |||||
| Earned insurance and reinsurance premiums | $ | 2,378.5 | $ | 2,160.3 | $ | 2,870.9 | |||||
| Net investment income | 221.4 | 223.7 | 314.0 | ||||||||
| Net realized investment gains | 129.6 | 127.0 | 113.0 | ||||||||
| Other revenue | 141.8 | 90.5 | 14.4 | ||||||||
| Total revenues | 2,871.3 | 2,601.5 | 3,312.3 | ||||||||
| Losses and LAE | 1,545.2 | 1,475.6 | 2,131.3 | ||||||||
| Insurance and reinsurance acquisition expenses | 442.3 | 394.2 | 629.6 | ||||||||
| Other underwriting expenses | 369.2 | 258.7 | 329.2 | ||||||||
| General and administrative expenses | 122.2 | 67.6 | 22.4 | ||||||||
| Interest expense on debt | 1.0 | .3 | — | ||||||||
| Total expenses | 2,479.9 | 2,196.4 | 3,112.5 | ||||||||
| Pretax earnings | $ | 391.4 | $ | 405.1 | $ | 199.8 | |||||
|
| Year Ended December 31, |
| |||||||
($ in millions) |
| 2006 |
| 2005 |
| 2004 |
| |||
Gross written premiums |
| $ | 2,088.4 |
| $ | 2,266.5 |
| $ | 2,657.5 |
|
Net written premiums |
| $ | 1,957.6 |
| $ | 2,121.1 |
| $ | 2,459.1 |
|
Earned insurance and reinsurance premiums |
| $ | 1,944.0 |
| $ | 2,118.4 |
| $ | 2,378.5 |
|
Net investment income |
| 187.6 |
| 242.4 |
| 219.9 |
| |||
Net realized investment gains |
| 156.4 |
| 122.8 |
| 129.4 |
| |||
Other revenue |
| 38.8 |
| 50.3 |
| 59.5 |
| |||
Total revenues |
| 2,326.8 |
| 2,533.9 |
| 2,787.3 |
| |||
Losses and LAE |
| 1,180.3 |
| 1,401.5 |
| 1,545.2 |
| |||
Insurance and reinsurance acquisition expenses |
| 332.3 |
| 390.7 |
| 442.3 |
| |||
Other underwriting expenses |
| 360.1 |
| 278.9 |
| 369.2 |
| |||
General and administrative expenses |
| 15.3 |
| 8.4 |
| 81.9 |
| |||
Accretion of fair value adjustment to loss and LAE reserves |
| 23.0 |
| 26.0 |
| 33.2 |
| |||
Interest expense on debt |
| 45.6 |
| 44.1 |
| 45.0 |
| |||
Interest expense - dividends and accretion on preferred stock |
| 58.6 |
| 52.4 |
| 47.6 |
| |||
Total expenses |
| 2,015.2 |
| 2,202.0 |
| 2,564.4 |
| |||
Pre-tax earnings |
| $ | 311.6 |
| $ | 331.9 |
| $ | 222.9 |
|
The following tables provide GAAP ratios, net written premiums and earned insurance premiums for OneBeacon'sOneBeacon’s ongoing businesses and in total for the years ended December 31, 2004, 2003,2006, 2005, and 2002:2004:
| Twelve Months Ended December 31, 2004 | Specialty | Personal | Commercial | Total(1) | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| GAAP Ratios: | ||||||||||||||
| Loss and LAE | 59 | % | 62 | % | 56 | % | 65 | % | ||||||
| Expense | 31 | % | 32 | % | 41 | % | 34 | % | ||||||
| Total Combined | 90 | % | 94 | % | 97 | % | 99 | % | ||||||
| Dollars in millions | | | | | ||||||||||
| Net written premiums | $ | 848.5 | $ | 724.7 | $ | 807.1 | $ | 2,459.1 | ||||||
| Earned insurance premiums | $ | 812.0 | $ | 723.8 | $ | 703.3 | $ | 2,378.5 | ||||||
| Twelve Months Ended December 31, 2003 | Specialty | Personal | Commercial | Total(1) | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| GAAP Ratios: | ||||||||||||||
| Loss and LAE | 54 | % | 61 | % | 61 | % | 68 | % | ||||||
| Expense | 32 | % | 30 | % | 34 | % | 30 | % | ||||||
| Total Combined | 86 | % | 91 | % | 95 | % | 98 | % | ||||||
| Dollars in millions | | | | | ||||||||||
| Net written premiums | $ | 733.7 | $ | 676.8 | $ | 426.7 | $ | 1,972.5 | ||||||
| Earned insurance premiums | $ | 694.9 | $ | 744.7 | $ | 432.0 | $ | 2,160.3 | ||||||
| Twelve Months Ended December 31, 2002 | Specialty | Personal | Commercial | Total(1) | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| GAAP Ratios: | ||||||||||||||
| Loss and LAE | 64 | % | 71 | % | 67 | % | 74 | % | ||||||
| Expense | 28 | % | 26 | % | 33 | % | 33 | % | ||||||
| Total Combined | 92 | % | 97 | % | 100 | % | 107 | % | ||||||
| Dollars in millions | | | | | ||||||||||
| Net written premiums | $ | 696.6 | $ | 845.2 | $ | 454.6 | $ | 2,522.8 | ||||||
| Earned insurance premiums | $ | 564.3 | $ | 871.3 | $ | 527.4 | $ | 2,870.9 | ||||||
($ in millions) |
| Year Ended December 31, 2006 |
| ||||||||||
GAAP Ratios: |
| Specialty |
| Personal |
| Commercial |
| Total(1) |
| ||||
Loss and LAE |
| 55 | % | 64 | % | 56 | % | 61 | % | ||||
Expense |
| 34 | % | 32 | % | 39 | % | 35 | % | ||||
Total Combined |
| 89 | % | 96 | % | 95 | % | 96 | % | ||||
Net written premiums |
| $ | 437.6 |
| $ | 800.6 |
| $ | 718.3 |
| $ | 1,957.6 |
|
Earned insurance premiums |
| $ | 432.3 |
| $ | 822.3 |
| $ | 689.3 |
| $ | 1,944.0 |
|
($ in millions) |
| Year Ended December 31, 2005 |
| ||||||||||
GAAP Ratios: |
| Specialty |
| Personal |
| Commercial |
| Total (1) |
| ||||
Loss and LAE |
| 54 | % | 62 | % | 59 | % | 66 | % | ||||
Expense |
| 31 | % | 29 | % | 38 | % | 32 | % | ||||
Total Combined |
| 85 | % | 91 | % | 97 | % | 98 | % | ||||
Net written premiums |
| $ | 548.8 |
| $ | 910.2 |
| $ | 654.4 |
| $ | 2,121.1 |
|
Earned insurance premiums |
| $ | 521.9 |
| $ | 933.7 |
| $ | 654.7 |
| $ | 2,118.4 |
|
($ in millions) |
| Year Ended December 31, 2004 |
| ||||||||||
GAAP Ratios: |
| Specialty |
| Personal |
| Commercial |
| Total (1) |
| ||||
Loss and LAE |
| 57 | % | 63 | % | 56 | % | 65 | % | ||||
Expense |
| 33 | % | 28 | % | 42 | % | 34 | % | ||||
Total Combined |
| 90 | % | 91 | % | 98 | % | 99 | % | ||||
Net written premiums |
| $ | 565.7 |
| $ | 1,063.3 |
| $ | 826.8 |
| $ | 2,459.1 |
|
Earned insurance premiums |
| $ | 539.0 |
| $ | 1,070.9 |
| $ | 710.3 |
| $ | 2,378.5 |
|
(1)Includes results from reciprocals (consolidated beginning April 1, 2004)run-off operations.
Beginning in the fourth quarter of 2006, OneBeacon includes OBSP within commercial lines and run-off operations. ResultsAutoOne within personal lines. Both OBSP and AutoOne were formerly reported in specialty lines. The reporting change was undertaken to better align the reported results of OneBeacon’s underwriting units with their product and management structure. Prior periods have been reclassified to conform to the current presentation. Additionally, during 2005, OneBeacon reallocated $34 million of IBNR reserves from reciprocals are netongoing lines of business assumed by to run-off. This reallocation had the effect of lowering the combined ratios for specialty, commercial and personal lines, but had no net impact on OneBeacon’s overall results.
OneBeacon which is contained in Personal Lines.OneBeacon Results—Results - Year Ended December 31, 20042006 versus Year Ended December 31, 20032005
OneBeacon's pretaxOneBeacon’s pre-tax income for 20042006 was $391$312 million compared to pre-tax income of $405$332 million for 20032005, and its GAAP combined ratio was 99%96% for 2004,2006 compared to 98% for 2003.2005. OneBeacon’s 2005 results included the results of NFU prior to its sale on September 30, 2005. The earnings and combined ratios for each period were relatively consistent as each period had solid performanceinclusion of NFU in the results for the current underwriting year, partially offsetfirst nine months of 2005 reduced the 2005 combined ratio by someone point.
Lower adverse development inon prior year's reserves. In total,accident year losses caused OneBeacon’s 2006 combined ratio to decrease four points from 2005. OneBeacon’s 2006 results included $23 million of adverse development was $100on prior accident years compared to $95 million in 2004 (relating2005, which primarily related to 2002 and prior accident years) and $147years. Lower current accident year catastrophe losses also caused OneBeacon’s 2006 combined ratio to decrease two points from 2005. OneBeacon’s 2006 results included $29 million in 2003 (relatingcurrent accident year catastrophe losses compared to $81 million in 2005, which included $69 million in from hurricanes Katrina, Rita and Wilma. Offsetting these decreases was a one point increase from higher incentive compensation expenses in 2006 and a one point increase from $20 million of expenses associated with actions taken to reduce long-term occupancy costs, including OneBeacon’s move to its new U.S. headquarters in Canton, Massachusetts. In addition, OneBeacon’s 2005 results included a $54 million gain from the settlement of its retiree medical plan, which reduced the 2005 combined ratio by three points. The retiree medical plan, which had been frozen in 2002, was terminated and an independent trust was established and funded to provide benefits to covered participants. These actions relieved OneBeacon of its future retiree medical obligations and triggered recognition of the gain. The majority of the gain was recorded as a reduction of other underwriting expenses with a portion of the gain reflected as a reduction in loss and LAE because a portion of the expense of the retiree medical program was allocated to the claims department.
OneBeacon’s total revenues decreased 8% in 2006 to $2,327 million compared to $2,534 million in 2005. The decrease was due principally to a 6% decrease in earned premiums in 2006, primarily due to 2000the aforementioned sale of NFU, which had $130 million of earned premium in 2005. Net investment income decreased to $188 million in 2006 compared to $242 million in 2005, primarily due to the receipt of a $35 million special dividend on Montpelier Re common shares in the first quarter of 2005. Net realized investment gains increased to $156 million in 2006 compared to $123 million in 2005. The 2005 period included a realized loss of $55 million due to an other-than-temporary impairment on OneBeacon’s investment in Montpelier Re common shares. Other revenues in 2006 included a pre-tax gain of $30 million from OneBeacon’s sale of the renewal rights to its Agri business and a pre-tax loss on the exchange of its investment in MSA of $13 million (after tax, the MSA exchange resulted in an $8 million net realized gain). Other revenues in 2005 included $34 million in gains recorded from the sales of two subsidiaries, NFU and Traders and Pacific Insurance Company.
Specialty Lines. The specialty lines combined ratio for 2006 was 89% compared to 85% for 2005. The increase was primarily due a higher expense ratio, which rose to 34% in 2006 from 31% in 2005. The increased expense ratio was primarily due to a one point increase in incentive compensation expense in 2006 and the favorable impact in 2005 of the settlement of the retiree medical plan, which lowered that year’s expense ratio by two points. The loss and LAE ratio for 2006 was essentially flat when compared to 2005. Excluding the impact of the aforementioned reallocation of reserves to run-off, which reduced the 2005 loss ratio by three points, the loss and LAE ratio improved in 2006.
Net written premiums for specialty lines decreased by 20% to $438 million in 2006, compared to $549 million in 2005, mainly due to the aforementioned sales of NFU and Agri. Excluding NFU and Agri, specialty lines net written premiums increased $41 million, or 12%, from 2005. The increase was mainly due to a $30 million increase in net written premiums at OBPP to $179 million in 2006 from $149 million in 2005, principally driven by long-term care and lawyers professional liability products. Net written premiums for all other specialty lines businesses increased modestly or were essentially flat when compared with the prior year.
Personal Lines. The personal lines combined ratio for 2006 was 96%, compared to 91% for 2005. The loss and LAE ratio increased to 64% in 2006, compared to 62% in 2005, primarily due to favorable items in 2005. The personal lines 2005 loss and LAE ratio included the benefit of the settlement of the retiree medical plan and the favorable impact of the reallocation of IBNR reserves to run-off, which each reduced the loss and LAE ratio by approximately one point. The expense ratio increased to 32% in 2006, compared to 29% in the prior year, mainly due to increased incentive compensation expenses of approximately one point in 2006 and the benefit of the settlement of the retiree medical plan in 2005, which decreased the 2005 expense ratio by approximately two points. In addition, the 2006 expense ratio was higher than the 2005 expense ratio by approximately one point as expense reductions were not proportional to reductions in earned premiums.
Net written premiums for personal lines decreased by 12% to $801 million in 2006 compared to $910 million in 2005. The decrease was primarily attributable to reduced writings at AutoOne due to the size of New York’s assigned risk pool significantly decreasing and reduced writings in traditional personal lines due to an increasingly competitive auto market and state-mandated rate decreases in Massachusetts. With respect to the New York assigned risk pool, market trends indicate that assigned risk volumes are expected to decline to approximately $200 million in 2007, down from $240 million in 2006, $383 million in 2005 and $629 million in 2004. Assigned risk volumes in New Jersey are also expected to decline. Market trends indicate that the assigned risk pool in New Jersey is expected to decline to approximately $140 million in 2007, down from $175 million in 2006, $275 million in 2005 and $375 million in 2004. OneBeacon expects a continued reduction in AutoOne’s premium volume in 2007 reflective of these trends.
Commercial Lines. The commercial lines combined ratio for 2006 was 95% compared to 97% for 2005. Lower catastrophe losses caused the commercial lines 2006 combined ratio to decrease six points from 2005. Commercial lines 2006 results included $31 million in current and prior accident years).year catastrophe losses, which included $21 million in losses incurred from hurricanes Katrina, Rita and Wilma, compared to $64 million in 2005, which included $56 million in losses incurred from hurricanes Katrina, Rita and Wilma. Partially offsetting this decrease was the favorable impact of one point related to the benefit of the settlement of the retiree medical plan in 2005 and two points related to the reallocation in 2005 of IBNR reserves to run-off.
Net written premiums for commercial lines increased by 10% to $718 million in 2006 compared to $654 million in 2005, as net written premiums increased for both the middle market division and the small business division. The 2004 development related primarily to personal auto liability, general liability and multiple peril reserves dueincrease in part to emerging trendsnet written premiums in claimsthe middle market division was experienced in OneBeacon's run-off operations,property and inland marine products as
well as national accountat OBSP. The increase in small business was experienced in small business package products.
Other Lines. For 2006, other lines generated an underwriting loss of $44 million compared to an underwriting loss of $133 million in 2005. The 2005 results included $107 million in adverse development, mainly from 2002 and program claims administered by third parties. These claim trends principally included prior accident years, which was primarily due to higher than anticipated defense costs and higher damages from liability assessments. The 2003 developmentassessments in general liability and multiple peril lines. As described above, 2005 also included a reallocation of $34 million of IBNR reserves from ongoing lines of business to run-off.
OneBeacon Results - Year Ended December 31, 2005 versus Year Ended December 31, 2004
Overview
OneBeacon’s pre-tax income for 2005 was primarily$332 million, compared to pre-tax income of $223 million for 2004, and its combined ratio was 98% for 2005, compared to 99% for 2004.
Higher catastrophe losses caused OneBeacon’s 2005 combined ratio to increase approximately three points from 2004. OneBeacon’s 2005 results included $82 million in catastrophe losses, which included $69 million in catastrophe losses related to construction defect claims. Adverse developmenthurricanes Katrina, Rita and Wilma, compared to $31 million of catastrophe losses in 20042004. In addition, OneBeacon’s 2005 results included a $54 million gain from the settlement of its retiree medical plan, which reduced the 2005 combined ratio by three points, and 2003, respectively, was partially offset by thea release of approximately $20 million and $30 million of the New York assigned risk liability due to the shrinking New York assigned risk pool.
OneBeacon's total revenues for 2004 increased by 10% compared to 2003, due principally to an increase in earned premiums resulting primarily from the Atlantic Specialty Transaction. Total revenues for 2004 were also impacted by an increase in other revenues due mainly to the commencement of two new private equity funds managed by Tuckerman Capital, a group of private equity funds that are consolidated as a result of White Mountains' significant investment in the funds.
OneBeacon's total expenses for 2004 increased 13% compared to 2003, primarily as a result of increased incentive compensation accruals driven by the 41% rise in White Mountains' share price in 2004, partially offset by the release of $20 million of the New York assigned risk liability. The release of this liability resulted frompool, which reduced the continued effects of favorable revisions2005 combined ratio by one point. OneBeacon’s 2005 and 2004 results also include $95 million and $100 million, respectively, in adverse development, primarily relating to 2002 and prior accident years, which impacted the structure of credit programs. General and administrative expenses were highercombined ratio by approximately four points in each year.
OneBeacon’s total revenues decreased 9% in 2005 to $2,534 million, compared to $2,787 million in 2004, due mainlyprincipally to an 11% decline in earned premiums in 2005. The decrease in earned premiums was partially due to lower commercial lines premiums resulting from the commencementsale of two new private equity funds managed by Tuckerman Capital, a groupthe renewal rights on most of private equity funds that are consolidated asOneBeacon’s non-Atlantic Mutual New York commercial lines business to Tower Insurance Group late in 2004. As a result of White Mountains' significantthis transaction, approximately $110 million of premiums written in 2004 were subject to this renewal rights agreement and were not written by OneBeacon during 2005. OneBeacon’s commercial lines also had a one-time premium increase of approximately $135 million in 2004 from the assumption of unearned premium from the Atlantic Specialty transaction.
In addition, personal lines premium decreased in 2005 due to lower volumes in Massachusetts and New York. New Jersey Skylands Insurance also had lower premiums in 2005 as compared to 2004.
Net realized investment gains for 2005 included a realized loss of $55 million due to an other-than-temporary impairment with respect to OneBeacon’s investment in Montpelier Re common shares. During 2005, the funds.market value of Montpelier Re common shares decreased from $38.45 per share to $18.90 per share. OneBeacon’s original cost of this investment in 2001 was $105 million, which was subsequently increased by $65 million in equity in earnings recorded from 2001 to March 2004, the period in which OneBeacon accounted for the investment under the equity method of accounting. The impairment charge represented the difference between OneBeacon’s GAAP cost of $170 million and the investment’s fair value of $116 million at December 31, 2005.
Other revenue for 2005 included $34 million in gains recorded from the sales of two subsidiaries, NFU and Traders and Pacific Insurance Company. During the fourth quarter of 2004, OneBeacon sold two of its subsidiaries, Potomac Insurance Company of Illinois ("Potomac"(“Potomac”) and Western States Insurance Company ("(“Western States"States”), as well as its boiler inspection service business, and recognized gains on the salesfor a total gain of $22 million throughthat was recognized in other revenues.revenue.
As a result of an actuarial review completed in the fourth quarter of 2005, OneBeacon reallocated some of its IBNR reserves from some of the ongoing lines of business to run-off operations. This shifted $34 million of IBNR reserves from specialty lines ($10 million), commercial lines ($12 million) and personal lines ($12 million) to run-off operations. This adjustment had no impact on OneBeacon’s total combined ratio.
Specialty Lines.The specialty lines combined ratio for 2005 was 85%, compared to 90% for 2004, compared to2004. The decrease in the 2003 combined ratio of 86%. The 2004 combined ratio was higher than 2003 primarilymainly due to the reallocation of IBNR reserves to run-off operations and the settlement of the retiree medical plan, which reduced the combined ratio by a total of five points. Specialty lines results in 2005 included $13 million of losses relating($9 million at IMU and $4 million atAgri) related to hurricanes Katrina, Rita and Wilma, which unfavorably impacted the combined ratio by three points. In 2004, the combined ratio for specialty lines was adversely impacted by two points ($11 million) from the four stormshurricanes in the southeastern United States that impacted IMU and better than expected weather losses in 2003. WrittenStates.
Net written premiums for specialty lines were up 16%2005 decreased by 3% to $549 million, compared to $566 million in 2004, driven by growth in writingsas increases at OBPP, which included $28 million of net written premium from a renewal rights agreement with Chubb Specialty Insurance that took effect during the third quarter of 2005 were offset by the sale of NFU in the third quarter of 2005.
Personal Lines. The personal lines combined ratio for 2005 was 91%, compared to 91% for 2004. The loss and AutoOne Insurance,LAE ratio decreased in 2005 primarily due to strong homeowners results, aided by favorable catastrophe experience resulting from a relatively mild winter and lack of northeast wind events, as well as lower frequencies in OneBeacon’s legacy auto business. The settlement of the introduction of OBSP in 2004, a new division offering coverages toretiree medical plan favorably impacted the excess and surplus property market.
Personal Lines. The2005 combined ratio for personal lines for 2004 was 94%, compared toby three points. In addition, the 2003 combined ratio of 91%. The 2004 personal lines combined ratio was adverselyfavorably impacted by seven points as a resultone point from the reallocation of increased incentive compensation accruals, partially offset by three points dueIBNR reserves to the reduction of the New York assigned risk liability. The 2003 combined ratio benefitted by four points due to a reduction of the New York assigned risk liability. Premiums in this line grew 7% due in part to improved production of new business and increased retention levels and also $47 million in premiums assumed from New Jersey Skylands Insurance Association through a quota-share reinsurance agreement.run-off operations.
Commercial Lines.The commercial lines combined ratio for commercial lines for 20042005 was 97%, compared to 98% for 2004. The reallocation of IBNR reserves to run-off operations and the 2003settlement of the retiree medical plan reduced the combined ratio in 2005 by a total of 95%.five points. Commercial lines results in 2005 included $56 million of losses related to hurricanes Katrina, Rita and Wilma, which impacted the combined ratio by nine points, while 2004 included storm losses of $13 million, which impacted the combined ratio by two points. The commercial lines 2004 combined ratio was a bit higher as a result ofalso adversely impacted by transition and integration costs related to the Atlantic Specialty Transactiontransaction and adverse results from its non-Atlantic Mutual New York commercial lines book. The 2004 loss ratio includes two points relating to the four storms
Other Lines. Other lines for 2005 included approximately $107 million in the southeastern United States,adverse development, mainly from 2002 and prior accident years, which primarily related to Atlantic Specialty business in that area. Excluding these losses, the commercial lines loss ratio significantly improved. Premiums in this line grew by 89%was primarily due to the Atlantic Specialty Transaction.
During the third quarterhigher than anticipated defense costs and higher damages from liability assessments in general liability and multiple peril lines. In addition, during 2005, OneBeacon reallocated $34 million of 2004, OneBeacon entered into an agreement to sell the renewal rights to mostIBNR reserves from some of its non-Atlantic Mutual New York commercialongoing lines of business to Tower Insurance Group. The transaction, effective with December 1, 2004 renewals, will remove approximately $110 million of premiums over the next year.run-off lines.
OneBeacon Results—Year Ended December 31, 2003 versus Year Ended December 31, 2002
OneBeacon's pretax income for 2003 was $405 million, compared to pre-tax income of $200 million for 2002, and its GAAP combined ratio was 98% for 2003 compared to 107% for 2002. All of OneBeacon's ongoing businesses—specialty, personal and commercial lines—delivered combined ratios below 100% in 2003 and, in the second half of 2003, its premiums from its ongoing businesses grew for the first time since the OneBeacon Acquisition.
OneBeacon's total revenues for 2003 declined by 21% compared to 2002, due principally to a 25% decline in earned premiums, resulting primarily from a reduction in premiums assumed under the Liberty Agreement. Total revenues for 2003 were also impacted by a 29% decrease in net investment income due to the runoff of loss reserves as well as the reduced interest rate environment. Other revenues increased significantly in 2003 due mainly to fee revenue generated by New Jersey Skylands Management LLC and certain consolidated limited partnerships.
OneBeacon's total expenses for 2003 declined by 29% compared to 2002, primarily as a result of reduced premium writings and improved underwriting performance. Total expenses in 2003 included a net $147 million reserve increase in OneBeacon's runoff operations, primarily related to prior year construction defect claims, that was partially offset by an approximate $30 million release of the New York assigned risk liability due to the shrinking New York assigned risk pool. General and administrative expenses increased significantly in 2003 due mainly to expenses generated by New Jersey Skylands Management LLC and certain consolidated limited partnerships.
During the fourth quarter of 2003, OneBeacon sold one of its subsidiaries, National Farmers Union Standard Insurance Company ("NFU Standard"), for $22 million and recognized a $9 million gain on the sale through other revenue.
Specialty Lines. The combined ratio in 2003 was 86%, a six point improvement over the 92% reported in 2002. This was driven by good underwriting results across OneBeacon's various specialty businesses, as well as favorable development in AutoOne Insurance's prior year reserves, which positively impacted the combined ratio by two points. OneBeacon wrote specialty lines premiums of $734 million in 2003, up 5% over 2002, mostly due to an increase in business written by OBPP and IMU.
Personal Lines. The combined ratio in 2003 was 91%, a six point improvement over the 97% reported in 2002 as price increases achieved in 2002 and 2003 flowed through into underwriting results. In addition, the 2003 period reflected the reduction in OneBeacon's New York assigned risk liability, discussed above, which lowered the combined ratio by three points. OneBeacon's personal lines written premium volume for 2003 decreased 20% from 2002, primarily due to re-underwriting efforts such as actions to reduce exposure to windstorms on property located in coastal areas. Also contributing to the decrease were declines in written premiums relating to the transfer of OneBeacon's private passenger automobile business in New Jersey to New Jersey Skylands Insurance Association in 2002.
Commercial Lines. The combined ratio in 2003 was 95%, a five point improvement over the 100% reported in 2002 as the Company's efforts to re-underwrite its book took hold, partially offset by prior year reserve development of three points. OneBeacon's commercial lines written premium volume for 2003 decreased 6% from 2002, primarily due to the continued effects of actions taken to reduce the concentration of risks subject to terrorism, such as reducing total insured values in 11 major cities, and reductions in workers compensation writings.
Run-off Operations. Pursuant to the Liberty Agreement, Liberty Mutual assumed control of OneBeacon's claims offices in the regions subject to the Liberty Agreement and was responsible for servicing claims from the OneBeacon policies written prior to November 1, 2001, as well as policies
which renewed in those regions since that date. Effective July 11, 2003, the servicing agreement with Liberty Mutual was amended and OneBeacon took back substantially all remaining outstanding claims related to policies written prior to the Liberty Agreement.
During the second quarter of 2003, OneBeacon claims and actuarial personnel noticed an unusual spike in case reserves related to the policies taken back from Liberty Mutual. The spike was isolated primarily to incurred losses on construction defect claims which were approximately $38 million higher than expected. There were 924 new claims, 32% higher than expected. The four states with the largest number of new construction defect claims were California, Nevada, Colorado and Arizona (345 of the total 924 new claims). As a result, OneBeacon claims and actuarial personnel undertook a study to determine the cause of the increase. This study, which was completed in the third quarter of 2003, indicated that most of the increase in activity was due to differences in case reserving philosophies between OneBeacon's and Liberty's claims adjusters, such as the identification and coding of construction defect claims. However, the study also indicated that some of the increase in activity related to an increase in the severity of construction defect claims stemming from increased litigation and resulting adverse court decisions. As a result, OneBeacon recorded an increase for construction defect claim reserves of $98 million in the third quarter of 2003. SeeConstruction Defect Claims in CRITICAL ACCOUNTING ESTIMATES below for further background on construction defect claims.
White Mountains Re
Financial results and GAAP combined ratios for White Mountains Re for the years ended December 31, 2006, 2005 and 2004 2003 and 2002 follows:
| | Year Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Millions | |||||||||||
| 2004 | 2003 | 2002 | |||||||||
| Gross written premiums | $ | 1,933.3 | $ | 1,414.9 | $ | 982.0 | |||||
| Net written premiums | $ | 1,246.3 | $ | 885.7 | $ | 688.2 | |||||
| Earned insurance and reinsurance premiums | $ | 1,265.5 | $ | 845.8 | $ | 635.0 | |||||
| Net investment income | 98.5 | 50.4 | 51.5 | ||||||||
| Net realized investment gains | 29.6 | 7.7 | 30.3 | ||||||||
| Other revenue | 36.1 | 75.5 | 53.6 | ||||||||
| Total revenues | 1,429.7 | 979.4 | 770.4 | ||||||||
| Losses and LAE | 918.9 | 557.6 | 442.2 | ||||||||
| Insurance and reinsurance acquisition expenses | 271.8 | 198.0 | 161.2 | ||||||||
| Other underwriting expenses | 122.9 | 57.8 | 41.0 | ||||||||
| General and administrative expenses | 15.1 | 19.6 | 20.6 | ||||||||
| Accretion of fair value adjustment to loss and LAE reserves | 10.1 | — | — | ||||||||
| Interest expense on debt | 3.8 | 2.0 | 2.0 | ||||||||
| Total expenses | 1,342.6 | 835.0 | 667.0 | ||||||||
| Pretax earnings | $ | 87.1 | $ | 144.4 | $ | 103.4 | |||||
| | Years Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| | 2004 | 2003 | 2002 | ||||||
| GAAP ratios: | |||||||||
| Loss and LAE | 73 | % | 66 | % | 70 | % | |||
| Expense | 31 | % | 30 | % | 32 | % | |||
| Total Combined | 104 | % | 96 | % | 102 | % | |||
|
| Year Ended December 31, |
| |||||||
Millions |
| 2006 |
| 2005 |
| 2004 |
| |||
Gross written premiums |
| $ | 1,624.5 |
| $ | 1,981.3 |
| $ | 1,933.3 |
|
Net written premiums |
| $ | 1,290.0 |
| $ | 1,304.1 |
| $ | 1,246.3 |
|
Earned insurance and reinsurance premiums |
| $ | 1,241.2 |
| $ | 1,371.6 |
| $ | 1,265.5 |
|
Net investment income |
| 182.7 |
| 148.9 |
| 98.5 |
| |||
Net realized investment gains |
| 59.0 |
| 76.8 |
| 29.6 |
| |||
Other revenue |
| 47.8 |
| 33.5 |
| 36.1 |
| |||
Total revenues |
| 1,530.7 |
| 1,630.8 |
| 1,429.7 |
| |||
Losses and LAE |
| 884.6 |
| 1,237.9 |
| 918.9 |
| |||
Insurance and reinsurance acquisition expenses |
| 287.2 |
| 279.6 |
| 271.8 |
| |||
Other underwriting expenses |
| 94.7 |
| 107.0 |
| 122.9 |
| |||
General and administrative expenses |
| 24.2 |
| 12.4 |
| 15.1 |
| |||
Accretion of fair value adjustment to loss and LAE reserves |
| 1.5 |
| 10.9 |
| 10.1 |
| |||
Interest expense on debt |
| 1.5 |
| .4 |
| 3.8 |
| |||
Total expenses |
| 1,293.7 |
| 1,648.2 |
| 1,342.6 |
| |||
Pre-tax earnings (loss) |
| $ | 237.0 |
| $ | (17.4 | ) | $ | 87.1 |
|
|
| Years Ended December 31, |
| ||||
|
| 2006 |
| 2005 |
| 2004 |
|
GAAP ratios: |
|
|
|
|
|
|
|
Loss and LAE |
| 71 | % | 90 | % | 73 | % |
Expense |
| 31 | % | 28 | % | 31 | % |
Total Combined |
| 102 | % | 118 | % | 104 | % |
White Mountains Re Results—Results - Year Ended December 31, 20042006 versus Year Ended December 31, 20032005
White Mountains Re'sRe’s pre-tax income for 2006 was $237 million compared to a pre-tax loss of $17 million for 2005, and its GAAP combined ratio increasedwas 102% for 2006 compared to 118% for 2005. The improved combined ratio and the increase in pre-tax income resulted primarily from 96% in 2003 to 104% in 2004, due primarily to $135significantly lower catastrophe losses. During 2006, White Mountains Re recorded $86 million of claims incurredunfavorable development, net of reinstatement premiums and reinsurance, related to hurricanes Katrina, Rita and Wilma and $137 million in losses and $9 million of forgone override commissions related to the Olympus reimbursement. During 2005, White Mountains Re recognized $351 million in pre-tax losses, net of reinstatement premiums and reinsurance from hurricanes Katrina, Rita and Wilma. 2005 also included $57 million of other significant property catastrophe eventslosses, primarily from European storm Erwin and floods in Europe.
Excluding the unfavorable development from Katrina, Rita and Wilma and the Olympus reimbursement, White Mountains Re’s underwriting units performed well in 2006, reflecting generally more favorable weather conditions and continued favorable prices, terms and conditions within the reinsurance marketplace. Excluding the additional losses from hurricanes Katrina, Rita and Wilma and the Olympus reimbursement, favorable development on prior year reserves of $11 million resulted primarily from continued favorable run off of recent underwriting years at Sirius International of $46 million and favorable development of $19 million arising from Folksamerica’s agriculture line of business, offset by unfavorable development of $55 million from casualty losses associated with the Risk Capital acquisition.
White Mountains Re’s 2006 gross written premiums decreased by 18% to $1,625 million and net written premiums decreased by 1% to $1,290 million from $1,304 million in 2005. White Mountains Re reduced its overall property exposure and Folksamerica non-renewed its excess offshore energy and marine business in the Gulf of Mexico starting on January 1, 2006, which caused gross written premiums to decline substantially in 2006 versus
2005. All of the non-renewed excess offshore energy and marine business was subject to Folksamerica’s reinsurance treaty with Olympus, under which Folksamerica ceded up to 75% of this business in 2005. As a result, the impact on the change in White Mountains Re’s net written premiums from 2005 to 2006 was significantly less than the impact on the change in its gross written premiums over the same period. Gross and net written premiums were also lower during 2006 due to lower reinstatement premiums on property catastrophe reinsurance, which had primarily resulted from reinstated coverage after hurricanes Katrina and Rita in 2005, and lower premiums from Sirius America, which was sold in August 2006. Sirius America contributed $71 million and $39 million of gross and net written premiums, respectively, in 2006, compared to $248 million and $87 million, respectively, in 2005. Additionally, gross and net written premiums on casualty lines were lower in 2006, due mainly to pricing, terms and conditions that did not meet White Mountains Re’s pricing guidelines and due to higher ceding company retentions. These decreases were partially offset by increases in certain non-catastrophe exposed classes, particularly in specialty lines.
White Mountains Re’s net investment income increased by $34 million in 2006 as a result of higher overall yields and a larger investment asset base, principally due to contributions from White Mountains. Other underwriting expenses decreased in 2006 by $12 million, or 11%, from 2005, primarily due to a reduction in unallocated loss adjustment expense reserves of approximately $7 million during the first quarter of 2006 resulting from an evaluation of the remaining run-off contracts at Scandinavian Re, as well as a reduction in incentive compensation accruals. General and administrative expenses increased to $24 million in 2006 from $12 million in 2005. The increase is primarily due to accruals related to the relocation of the underwriting advisory operations from Ireland to Bermuda and costs associated with expanding the Bermuda advisory operations.
Accretion of fair value adjustment to loss and LAE reserves decreased in 2006 by $9 million, or 86%, from $11 million in 2005 as a result of a change in the rate of accretion of the fair value adjustment to loss and LAE reserves that was established in the purchase accounting for the Sirius Acquisition. The change in accretion resulted from the aforementioned evaluation of the remaining run-off contracts at Scandinavian Re and will be made prospectively over the remaining amortization period.
White Mountains Re recognized fee income of $12 million from Olympus and Helicon in 2006, $9 million of which was recorded as other revenues, compared to $61 million of fee income from Olympus in 2005, $28 million of which was recorded as other revenues. The decrease in fee income was primarily the result of a reduction in amounts ceded to Olympus and Helicon in 2006 compared to 2005 and due to FHC waiving $9 million of override commission due from Olympus in accordance with the Olympus reimbursement. Other revenues in 2006 also included a $14 million gain from the sale of Sirius America and $21 million of realized foreign exchange gains. In 2005, other revenue also included a $5 million gain from the sale of California Indemnity Insurance Company, a wholly-owned subsidiary of White Mountains Re acquired in 2004 as part of the Sierra acquisition.
Olympus reimbursement. In June 2006, following the receipt of new claims information reported from several ceding companies and subsequent reassessment of the ultimate loss exposures, White Mountains Re increased its gross loss estimates for hurricanes Katrina, Rita and Wilma by $201 million. This was mostly on Folksamerica Re’s off-shore energy and marine exposures attributable to retrocessional arrangements and business interruption coverage. As a result, Folksamerica Re set its gross loss and LAE reserves as of June 30, 2006 on offshore energy and marine exposures for hurricanes Katrina and Rita at full contract limits. Starting January 1, 2006, Folksamerica Re non-renewed its excess offshore energy and marine business in the Gulf of Mexico.
Under the terms of Folksamerica Re’s 2005 quota share reinsurance treaty with Olympus, $139 million of the loss, net of reinstatement premiums, from hurricanes Katrina, Rita and Wilma recorded in the second halfquarter of 2004. These catastrophes,2006 was ceded to Olympus. However, FHC entered into an indemnity agreement with Olympus on June 16, 2006, under which are discussed further below, increasedit agreed to reimburse Olympus for up to $137 million of these losses, which were recorded as loss and LAE during the combined ratio in 2004second quarter of 2006. FHC also waived override commissions on premiums earned by 11 points. In general,Olympus after March 31, 2006 for reinsurance contracts recommended by White Mountains Re has experienced favorablewith an effective date of December 31, 2005 and prior. White Mountains Re expects that the commission waivers will total approximately $10 million. Folksamerica Re will continue to cede 35% of its 2007 underwriting conditionsyear short-tailed excess of loss business, mainly property and marine, with Olympus and Helicon sharing approximately 55% and 45%, respectively, in 2007. Olympus will continue to be responsible to pay losses on exposures that have been ceded to it and will continue to receive cessions from Folksamerica Re.
White Mountains Re Results - Year Ended December 31, 2005 versus Year Ended December 31, 2004
White Mountains Re’s pre-tax loss for 2005 was $17 million, compared to pre-tax income of $87 million for 2004, and its GAAP combined ratio was 118% for 2005, compared to 104% for 2004. White Mountains Re’s 2005 results included pre-tax losses, net of reinstatements and reinsurance, of $351 million from hurricanes Katrina, Rita and Wilma and $57 million of other significant property catastrophe losses, primarily from European storm Erwin and floods in Europe, which added a total of 30 points to the past three underwriting years. Earningscombined ratio. In addition, White Mountains Re recorded $51 million of net unfavorable loss reserve development in 2005 (discussed below), which contributed 4 points to the loss ratio. During 2005, earnings from business segments not impacted by the property catastrophe events and earnings from the recently completed Sirius Acquisition, haveincreased net investment income partially offset the impact of these natural disasters. Net written premiums, total revenues, and total expenses were all up substantiallylosses. Additionally, White Mountains Re’s expense ratio decreased to 28% in 2005, from 31% in 2004, due mainly to the Sirius Acquisition.
Gross written premiums increased $518 million, or 37% from 2003 toa decrease in incentive compensation accruals. White Mountains Re’s 2004 and net written premiums increased $361 million, or 41% for the same period. This increase is due primarily to the Sirius Acquisition, which contributed $612results included $135 million of gross written premiumspre-tax losses, net of reinstatements and $418 million of net written premiums during 2004. Included in these amounts is the U.S. program business written by Sirius America totaling $216 million of gross written premiums and $85 million of net written premiums. Additionally, in late 2003, White Mountains Re, through Folksamerica, entered into the CNA Re agreement and established a Chicago underwriting office. Annual gross written premiums for the 2004 underwriting year resultingreinsurance, from this transaction and the related opening of the Chicago underwriting office were approximately $177 million, of which $129 million was recorded as gross written premium and $91 million as net written premium for the year ended December 31, 2004. Partially offsetting the increases resulting from these transactions was the cancellation of several large casualty treaties at Folksamerica whose pricing or terms did not meet White Mountains Re's underwriting guidelines.
There were significant levels of property catastrophe activity during the last half of 2004, including the four hurricanes whichthat affected the Southeastsoutheastern United States and the Caribbean, where White Mountains Re has historically been a significant participant in the property reinsurance market. Additionally, Sirius International was exposed to losses from the devastating tsunami that impacted South Asia, in December 2004. which added a total of 11 points to the combined ratio.
White Mountains Re believes its underwriting disciplineRe’s 2005 gross written premiums increased by 3% to $1,981 million and risk management approach helpednet written premiums increased by 5% to contain these losses$1,304 million from 2004. The increase was due primarily to manageable levels. This significant property catastrophe activitySirius International, which was acquired in the second quarter of 2004 and contributed nine months of premiums in 2004 versus twelve months in 2005, partially offset by decreased premium volume at both Sirius International and Folksamerica as a result of the general softness in the reinsurance market prior to hurricanes Katrina, Rita and Wilma.
White Mountains Re’s net investment income increased in 2005 compared to 2004 primarily as a result of the inclusion of Sirius International’s investment portfolio, which was acquired during the last halfsecond quarter of 2004, resultedfor the entire year of 2005. Other underwriting expenses decreased in $135 million of pre-tax losses, including2005 by $16 million, related to the tsunami. There was no significant property catastrophe activity in 2003.or 13%, from 2004.
During 2004, White Mountains Re recorded $11$51 million of net unfavorable loss reserve development in 2005, the majority of which contributed 1 point to the loss ratio in 2004, as compared to $46 million, or 5 points in 2003. The 2003 unfavorable development is described in further detail in the section titledresulted from a detailed, ground-up asbestos study completed by White Mountains Re Results—Year Ended December 31, 2003 versus Year Ended December 31, 2002, below.in 2005. The majoritystudy analyzed all insureds that have reported over $250,000 of asbestos claims to Folksamerica and a significant sample of all other insureds with reported asbestos claims of less than $250,000. Comparing estimates generated by the unfavorable development recordedstudy to Folksamerica exposed limits by underwriting year led to an increase of approximately $50 million in 2004 resulted from certain discontinued lines at Folksamerica as well as run-off operations acquired as partIBNR during the third quarter of the Sirius Acquisition.2005. This unfavorable development was partially offset by favorable development in the Sirius International reserve portfolio stemmingof approximately $12 million, mainly from the three most recent underwriting years, and is indicative of the favorable terms and conditions that have existedyears. Included in the global reinsurance marketplace during that time. Additionally, White Mountains Re recorded $10 million ofnet unfavorable loss development on itsin 2005 was $23 million from workers compensation reserves acquired in 2004 as part of the Sierra acquisition in 2004. This adverse developmentacquisition. However, this amount was offset dollar-for-dollar by a decrease in the balance due under the adjustable note discussedissued in Note 2—Significant Transactions.conjunction with this acquisition.
White Mountains Re receives fee income on reinsurance placements referred to Olympus and is entitled to a profit commission based on net underwriting profits on referred business. The additional capacity provided by the reinsurance relationship with Olympus supports White Mountains Re's ability to offer significant reinsurance protection.During 2005 and 2004, White Mountains Re recognized netearned $61 million and $69 million, respectively, of fee income of $69 million from OlympusOlympus. The decrease in 2004 asfee income from the prior period is primarily due to the significant loss events in 2005, including hurricanes Katrina, Rita and Wilma, which resulted in White Mountains Re not earning any profit commission in 2005 compared to $98earning $12 million of profit commission in 2003.2004. The decline in the fee income earned is
due primarily to the negative impact of the four hurricanes on the profit commission arrangement betweenwith Olympus is subject to a deficit carryforward whereby net underwriting losses from one underwriting year carryover to future underwriting years. As a result of the significant loss events in 2005, Olympus recorded a substantial net underwriting loss for the year. Accordingly, White Mountains Re and Olympus.does not expect to record profit commissions from Olympus for the foreseeable future.
White Mountains Re Results—Year Ended December 31, 2003 versus Year Ended December 31, 2002
White Mountains' Re's pretax income was $144 million for 2003, an increase of 40% over the $103 million recorded in 2002. White Mountains Re's GAAP combined ratio improved to 96% for 2003, from 102% for 2002. The improvement in White Mountains Re's combined ratio resulted primarily from more favorableEffective January 1, 2006, Folksamerica renewed its quota-share reinsurance arrangements with Olympus on modified terms and conditions Sirius International terminated its agreement with Olympus. The 2005 and prior underwriting year business will continue to run-off with Olympus. For a further discussion, see “Reinsurance Protection”, under “WHITE MOUNTAINS RE” in the reinsurance marketplace, and fewer catastrophe losses affecting White Mountains Re in 2003 as compared to 2002.
White Mountains Re's gross written premiums increased 44% from 2002 to 2003, while net written premiums increased 29% and earned premiums increased 33%. The increases in net written and earned premiums were due to increased pricing on White Mountains Re's expiring and renewed contracts, increased shares on renewed contracts and new contracts resulting from the increased demand of reinsurance buyers for placing reinsurance with responsible, well-capitalized reinsurers.
White Mountains Re's total revenues were up 27% in 2003 over 2002, primarily driven by a 33% increase in earned premiums. The increase in earned (and net written) premiums was due to increased pricing on White Mountains Re's expiring and renewed contracts, increased shares on renewed contracts and new contracts resulting from the increased demand of reinsurance buyers for placing reinsurance with responsible, well-capitalized reinsurers. Also contributing to the increase in revenues in 2003 was a $49 million increase ($98 million in 2003 vs $49 million in 2002) in advisory fees and profit commissions received by White Mountains Re on reinsurance placements referred to Olympus, due principally to an increase in the volume of business ceded to Olympus in 2003.
White Mountains Re experienced approximately $46 million of unfavorable loss reserve development during 2003, primarily due to strengthening of A&E reserves and reserves on Risk Capital casualty lines. White Mountains Re's 2003 loss development for A&E exposures was due to the completion of a detailed A&E market share study. This study compared Folksamerica's share of industry paid losses to estimated industry carried reserves and resulted in Folksamerica increasing its IBNR by approximately $25 million.
EsuranceItem 1.
Esurance's53
Esurance
Esurance’s financial results and GAAP combined ratios for the years ended December 31, 2006, 2005 and 2004 2003 and 2002 follows:
| | Year Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Millions | ||||||||||||
| 2004 | 2003 | 2002 | ||||||||||
| Gross written premiums | $ | 201.3 | $ | 116.4 | $ | 53.0 | ||||||
| Net written premiums | $ | 199.4 | $ | 116.4 | $ | 53.0 | ||||||
| Earned insurance and reinsurance premiums | $ | 176.5 | $ | 99.9 | $ | 40.8 | ||||||
| Net investment income | 3.5 | 1.3 | 1.2 | |||||||||
| Net realized investment gains | 1.1 | .2 | — | |||||||||
| Other revenue | 2.2 | .3 | 1.6 | |||||||||
| Total revenues | 183.3 | 101.7 | 43.6 | |||||||||
| Losses and LAE | 122.4 | 81.0 | 36.6 | |||||||||
| Insurance and reinsurance acquisition expenses | 29.4 | 18.8 | 9.7 | |||||||||
| Other underwriting expenses | 27.7 | 20.4 | 22.4 | |||||||||
| Total expenses | 179.5 | 120.2 | 68.7 | |||||||||
| Pretax earnings (loss) | $ | 3.8 | $ | (18.5 | ) | $ | (25.1 | ) | ||||
| | Years Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| | 2004 | 2003 | 2002 | ||||||
| GAAP ratios: | |||||||||
| Loss and LAE | 69 | % | 81 | % | 89 | % | |||
| Expense | 33 | % | 39 | % | 80 | % | |||
| Total Combined | 102 | % | 120 | % | 169 | % | |||
|
| Year Ended December 31, |
| |||||||
Millions |
| 2006 |
| 2005 |
| 2004 |
| |||
Gross written premiums |
| $ | 599.5 |
| $ | 351.9 |
| $ | 201.3 |
|
Net written premiums |
| $ | 595.9 |
| $ | 349.1 |
| $ | 199.4 |
|
|
|
|
|
|
|
|
| |||
Earned insurance and reinsurance premiums |
| $ | 527.5 |
| $ | 306.8 |
| $ | 176.5 |
|
Net investment income |
| 18.4 |
| 9.8 |
| 3.5 |
| |||
Net realized investment gains |
| 6.9 |
| 2.1 |
| 1.1 |
| |||
Other revenue |
| 7.4 |
| 3.0 |
| 2.2 |
| |||
Total revenues |
| 560.2 |
| 321.7 |
| 183.3 |
| |||
|
|
|
|
|
|
|
| |||
Losses and LAE |
| 383.9 |
| 206.2 |
| 122.4 |
| |||
Insurance and reinsurance acquisition expenses |
| 135.3 |
| 90.8 |
| 30.3 |
| |||
Other underwriting expenses |
| 48.8 |
| 37.2 |
| 26.8 |
| |||
General and administrative expenses |
| 0.2 |
| — |
| — |
| |||
Total expenses |
| 568.2 |
| 334.2 |
| 179.5 |
| |||
Pre-tax earnings (loss) |
| $ | (8.0 | ) | $ | (12.5 | ) | $ | 3.8 |
|
|
| Years Ended December 31, |
| ||||
|
| 2006 |
| 2005 |
| 2004 |
|
GAAP ratios: |
|
|
|
|
|
|
|
Loss and LAE |
| 73 | % | 67 | % | 69 | % |
Expense |
| 35 | % | 42 | % | 33 | % |
Total Combined |
| 108 | % | 109 | % | 102 | % |
Esurance Results—Results - Year Ended December 31, 20042006 versus Year Ended December 31, 20032005
Esurance’s pre-tax loss for 2006 was $8 million compared to a pre-tax loss of $13 million for 2005. Esurance’s GAAP combined ratio was 108% for 2006 compared to 109% for 2005. Esurance’s loss ratio increased to 73% in 2006 from 67% in the prior period, due to rate reductions and one point of unfavorable development on loss reserves in 2006 compared to three points of favorable development on loss reserves in the prior year. The expense ratio decreased to 35% in 2006 from the prior period expense ratio of 42% due to lower acquisition costs and additional operating efficiencies.
Net written premium increased to $596 million, a 71% increase from 2005. As of December 31, 2006, Esurance’s in-force policy count totaled 372,688, a 76% increase over 2005. During 2006, Esurance continued to expand through national and local television advertising, online marketing, direct mail, and online agency channels. More site traffic and improved conversion rates lowered the costs of acquiring new customers during 2006.
Esurance'sEsurance writes business in 24 states. During 2006, Esurance’s largest states were California (with 19% of direct premium written), Florida (17%), New York (9%), Texas (6%) and Michigan (6%).
Esurance Results - Year Ended December 31, 2005 versus Year Ended December 31, 2004
Esurance’s pre-tax loss for 2005 was $13 million, compared to pretax income of $4 million for 2004 represented an improvement over2004. Esurance’s GAAP combined ratio was 109% for 2005, compared to 102% for 2004. Esurance’s loss ratio decreased to 67% in 2005, from 69% in the pretax loss of $19prior year, despite $2 million in 2003. Esurance's 2004losses sustained from hurricane Wilma during 2005. The decrease in the loss ratio resulted primarily from improved claims performance and increased pricing sophistication. The expense ratio increased to 42% in 2005, from 33% in the prior year, mainly due to higher acquisition expenses from Esurance’s marketing programs, driven by increased competition for new customers. The combined ratio improved to 102% from 120% in 2003 due to improvements in both loss and expense ratios. Esurance's loss ratio improvement resultedwas also adversely impacted by approximately 3 points from the continued rollout and refinementadoption of Esurance's proprietary auto insurance program. Loss ratio improvement also resulteda new long-term incentive compensation plan in 2005.
Net written premiums increased to $349 million in 2005, a 75% increase from better claims performance, driven by the transition from a third party administrator to an in-house claims operation in 2003, as well as 3 points of favorable development on loss reserves.
The auto program, combined with Esurance's self-service, web-enabled operating platform, allowed Esurance to increase premium volume and in-force policy count while reducing the expense ratio from 39% to 33%.2004. As of December 31, 2004, Esurance's2005, Esurance’s in-force policy count was 118,513 policies,totaled 211,851, a 60%79% increase over 2004, and it wrote business in twenty-two states. For the year ended December 31, 2003. Increased advertising, particularly in radio2005, Esurance’s largest states were Florida (with 20% of direct premium written), California (20%), Texas (9%), New York (8%) and TV, drove policy count growth.
Esurance Results—Year Ended December 31, 2003 versus Year Ended December 31, 2002
The trends described above that drove Esurance's favorable results in 2004 relative to 2003 also benefitted the 2003 results in relation to 2002. Thus, the pretax loss for Esurance decreased by $7 million in 2003 and the combined ratio fell 49 points, while net written premiums more than doubled.Michigan (7%).
Other Operations
Other Operations consists of the operations of the Company, and the Company'sCompany’s intermediate subsidiary holding companies, White Mountains’ weather risk management and variable annuity reinsurance businesses, the consolidated results of the Tuckerman Funds, the International American Group as well asand White Mountains'Mountains’ investments in Symetra and Montpelier and Symetra warrants.Re. A summary of White Mountains'Mountains’ financial results from its Other Operations segment for the years ended December 31, 2006, 2005 and 2004 2003 and 2002 follows:
| | | Year Ended December 31, |
| Year Ended December 31, |
| |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Millions | Millions |
| 2006 |
| 2005 |
| 2004 |
| ||||||||||||||
| 2004 | 2003 | 2002 | ||||||||||||||||||||
Gross written premiums |
| $ | — |
| $ | 1.9 |
| $ |
|
| ||||||||||||
Net written premiums |
| $ | — |
| $ | 1.8 |
| $ | — |
| ||||||||||||
| Gross written premiums | $ | — | $ | 41.2 | $ | 35.0 |
|
|
|
|
|
|
| |||||||||
Earned insurance and reinsurance premiums |
| $ | — |
| $ | 1.8 |
| $ | — |
| ||||||||||||
Net investment income |
| 46.8 |
| 90.4 |
| 39.0 |
| |||||||||||||||
Net realized investment gains (loss) |
| 50.4 |
| (89.1 | ) | 21.0 |
| |||||||||||||||
Gain on sale of shares of OneBeacon |
| 171.3 |
| — |
| — |
| |||||||||||||||
Other revenue |
| 108.0 |
| 142.4 |
| 95.0 |
| |||||||||||||||
Total revenues |
| 376.5 |
| 145.5 |
| 155.0 |
| |||||||||||||||
|
|
|
|
|
|
| ||||||||||||||||
| Net written premiums | $ | — | $ | 33.1 | $ | 29.5 | ||||||||||||||||
| Earned insurance and reinsurance premiums | $ | — | $ | 31.7 | $ | 29.7 | ||||||||||||||||
| Net investment income | 37.5 | 15.5 | (.7 | ) | ||||||||||||||||||
| Net realized investment gains | 20.8 | 27.7 | 12.7 | |||||||||||||||||||
| Other revenue | 10.4 | 36.3 | 39.9 | |||||||||||||||||||
| Total revenues | 68.7 | 111.2 | 81.6 | |||||||||||||||||||
| Losses and LAE | 4.6 | 23.9 | 28.1 | |||||||||||||||||||
| Insurance and reinsurance acquisition expenses | — | 4.0 | 3.8 | |||||||||||||||||||
| Other underwriting expenses | 1.5 | 10.2 | 9.1 | |||||||||||||||||||
| General and administrative expenses | 172.0 | 114.6 | 49.7 | |||||||||||||||||||
| Accretion of fair value adjustment to loss and LAE reserves | 33.2 | 48.6 | 79.8 | |||||||||||||||||||
| Interest expense on debt | 44.3 | 46.3 | 69.8 | |||||||||||||||||||
| Interest expense—dividends and accretion on preferred stock subject to mandatory redemption | 47.6 | 22.3 | — | |||||||||||||||||||
| Total expenses | 303.2 | 269.9 | 240.3 | |||||||||||||||||||
| Pretax loss | $ | (234.5 | ) | $ | (158.7 | ) | $ | (158.7 | ) | |||||||||||||
Losses and LAE |
| 3.9 |
| 12.6 |
| 4.6 |
| |||||||||||||||
Insurance and reinsurance acquisition expenses |
| — |
| .1 |
| — |
| |||||||||||||||
Other underwriting expenses |
| 1.8 |
| 1.6 |
| 1.5 |
| |||||||||||||||
General and administrative expenses |
| 178.6 |
| 128.0 |
| 204.0 |
| |||||||||||||||
Interest expense on debt |
| 3.0 |
| — |
| .3 |
| |||||||||||||||
Total expenses |
| 187.3 |
| 142.3 |
| 210.4 |
| |||||||||||||||
Pre-tax income (loss) |
| $ | 189.2 |
| $ | 3.2 |
| $ | (55.4 | ) | ||||||||||||
White Mountains' capital raising and capital allocation activities are principally conducted through its holding companies. In this regard, the results of its
Other Operations segment primarily relate to financing activities, purchase accounting adjustments relating to the OneBeacon Acquisition, gains and losses recognized from the purchase and sale of certain of the Company's subsidiaries and other assets and general and administrative expenses incurred at the holding company level.
Other Operations Results—Results - Year Ended December 31, 20042006 versus Year Ended December 31, 20032005
White Mountains'Mountains’ Other Operations segment reported pre-tax income of $189 million for 2006, compared to $3 million for 2005. The increase was primarily attributable to the $171 million gain on the sale of OneBeacon shares. In addition, the Montpelier Re investment accounted for $13 million in pre-tax income during 2006, compared to $63 million of pre-tax losses during 2005, which included $39 million of net investment income from the special dividend. These increased gains were partially offset by a $58 million increase in incentive compensation expense in 2006 compared to 2005. In addition, White Mountains’ weather risk management and variable annuity reinsurance businesses contributed $(3) million and $2 million, respectively, to pre-tax income for the Other Operations segment in their first year of operation.
Other Operations Results - Year Ended December 31, 2005 versus Year Ended December 31, 2004
White Mountains’ Other Operations segment reported pre-tax income of $3 million for 2005, compared to a pre-tax loss of $235$55 million for 2004. The following items contributed to the improved results in 2005: (1) an $84 million decrease in incentive compensation expense in 2005; (2) the special dividend from Montpelier Re in the 2005 first quarter, $39 million of which was reported in this segment; (3) $26 million of gains recorded in other revenues in 2005 from the settlement of two lawsuits in which White Mountains was a plaintiff; and (4) a $14 million increase in other net investment income. Additionally, the 2004 results included a $20 million realized loss from the impact that currency fluctuations had on hedging the cost of funding for the Sirius Acquisition. These loss-reducing factors were partially offset by a $126 million decrease in net realized investment gains from the valuation of the Montpelier Re warrants (a $110 million loss in 2005 versus a $16 million gain in 2004).
II. Summary of Investment Results
A summary of White Mountains’ consolidated pre-tax investment results for the years ended December 31, 2006, 2005 and 2004 follows:
|
| Year Ended December 31, |
| |||||||
Millions |
| 2006 |
| 2005 |
| 2004 |
| |||
Net investment income |
| $ | 435.5 |
| $ | 491.5 |
| $ | 360.9 |
|
Net realized investment gains |
| 272.7 |
| 112.6 |
| 181.1 |
| |||
Net unrealized investment gains (losses) |
| 120.1 |
| (275.1 | ) | 156.1 |
| |||
Total GAAP pre-tax investment results |
| $ | 828.3 |
| $ | 329.0 |
| $ | 698.1 |
|
Gross investment returns versus typical benchmarks for the years ended December 31, 2006, 2005 and 2004 are as follows. For purposes of discussing rates of return, all percentages are presented gross of management fees and trading expenses in order to produce a more relevant comparison to benchmark returns, while all dollar amounts are presented net of any management fees and trading expenses.
|
| Year Ended December 31, |
| ||||
|
| 2006 |
| 2005 |
| 2004 |
|
Fixed maturity investments |
| 5.9 | % | 2.7 | % | 4.4 | % |
Short-term investments |
| 6.1 |
| 5.6 |
| 1.9 |
|
Total fixed maturities |
| 6.0 |
| 3.0 |
| 4.1 |
|
Lehman U.S. Aggregate Index |
| 4.3 |
| 2.4 |
| 4.3 |
|
|
|
|
|
|
|
|
|
Common stock |
| 22.0 |
| 5.1 |
| 35.4 |
|
Other investments |
| 16.9 |
| 3.9 |
| 24.3 |
|
Total equities |
| 20.4 |
| 4.7 |
| 31.8 |
|
S&P 500 Index (total return) |
| 15.8 |
| 4.9 |
| 10.9 |
|
|
|
|
|
|
|
|
|
Total consolidated portfolio |
| 8.2 | % | 3.3 | % | 7.4 | % |
Investment Returns -Year Ended December 31, 2006 versus Year Ended December31, 2005
White Mountains’ total pre-tax investment result was a gain of $828 million, a return of 8.2% for 2006 compared to $159a gain of $329 million, a return of 3.3% for 2003.2005. White Mountains’ total fixed maturity portfolio returned 6.0% during 2006 versus 3.0% during 2005. The increased loss for the yearhigher return in 2006 was primarily due to a $20more favorable interest rate environment, where the rate of increase in interest rates during 2006 was lower than during 2005. In addition, the weakening of the U.S. dollar during 2006 reversed a trend from 2005 and produced unrealized currency exchange gains of $112 million in White Mountains’ foreign denominated fixed maturity securities portfolio. White Mountains’ total equity portfolio returned 20.4% during 2006 versus 4.7% during 2005. The equity return in 2005 was adversely impacted by 12.1 points due to the decline in the Montpelier Re investment.
Net investment income of $436 million during 2006 decreased 11% from $492 million during 2005, principally due to the receipt of a $74 million special dividend on the Montpelier Re investment during 2005. Net realized investment gains of $273 million during 2006 increased by 142% from $113 million during 2005, primarily due to a $170 million increase in incentive compensation accruals, which were driven by a 41% rise in White Mountains' stock price during 2004, and higherrealized gains from the saleMontpelier Re investment (a $5 million realized gain in 2006 period versus a $165 million realized loss in 2005). Net unrealized gains on investments of real estate in 2003 ($13$120 million in 2004 and $43during 2006 improved from net unrealized losses of $275 million in 2003). In addition, interest expense on preferred stock was up $25 million in 2004during 2005, primarily due to the inclusioneffect of interest rate movements and foreign currency fluctuations, as described above. In addition, 2005 included a full year of expense in$65 million pre-tax income in 2004 as opposed to six months included in 2003 as a result ofunrealized loss from the Company's adoption of SFAS 150, effective July 1, 2003. Prior to the adoption of SFAS 150, the interest expense on preferred stock was classified below the pretax loss line on the income statement as preferred stock dividends.
During the periods presented, Peninsula was the only operating company in the segment, and therefore it accounts for all of the premiums reported in the tables above. During January 2004, White Mountains sold Peninsula for $23 million. The operations of American Centennial and British Insurance Company are not significant to White Mountains, as those companies have been in run-off since they were acquired in 1999.Montpelier Re common share investment.
Other Operations Results—YearInvestment Returns -Year Ended December 31, 20032005 versus Year Ended December 31, 20022004
White Mountains' Other Operations segment reportedMountains’ total pre-tax lossesinvestment result was $329 million, a return of $1593.3% for 2005 versus $698 million, a return of 7.4%, for both 2003 and 2002. Incentive compensation accruals increased by $72 million2004. White Mountains’ total fixed maturity portfolio returned 3.0% during 2005 versus 4.1% during 2004. The lower return in 2003, but this increase2005 was offset by, among other items,primarily due to a $43 million decrease in losses onless favorable interest rate swap agreements and a $31 million decreaseenvironment, where the rate of increase in interest rates during 2005 was much larger than during 2004. In addition, the accretionstrengthening of the fair value adjustment on loss reserves acquiredU.S. dollar during 2005 reversed a trend from 2004 and produced unrealized currency exchange losses in the OneBeacon Acquisition. Interest expense on debt decreased by $24 million in 2003, due to the pay-off of a $260 million loan and the refinancing of $700 million of senior debt and amortization of the previous credit facility. This decrease was offset by the inclusion of $22 million of interest expense on preferred stock as a result of SFAS 150.
II. Summary of Investment Results
White Mountains manages all of its consolidated investments through its wholly-owned subsidiary, WM Advisors. White Mountains' investment philosophy is to invest its assets with a view towards maximizing its after-tax total return over extended periods of time. Under this approach, each dollar of after-tax investment income and realized and unrealized gains and losses is valued equally. White Mountains' overallMountains’ foreign denominated fixed maturity investment strategy is to purchase securities that are attractively priced in relation to perceived credit risks.portfolio. White Mountains generally manages the interest rate risk associated with holding fixed maturity investments by actively monitoring and maintaining the average duration of the portfolio with the goal of achieving an adequate after-taxMountains’ total return without subjecting the portfolio to an unreasonable level of interest rate risk. White Mountains' investment portfolio mix as of December 31, 2004 consisted in large part of high-quality, fixed maturity investments and short-term investments, as well as some equity investments and limited partnerships. White Mountains' management believes that prudent levels of investments in common equity securities and other investments within its investment portfolio are likely to enhance after-tax total returns without significantly increasing the risk profile of the portfolio when considered over long periods of time when balanced with leverage and insurance risk considerations. White Mountains seeks to maximize after-tax risk-adjusted returns over the long term.
White Mountains generated strong investment returns in 2004. The GAAP total return on invested assets was 7%, while the equity portfolio returned 20% for the year.4.7% during 2005 versus 31.8% during 2004. The equity return in 2005 was significantly better than the S&P 500, which returned 11% for the year, while the bond portfolio performed in line with its duration and credit characteristics. Management is continuing to keep its fixed maturity portfolio duration relatively short at about 3 years to reflect its concern that interest rates may rise in the next few years. Net investment income was up 24% from last year mainly due to the Sirius Acquisition, after declining 21% in 2003 primarilyadversely impacted by 12.1 percentage points due to the decline in reservesthe Montpelier Re investment, while the equity return in 2004 was favorably impacted by 7.4 percentage points due to gains in the Montpelier Re investment.
Net investment income of $492 million during 2005 increased 36% from $361 million during 2004, principally due to the receipt of a $74 million special dividend on the Montpelier Re investment during 2005. Net realized investment gains of $113 million during 2005 decreased by 38% from $181 million during 2004, primarily due to a $165 million realized loss from the Montpelier Re investment, partially offset by realized gains generated by reducing our positions in certain highly appreciated securities. Net unrealized losses on investments of $275 million during 2005 deteriorated from net unrealized gains of $156 million during 2004, primarily due to the effect of interest rate movements and foreign currency fluctuations, as described above. In addition, 2005 included a $65 million pre-tax unrealized loss from the Montpelier Re common share investment.
Portfolio composition
The following table presents the composition of White Mountains’ investment portfolio as of December 31, 2006 and 2005:
|
| As of |
| As of |
| ||||||
Millions |
| $ in millions |
| % of total |
| $ in millions |
| % of total |
| ||
Fixed maturity investments |
| $ | 7,911.5 |
| 69.8 | % | $ | 7,582.7 |
| 76.9 | % |
Short-term investments |
| 1,344.9 |
| 11.9 |
| 727.8 |
| 7.4 |
| ||
Common equity securities |
| 1,212.6 |
| 10.7 |
| 967.8 |
| 9.8 |
| ||
Other investments |
| 524.8 |
| 4.6 |
| 588.1 |
| 5.9 |
| ||
Trust account investments |
| 338.9 |
| 3.0 |
| — |
| — |
| ||
Total investments |
| $ | 11,332.7 |
| 100.0 | % | $ | 9,866.4 |
| 100.0 | % |
The breakdown of White Mountains’ fixed maturity investments, including trust account investments, at OneBeaconDecember 31, 2006 by credit class, based upon issue credit ratings provided by Standard and Poor’s, or if unrated by Standard and Poor’s, long term obligation ratings provided by Moody’s, is as follows:
|
| As of December 31 2006, |
| |||
Millions |
| Amortized cost |
| % of total |
| |
U.S. government and government-sponsored entities |
| $ | 2,406.5 |
| 29.6 | % |
AAA/Aaa |
| 3,000.2 |
| 37.0 |
| |
AA/Aa |
| 261.5 |
| 3.2 |
| |
A/A |
| 1,080.6 |
| 13.3 |
| |
BBB/Baa |
| 1,141.7 |
| 14.1 |
| |
Other/not rated |
| 227.4 |
| 2.8 |
| |
Total fixed maturity investments |
| $ | 8,117.9 |
| 100.0 | % |
The weighted average duration of White Mountains’ fixed maturity portfolio, excluding short-term investments, at December 31, 2006 was three years. The cost or amortized cost and carrying value of White Mountains’ fixed maturity available-for-sale investments at December 31, 2006 is presented below by contractual maturity. Actual maturities could differ from contractual maturities because borrowers may have the right to call or prepay certain obligations with or without call or prepayment penalties.
|
| December 31, 2006 |
| ||||
Millions |
| Cost or |
| Carrying |
| ||
Due in one year or less |
| $ | 445.7 |
| $ | 462.5 |
|
Due after one year through five years |
| 3,058.3 |
| 3,101.4 |
| ||
Due after five years through ten years |
| 1,135.7 |
| 1,139.6 |
| ||
Due after ten years |
| 467.6 |
| 471.2 |
| ||
Asset-backed securities |
| 2,899.1 |
| 2,904.7 |
| ||
Preferred stocks |
| 111.5 |
| 136.1 |
| ||
Total |
| $ | 8,117.9 |
| $ | 8,215.5 |
|
Montpelier Re investment
After-tax changes in White Mountains’ book value from its premium volumeinvestment in Montpelier Re for the years ended December 31, 2006, 2005 and 2004 were as follows:
|
| Year Ended December 31, |
| |||||||
Millions |
| 2006 |
| 2005 |
| 2004 |
| |||
Net investment income, pre-tax |
| $ | 3.6 |
| $ | 89.7 |
| $ | 18.3 |
|
Net realized investment gains (losses), pre-tax |
| 4.8 |
| (165.1 | ) | 51.5 |
| |||
Total revenues (losses), pre-tax |
| 8.4 |
| (75.4 | ) | 69.8 |
| |||
Tax benefit (expense) on total revenues |
| 1.3 |
| 13.5 |
| (17.9 | ) | |||
Total revenues (losses), after-tax |
| 9.7 |
| (61.9 | ) | 51.9 |
| |||
Change in net unrealized investment gains (losses), after-tax |
| .1 |
| (42.3 | ) | 36.0 |
| |||
Equity in earnings of Montpelier, after-tax |
| — |
| — |
| 11.0 |
| |||
Net after-tax change in White Mountains’ book value from Montpelier investment |
| $ | 9.8 |
| $ | (104.2 | ) | $ | 98.9 |
|
During 2005, White Mountains recognized $104 million of after-tax losses, net of dividends received, on its investment in Montpelier Re. Montpelier Re’s common share price decreased from $38.45 at December 31, 2004 to $18.90 at December31, 2005, resulting in a $110 million pre-tax realized investment loss on White Mountains’ Montpelier Re warrant investment. In addition, White Mountains recorded a $55 million pre-tax other-than-temporary impairment charge (reported as a realized investment loss) and a $42 million after-tax unrealized investment loss on its Montpelier Re common share investment during 2005. White Mountains’ original cost of its Montpelier common share investment was reduced.$106 million, which was subsequently increased by $65 million in equity in earnings recorded by White Mountains from 2001 to 2004, the period in which it accounted for the investment under the equity method of accounting. The impairment charge represented the difference between White Mountains’ GAAP cost of $171 million and the investment’s fair value of $116 million at December 31, 2005.
During 2006, White Mountains recorded $4 million in pre-tax dividends from Montpelier Re in net investment income. During 2005, Montpelier Re declared a special dividend of $5.50 per share, payable to holders of both its common shares and warrants to acquire its common shares. White Mountains recorded pre-tax dividend income of $74 million in 2005 for this special dividend, in addition to $16 million in dividend income from Montpelier’s normal quarterly dividends.
White Mountains sold a portion of its investment in Montpelier Re common shares during the first quarter of 2004 resulting in a $35 million pre-tax realized gain and, as a result, changed the method of accounting for its remaining Montpelier common shares to the fair value method, resulting in a $33 million increase in after-tax unrealized gains in the first quarter.quarter of 2004. During 2006, White Mountains sold an additional 5.4 million shares of its common share investment in Montpelier Re and realized a pre-tax gain of $5.5 million on the sale.
At December 31, 2006 and 2005, White Mountains’ investment in Montpelier Re warrants and common stock totaled $67 million and $167 million, respectively.
Impairment
See Impairment
SeeNote 5—Investments5 - “Investments” of the accompanying consolidated financial statements for White Mountains'Mountains analysis of impairment losses on investment securities.
This report includes twothree non-GAAP financial measures that have been reconciled to their most comparable GAAP financial measures. White Mountains believes these measures to be more relevant than comparable GAAP measures in evaluating White Mountains'Mountains’ financial performance.performance and capital position.
Adjusted comprehensive net income is a non-GAAP financial measure that excludes the change in net unrealized gains and losses from Symetra'sSymetra’s fixed maturity portfolio from comprehensive net income. In the calculation of comprehensive net income under GAAP, requires these assets to befixed maturity investments are marked-to-market which results in gains during periods when interest rates fall and losses in periods when interest rates rise. Becausewhile the liabilities related to which those assets are matched are not. Symetra attempts to earn a “spread” between what it earns on its investments and what it pays out on its products. In order to try to fix this spread, Symetra invests in a manner that tries to match the duration and cash flows of its investments with the required cash outflows associated with its life insurance and structured settlements products. As a result, Symetra typically earns the same spread on in-force business whether interest rates fall or rise. Further, at any given time, some of Symetra’s structured settlement obligations may extend 40 or 50 years into the future, which is further out than the longest maturing fixed maturity investments regularly available for purchase in the market (typically 30 years). For these long-dated products, Symetra is unable to fully match the obligation with assets until the remaining expected payout schedule comes within the duration of securities available in the market. If at that time, these assets supportfixed maturity investments have yields that are not marked-to-market, it is likely thatlower than the economic impact onyields expected when the structured settlement product was originally priced, the spread for the product will shrink and Symetra will ultimately harvest lower returns for its shareholders. GAAP comprehensive net income increases when rates decline, which would besuggest an increase in the value of Symetra - the opposite of that shown under GAAP (i.e., in general, Symetra'swhat is happening to the intrinsic value increasesof the business. Therefore, White Mountains’ management and Board of Directors use adjusted comprehensive net income when interest rates riseassessing Symetra’s quarterly financial performance. In addition, this measure is typically the predominant component of growth in fully converted tangible book value per share, which is used in calculation of White Mountains’ performance for both short-term (annual bonus) and decreases when interest rates fall).long-term incentive plans. The reconciliation of adjusted comprehensive net income to comprehensive net income is included on page 43.45.
Book value per share is derived by dividing the Company'sCompany’s total GAAP shareholders'shareholders’ equity as of a given date by the number of Common Sharescommon shares outstanding as of that date, including the dilutive effects of outstanding Options and warrants to acquire Common Shares,common shares, as well as the unamortized accretion of preferred stock. Fully converted tangible book value per common and equivalent share is a non-GAAP measure which is derived by expanding the GAAP book value per share calculation to include the effects of assumed conversion of all convertible securities and to exclude any unamortized goodwill and net unrealized gains from Symetra'sSymetra’s fixed maturity portfolio. The reconciliation of fully converted tangible book value per common and equivalent share to book value per share is included on page 42.44.
Total capital at White Mountains is comprised of common shareholders’ equity, minority interest in OneBeacon Ltd., debt and, through December31, 2005, preferred stock subject to mandatory redemption. As a result of the OneBeacon Offering, the preferred stock was economically defeased and, therefore, was not included in total capital as of December 31, 2006. Tangible capital is a non-GAAP measure which excludes from total capital the unamortized goodwill and the equity in net unrealized gains from Symetra’s fixed maturity portfolio. The reconciliation of total capital to total tangible capital is included on page 62.
LIQUIDITY AND CAPITAL RESOURCES
Operating cash and short-term investments
Holding company level.The primary sources of cash for the Company and certain of its intermediate holding companies are dividends and tax sharing payments received from its insurance and reinsurance operating subsidiaries, financing activities and net investment income and proceeds from sales and maturities of holding company investments. The primary uses of cash are interest payments on the Senior Notes,its debt obligations, dividend payments on the BerkshireCompany’s common shares and Zenith Preferred Stock as well as on Common Shares,minority interest holders of OneBeacon Ltd.’s common shares, purchases of investments and holding company operating expenses.
Operating subsidiary level.The primary sources of cash for White Mountains'Mountains’ insurance and reinsurance operating subsidiaries are premium collections, net investment income and proceeds from sales and maturities of investments. The primary uses of cash are claim payments, policy acquisition costs, operating expenses, the purchase of investments and dividend and tax sharing payments made to parent holding companies.
Both internal and external forces influence White Mountains'Mountains’ financial condition, results of operations and cash flows. Claim settlements, premium levels and investment returns may be impacted by changing rates of inflation and other economic conditions. In many cases, significant periods of time, ranging up to several years or more, may lapse between the occurrence of an insured loss, the reporting of the loss to White Mountains and the settlement of the liability for that loss. The exact timing of the payment of claims and benefits cannot be predicted with certainty. White Mountains'Mountains’ insurance and reinsurance operating subsidiaries maintain portfolios of invested assets with varying maturities and a substantial amount of short-term investments to provide adequate cashliquidity for the payment of claims.
Management believes that White Mountains'Mountains’ cash balances, cash flows from operations, routine sales of investments and the liquidity provided by itsthe WTM Bank Facility and the FAC Bank Facility are adequate to meet expected cash requirements for the foreseeable future on both a holding company and insurance and reinsurance operating subsidiary level.
Under the insurance laws of the states and jurisdictions under which White Mountains'Mountains’ insurance and reinsurance operating subsidiaries are domiciled, an insurer is restricted with respect to the timing or the amount of dividends it may pay without prior approval by regulatory authorities. Accordingly, there can be no assurance regarding the amount of such dividends that may be paid by such subsidiaries in the future. Following is a description of the ability of White Mountains'Mountains’ insurance and reinsurance operating subsidiaries to pay dividends to the Company and certain of its intermediate holding companies:
OneBeacon:
OneBeacon:
Subsequent to the OneBeacon Offering, the Company and its intermediate holding companies expect to receive regular dividends from OneBeacon Ltd. The board of OneBeacon Ltd. has authorized quarterly dividend payments of $0.21 per share, commencing in the first quarter of 2007.
Generally, OneBeacon'sOneBeacon’s regulated insurance operating subsidiaries have the ability to pay dividends during any 12 month12-month period without the prior approval of regulatory authorities in an amount equal to the greater of prior year statutory net income or 10% of prior year end statutory surplus, subject to the availability of unassigned funds. As a result, based on 20042006 statutory net income, OneBeacon'sOneBeacon’s top tier regulated insurance operating subsidiaries have the ability to pay $325approximately $234 million of dividends during 20052007 without prior approval of regulatory authorities, subject to the availability of unassigned funds. As of December 31, 2004, OneBeacon's2006, OneBeacon’s top tier regulated insurance operating subsidiaries had $1.3$1.6 billion of unassigned funds available for dividend distribution.funds.
In addition, as of December 31, 2004,2006, OneBeacon had $195approximately $31 million of unrestricted cash and fixed maturity investments outside of its regulated insurance operating subsidiaries available for distribution during 2005.and OneBeacon Ltd. and its intermediate holding companies had an additional $66 million of unrestricted cash and fixed maturity investments at its intermediate holding companies. During 2004,2006, OneBeacon paid $305$90 million of cash dividends to Fund American.American and OneBeacon Ltd. paid $12 million of dividends to its immediate parent.
White Mountains Re:Re:
Folksamerica's principal regulated reinsurance operating subsidiaryFolksamerica Re has the ability to pay dividends during any 12 month12-month period without the prior approval of regulatory authorities in an amount equal to the lesser of net investment income, as defined by statute, or 10% of statutory surplus, in both cases as most recently reported to regulatory authorities, subject to the availability of earned surplus. As a result, basedBased upon December 31, 20042006 statutory surplus of $917$1,153 million, Folksamerica's principal regulated reinsurance operating subsidiaryFolksamerica Re would have the ability to pay approximately $92$115 million of dividends during 20052007 without prior approval of regulatory authorities, subject to the availability of earned surplus. As of December 31, 2004, Folksamerica's principal regulated reinsurance operating subsidiary2006, Folksamerica Re had $17$1 million of earned surplus, therefore it can pay dividends of $17 million plus additional earned surplus reported during 2005, subject to the $92 million limitation discussed above.surplus.
AsIn addition, as of December 31, 2004, WMU2006, Folksamerica had $3approximately $31 million of unrestricted cash and fixed maturity investments available for distribution during 2005. In addition, WMU has the ability to distributeoutside of its 2005 earnings without restriction.regulated insurance operating subsidiaries. During 2004, WMU2006, Folksamerica Re paid $60$5 million of cashin dividends to its immediate parent.
In addition,Sirius International has the ability to pay dividends subject to the availability of unrestricted statutory surplus. Historically, Sirius International has allocated the majority of its earnings to the Safety Reserve (see “Safety Reserve” below). As a result, as of December 31, 2004, White Mountains ReDecember31, 2006, Sirius International had approximately $97 million of cash and investments outside of its regulated insurance and reinsurance operating subsidiaries available for distribution during 2005.
Safety Reserve
no unrestricted statutory surplus.
In accordance with the provisions of Swedish law, Sirius International can voluntarily transfer its pretax earnings,pre-tax income, or a portion thereof, subject to certain limitations, to its parent company to minimize taxes. In early 2007, Sirius International will transfer approximately $35 million of its 2006 pre-tax income to its parent company.
WMRUS has the ability to distribute its 2007 earnings without restriction. At December 31, 2006, WMRUS had $7 million of unrestricted cash. During 2006, WMRUS paid $14 million of dividends to its immediate parent.
In addition, as of December 31, 2006, White Mountains Re and its intermediate holding companies had an additional $26 million of unrestricted cash and fixed maturity investments outside of Folksamerica, Sirius and WMRUS. During 2006, White Mountains Re paid $46 million of dividends to its immediate parent.
Esurance:
Generally, Esurance’s regulated insurance operating subsidiaries have the ability to pay dividends during any 12-month period without the prior approval of regulatory authorities in an amount equal to the lesser of prior year statutory net income or 10% of prior year end statutory surplus, subject to the availability of unassigned funds. As a result, based on December 31, 2006 statutory surplus of $69 million, Esurance’s top tier regulated insurance operating subsidiary has the ability to pay $7 million of dividends during 2007 without prior approval of regulatory authorities, subject to the availability of unassigned funds. As of December 31, 2006, Esurance’s top tier regulated insurance operating subsidiary had $21 million of unassigned funds.
In addition, as of December 31, 2006, Esurance had $3 million of unrestricted cash and fixed maturity investments outside of its regulated insurance operating subsidiaries. During 2006, Esurance did not pay any cash dividends to its immediate parent.
Other operations:
As of December 31, 2006, White Mountains had $497 million of unrestricted cash and fixed maturity investments at the Company and its intermediate holding companies included in its other operations segment.
Safety Reserve
In accordance with provisions of Swedish law, Sirius International is permitted to transfer up to the full amount of its pre-tax income, subject to certain limitations, into an untaxed reserve referred to as a safety reserve. The safety reserve, is a Swedish regulatory concept that has no equivalent under GAAP. Accordingly, underwhich amounted to $1.3 billion at December 31, 2006. Under GAAP, an amount equal to Sirius International'sthe safety reserve, of $1.1 billion at December 31, 2004, net of the related deferred tax liability established at the statutory Swedish tax rate of 28%, is classified as shareholders’ equity. Generally, this deferred tax liability is only required to be paid by Sirius
International if it fails to maintain predetermined levels of premium writings and loss reserves in future years. As a result of the indefinite deferral of these taxes, Swedish regulatory authorities do not apply any taxes to the safety reserve when calculating solvency capital under Swedish insurance regulations. Accordingly, under local statutory requirements, an amount equal to the deferred tax liability on Sirius International’s safety reserve ($351 million at December 31, 2006) is included in solvency capital.
On November 30, 2004, White Mountains completed a significant corporate reorganization, through which ownership of Folksamerica was transferred to White Mountains Re from Fund American. In order to effect the reorganization, White Mountains and Fund American entered into or amended certain agreements with respect to the Berkshire Preferred Stock. Under the terms of a Keep-Well Agreement dated November 30, 2004 between White Mountains and Fund American (the "Keep-Well"“Keep-Well”), White Mountains has agreed to return to Fund American up to approximately $1.1 billion, which equals the amount of net assets transferred out of Fund American as a result of the reorganization, if some or all of that amount is required by Fund American to meet its obligations to Berkshire under the Berkshire Preferred Stock. Additionally, the Keep-Well limits the aggregate amount of distributions that White Mountains may make to its shareholdersshareholders. This distribution limit, which as of December 31, 2006 was $2.2 billion, will increase or decrease by an amount equal to approximately $1.3 billion plus White Mountains' aggregateMountains’ consolidated net income after September 30, 2004.or loss over the remaining life of the agreement. The Keep-Well will expire when all obligations of the Berkshire Preferred Stock, which is redeemable in May 2008, have been satisfied, or when approximately $1.1 billion has been returned to Fund American.
Insurance float is an important dynamic of White Mountains'Mountains’ operations that must be managed effectively. Float is money that an insurance company holds for a limited time. In an insurance operation, float arises because premiums are collected before losses are paid. This interval can extend over many years. During that time, the insurer invests the money.funds. When the premiums that an insurer collects do not cover the losses and expenses it eventually must pay, the result is an underwriting loss, which is considered to be the cost of float. The amount and cost of float for White Mountains is affected by underlying market conditions, as well as acquisitions or dispositions of insurance and reinsurance businesses.
Although insurance float can be calculated using numbers determined under GAAP, insurance float is not a GAAP concept and, therefore, there is no comparable GAAP measure.
One of the means by which White Mountains calculates its insurance float is by taking its net investment assets and subtracting its total tangible capital. The following table illustrates White Mountains'Mountains’ consolidated insurance float position as of the past five year-ends:
| | | December 31, |
| December 31, |
| |||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ($ in millions) | ($ in millions) |
| 2006(1) |
| 2005 |
| 2004 |
| 2003 |
| 2002 |
| ||||||||||||||||||||||||
| 2004 | 2003 | 2002 | 2001 | 2000 | ||||||||||||||||||||||||||||||||
| Total investments | Total investments | $ | 10,529.5 | $ | 8,547.5 | $ | 8,899.4 | $ | 9,005.7 | $ | 2,102.2 |
| $ | 11,332.7 |
| $ | 9,866.4 |
| $ | 10,529.5 |
| $ | 8,547.5 |
| $ | 8,899.4 |
| |||||||||
Investments held in trust |
| (338.9 | ) | — |
| — |
|
|
|
|
| |||||||||||||||||||||||||
| Cash | Cash | 243.1 | 89.9 | 121.5 | 67.4 | 4.4 |
| 159.0 |
| 187.7 |
| 243.1 |
| 89.9 |
| 121.5 |
| |||||||||||||||||||
| Investment in unconsolidated insurance affiliate(s) | Investment in unconsolidated insurance affiliate(s) | 466.6 | 515.9 | 399.9 | 311.1 | 130.6 |
| 335.5 |
| 479.7 |
| 466.6 |
| 515.9 |
| 399.9 |
| |||||||||||||||||||
| Equity in net unrealized gains from Symetra's fixed maturity portfolio | (56.6 | ) | — | — | — | — | ||||||||||||||||||||||||||||||
Equity in net unrealized (gains) losses from Symetra’s fixed maturity portfolio |
| 4.1 |
| (24.2 | ) | (56.6 | ) | — |
| — |
| |||||||||||||||||||||||||
| Accounts receivable on unsettled investment sales | Accounts receivable on unsettled investment sales | 19.9 | 9.1 | 160.8 | 75.2 | — |
| 8.5 |
| 21.7 |
| 19.9 |
| 9.1 |
| 160.8 |
| |||||||||||||||||||
| Accounts payable on unsettled investment purchases | Accounts payable on unsettled investment purchases | (30.9 | ) | (371.6 | ) | (495.2 | ) | (311.2 | ) | (.2 | ) |
| (66.8 | ) | (43.4 | ) | (30.9 | ) | (371.6 | ) | (495.2 | ) | ||||||||||||||
| Interest-bearing funds held by ceding companies | Interest-bearing funds held by ceding companies | 516.9 | 70.4 | 50.1 | 42.9 | 23.4 | Interest-bearing funds held by ceding companies |
| 268.5 |
| 293.9 |
| 516.9 |
| 70.4 |
| 50.1 |
| ||||||||||||||||||
| Interest-bearing funds held under reinsurance treaties | Interest-bearing funds held under reinsurance treaties | (105.1 | ) | (152.5 | ) | (236.2 | ) | (311.0 | ) | (400.6 | ) | Interest-bearing funds held under reinsurance treaties |
| (94.5 | ) | (100.6 | ) | (105.1 | ) | (152.5 | ) | (236.2 | ) | |||||||||||||
Net investment assets |
| $ | 11,608.1 |
| $ | 10,681.2 |
| $ | 11,583.4 |
| $ | 8,708.7 |
| $ | 8,900.3 |
| ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
| Net investment assets | $ | 11,583.4 | $ | 8,708.7 | $ | 8,900.3 | $ | 8,880.1 | $ | 1,859.8 | ||||||||||||||||||||||||||
| Total common shareholders' equity | $ | 3,883.9 | $ | 2,979.2 | $ | 2,407.9 | $ | 1,444.6 | $ | 1,046.5 | ||||||||||||||||||||||||||
Total common shareholders’ equity |
| $ | 4,455.3 |
| $ | 3,833.2 |
| $ | 3,883.9 |
| $ | 2,979.2 |
| $ | 2,407.9 |
| ||||||||||||||||||||
Minority interest — OneBeacon Ltd. |
| 490.7 |
| — |
| — |
| — |
|
|
| |||||||||||||||||||||||||
| Debt | Debt | 783.3 | 743.0 | 793.2 | 1,125.4 | 96.0 |
| 1,106.7 |
| 779.1 |
| 783.3 |
| 743.0 |
| 793.2 |
| |||||||||||||||||||
| Preferred stock subject to mandatory redemption | Preferred stock subject to mandatory redemption | 211.9 | 194.5 | 180.9 | 170.3 | — |
| — |
| 234.0 |
| 211.9 |
| 194.5 |
| 180.9 |
| |||||||||||||||||||
| Convertible preference shares | Convertible preference shares | — | — | 219.0 | — | — |
| — |
| — |
| — |
| — |
| 219.0 |
| |||||||||||||||||||
| Less: | ||||||||||||||||||||||||||||||||||||
Total capital |
| $ | 6,052.7 |
| $ | 4,846.3 |
| $ | 4,879.1 |
| $ | 3,916.7 |
| $ | 3,601.0 |
| ||||||||||||||||||||
Unamortized deferred credits and goodwill |
| (32.5 | ) | (24.4 | ) | (20.0 | ) | (20.3 | ) | — |
| |||||||||||||||||||||||||
Equity in net unrealized (gains) losses from Symetra’s fixed maturity portfolio |
| 4.1 |
| (24.2 | ) | (56.6 | ) | — |
| — |
| |||||||||||||||||||||||||
Total tangible capital |
| $ | 6,024.3 |
| $ | 4,797.7 |
| $ | 4,802.5 |
| $ | 3,896.4 |
| $ | 3,601.0 |
| ||||||||||||||||||||
| Unamortized deferred credits and goodwill | (20.0 | ) | (20.3 | ) | — | 660.2 | 66.8 |
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
| Equity in net unrealized gains from Symetra's fixed maturity portfolio | (56.6 | ) | — | — | — | — | ||||||||||||||||||||||||||||||
| Total tangible capital | $ | 4,802.5 | $ | 3,896.4 | $ | 3,601.0 | $ | 3,400.5 | $ | 1,209.3 | ||||||||||||||||||||||||||
| Insurance float | $ | 6,780.9 | $ | 4,812.3 | $ | 5,299.3 | $ | 5,479.6 | $ | 650.5 | ||||||||||||||||||||||||||
Insurance float |
| $ | 5,583.8 |
| $ | 5,883.5 |
| $ | 6,780.9 |
| $ | 4,812.3 |
| $ | 5,299.3 |
| ||||||||||||||||||||
| Insurance float as a multiple of total tangible capital | Insurance float as a multiple of total tangible capital | 1.4 | x | 1.2 | x | 1.5 | x | 1.6 | x | 0.5 | x |
| 0.9 | x | 1.2 | x | 1.4 | x | 1.2 | x | 1.5 | x | ||||||||||||||
| Net investment assets as a multiple of total tangible capital | Net investment assets as a multiple of total tangible capital | 2.4 | x | 2.2 | x | 2.5 | x | 2.6 | x | 1.5 | x |
| 1.9 | x | 2.2 | x | 2.4 | x | 2.2 | x | 2.5 | x | ||||||||||||||
| Insurance float as a multiple of common shareholders' equity | 1.7 | x | 1.6 | x | 2.2 | x | 3.8 | x | 0.6 | x | ||||||||||||||||||||||||||
| Net investment assets as a multiple of common shareholders' equity | 3.0 | x | 2.9 | x | 3.7 | x | 6.1 | x | 1.8 | x | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
Insurance float as a multiple of common shareholders’ equity |
| 1.3 | x | 1.5 | x | 1.7 | x | 1.6 | x | 2.2 | x | |||||||||||||||||||||||||
Net investment assets as a multiple of common shareholders’ equity |
| 2.6 | x | 2.8 | x | 3.0 | x | 2.9 | x | 3.7 | x | |||||||||||||||||||||||||
(1) Excludes preferred stock subject to mandatory redemption, having an aggregate accreted liquidation preference at December 31, 2006 of $262 million, and $339 million of investments held in two irrevocable grantor trusts for the purpose of economically defeasing the preferredstock subject to mandatory redemption. The creation and funding of these trusts did not legally defease the preferred stock and therefore the preferred stock will continue to appear on White Mountains’ balance sheet until it is redeemed.
(2)Excludes funds held by ceding companies from which White Mountains does not receive interest credits and excludescredits.
(3) Excludes funds held by White Mountains under reinsurance treaties for which White Mountains does not provide interest credits.
White Mountains has historically obtained its insurance float primarily through acquisitions, as opposed to organic growth. For each of theIn recent years, in the three-year period ending December 31, 2004, White Mountains has had negative cash flows from operations but has generated significantgrown float from its insurance and reinsurance operations. This is due to the fact that White Mountains'Mountains’ cash flow from operations does
not reflect cash and investments generated by the acquisition of insurance and
reinsurance businesses in recent years. Post-acquisition, such companies are often placed into partial or complete run-off, thereby resulting in negative cash flows from operations as the investments acquired are liquidated over time to pay claims.
In the case of OneBeacon, the substantial amount of float initially acquired with the OneBeacon Acquisition has shrunk as a result of OneBeacon's re-underwriting efforts and the effects of the Liberty Agreement. OneBeacon's float is expected to continue to shrink during 2005 as older, long-tailed loss reserves are paid and are not replaced with the same level of current writings as those written in the past. In the case of White Mountains Re, its float increased substantially in 2004 as a result of the Sirius and Sierra acquisitions. White Mountains Re's float is expected to increase during 2005 as a result of higher premium writings from its increased capital base and acquisitions over the past few years.
It is White Mountains'Mountains’ intention to generate low-cost float over time through a combination of acquisitions and/or by organic growth in its existing insurance and reinsurance operations. However, White Mountains will seek to increase its insurance float organically only when market conditions allow for an expectation of generating an underwriting profits.
Financing
The following table summarizes White Mountains'Mountains’ capital structure as of December 31, 20042006 and 2003:2005:
| | December 31, | |||||||
|---|---|---|---|---|---|---|---|---|
| $ in millions | ||||||||
| 2004 | 2003 | |||||||
| Senior Notes, carrying value | $ | 698.3 | $ | 698.1 | ||||
| Bank Facility | — | — | ||||||
| Other debt of operating subsidiaries(1) | 85.0 | 44.9 | ||||||
| Total debt | 783.3 | 743.0 | ||||||
| Preferred stock subject to mandatory redemption | 211.9 | 194.5 | ||||||
| Total common shareholders' equity | 3,883.9 | 2,979.2 | ||||||
| Unamortized goodwill of consolidated limited partnerships | (20.0 | ) | (20.3 | ) | ||||
| Equity in net unrealized gains from Symetra's fixed maturity portfolio | (56.6 | ) | — | |||||
| Total tangible capital | $ | 4,802.5 | $ | 3,896.4 | ||||
| Senior Notes to total tangible capital | 15 | % | 18 | % | ||||
| Total debt to total tangible capital | 16 | % | 19 | % | ||||
| Total debt and preferred stock to total tangible capital | 21 | % | 24 | % | ||||
|
| December 31, |
| ||
($ in millions) |
| 2006 |
| 2005 |
|
Senior Notes, carrying value |
| $698.7 |
| $698.5 |
|
WTM Bank Facility |
| 320.0 |
| — |
|
Other debt of operating subsidiaries (1) |
| 88.0 |
| 80.6 |
|
Total debt |
| 1,106.7 |
| 779.1 |
|
|
|
|
|
|
|
Preferred stock subject to mandatory redemption |
| — | (2) | 234.0 |
|
Minority interest — OneBeacon Ltd. |
| 490.7 | (3) | — |
|
Total common shareholders’ equity |
| 4,455.3 |
| 3,833.2 |
|
Total capital |
| $6,052.7 |
| $4,846.3 |
|
Unamortized goodwill |
| (32.5 | ) | (24.4 | ) |
Equity in net unrealized losses (gains) from Symetra’s fixed maturity portfolio |
| 4.1 |
| (24.2 | ) |
Total tangible capital |
| $6,024.3 |
| $4,797.7 |
|
|
|
|
|
|
|
Total debt to total tangible capital |
| 18 | % | 16 | % |
Total debt and preferred stock to total tangible capital |
| 18 | % | 21 | % |
(1)6—Debt6 - “Debt” of the accompanying Consolidated Financial Statements for a discussion of operating subsidiary debt.
(2) The preferred stock subject to mandatory redemption, having an aggregate accreted liquidation preference $262 million, was not included in total capital at December 31, 2006 because it was economically defeased in connection with the OneBeacon Offering.
(3) The minority interest arising from White Mountains’ ownership in OneBeacon Ltd. has been included in White Mountains’ capitalization table because it supports debt service on the Senior Notes.
Management believes that White Mountains'Mountains’ strong financial position provides it with the flexibility and capacity to obtain funds externally as needed through debt or equity financing on both a short-term and long-term basis.
In May 2003,connection with the OneBeacon Offering, White Mountains reduced its cost of capital and significantly reduced its near-term obligations by fully prepaying its previous $740 million amortizing bank facility, principally through the net proceeds from the issuance of the Senior Notes, which were issued by Fund American through a public offering. The Senior Notes bear a fixed annual interest rate of 5.9%terminated their existing $400 million credit facility, under which they were both permitted borrowers, and mature in May 2013. replaced it with two distinct credit facilities, as described below.
In July 2003,November 2006, White Mountains enhanced its access to the capital markets by havingand White Mountains Re Group, Ltd, as co-borrowers and co-guarantors,established a shelf registration declared effective by the SEC for offerings of up to $2.0 billion in debt and/or equity securities.
In August 2004, Fund American restructured and re-syndicated its existing $300$500 million Bank Facility to increase the availability under the revolving credit facility to $400 million and to extend the maturity from September 2006 to August 2009. Under the Bank Facility, for which both Fund American and the Company are permitted borrowers, the Company guarantees all obligations of Fund American, and Fund American guarantees all borrowings of the Company, subject to certain limitations imposed by the terms of the Berkshire Preferred Stock.that matures in November 2011. As of December 31, 2004, the Bank Facility2006, White Mountains had $320 million outstanding on this facility, which bears interest at a current rate of 5.9%, and had accrued $2.5 million of interest expense on this borrowing during 2006.
In November 2006, Fund American, a subsidiary of OneBeacon Ltd., established a $75 million revolving credit facility that matures in November 2011. All borrowings under this facility are guaranteed by OneBeacon Ltd. As of December 31, 2006, this facility was undrawn.
In connection with its acquisition of the Sierra Group on March 31, 2004, Folksamerica entered into a $62 million purchase note (the "Sierra Note"“Sierra Note”), $58 million of which willmay be adjusted over its approximate six-year term to reflect favorable or adverse loss reserve development on the acquired reserve portfolio and run-off of remaining policies in force (mainly workers compensation business) as well as certain other balance sheet protections. During 2004,Since inception, the principal of the Sierra Note washas been reduced by $12$35 million, to an outstanding balance of $27 million as of December 31, 2006, as a result of adverse development on the acquired reserves and run-off of unearned premiums.
In connection with its acquisitionpurchase of Atlantic Specialty on March 31, 2004,an office building in Canton, Massachusetts, OneBeacon issuedentered into a $20$41 million ten-year noteconstruction facility to fund renovations to the seller (the "Atlantic Specialty Note").new space that currently houses its U.S. headquarters. As of December 31, 2006, OneBeacon is required to repay $2had drawn the entire $41 million of principal onunder the notes per year, commencing with the first payment due on January 1, 2007.facility.
Fund American'sAmerican’s Senior Notes are currently rated "Baa2" (Adequate,“Baa2” (Medium Grade, the 9thninth highest of 21 twenty-one ratings) with a stable outlook by Moody's and "BBB-"Moody’s, “BBB” (Adequate, the 10thninth highest of 24twenty-two ratings) with a positivestable outlook by S&PStandard & Poor’s, “bbb” (Very Good, the ninth highest of twenty-two ratings) with a stable outlook by A.M. Best and "BBB"“BBB” (Good, the 9thninth highest of 24twenty-three ratings) with a stable outlook by Fitch Ratings.
It is possible that, in the future, one or more of the rating agencies may lower White Mountains'Mountains’ existing ratings. If one or more of its ratings were downgraded, White Mountains could incur higher borrowing costs and its ability to access the capital markets could be impacted. In addition, White Mountains'Mountains’ insurance and reinsurance operating subsidiaries could be adversely impacted by a downgrade in their financial strength ratings, including a possible reduction in demand for their products in certain markets.
The Senior Notes were issued under an indenture which contains restrictive covenants that, among other things, limit the ability of the Company, Fund American and their respective subsidiaries to create liens and enter into sale and leaseback transactions and substantially limits the ability of Fund American and its respective subsidiaries to consolidate, merge or transfer their properties and assets. The indenture does not contain any financial ratios or specified levels of net worth or liquidity to which the Company or Fund American must adhere. At December 31, 2004,2006, White Mountains was in compliance with all of the covenants under the Senior Notes, and anticipates it will continue to remain in compliance with these covenants for the foreseeable future.
The WTM Bank Facility containsand the FAC Bank Facility contain various affirmative, negative and financial covenantswhich White Mountains considers to be customary for such borrowings and include maintaining certain minimum net worth and maximum debt to capitalization standards for White Mountains.and in the case of the WTM Bank Facility minimum interest coverage standards. Failure to meet one or more of these covenants could result in an event of default, which ultimately could eliminate availability under the facilitythese facilities and result in acceleration of principal repayment on any amounts outstanding. At December 31, 2004,December31, 2006, White Mountains was in compliance with all of the covenants under the WTM Bank Facility and the FAC Bank Facility, and anticipates it will continue to remain in compliance with these covenants for the foreseeable future.
Contractual Obligations and Commitments
Below is a schedule of White Mountains'Mountains’ material contractual obligations and commitments as of December 31, 2004: 2006:
| Millions | Millions | Due in One Year or Less | Due in Two to Three Years | Due in Four to Five Years | Due After Five Years | Total |
| Due in |
| Due in |
| Due in |
| Due After |
| Total |
| ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Debt | Debt | $ | — | $ | 17.0 | $ | 4.0 | $ | 764.0 | $ | 785.0 |
| $ | 2.0 |
| $ | 31.9 |
| $ | 325.6 |
| $ | 748.5 |
| $ | 1,108.0 |
| ||||||
| Mandatorily redeemable preferred stock | Mandatorily redeemable preferred stock | — | — | 300.0 | 20.0 | 320.0 | Mandatorily redeemable preferred stock |
| 20.0 |
| 300.0 |
| — |
| — |
| 320.0 |
| |||||||||||||||
| Loss and LAE reserves | Loss and LAE reserves | 2,967.9 | 3,026.4 | 1,485.0 | 2,588.2 | 10,067.5 | Loss and LAE reserves |
| 2,921.4 |
| 2,461.2 |
| 1,194.7 |
| 2,661.1 |
| 9,238.4 |
| |||||||||||||||
| Reserves for structured contracts | Reserves for structured contracts | 69.5 | 102.9 | 68.5 | 135.0 | 375.9 |
| 43.1 |
| 60.0 |
| 44.0 |
| — |
| 147.1 |
| ||||||||||||||||
| Interest on debt and dividends and accretion on preferred stock subject to mandatory redemption | 98.0 | 216.0 | 119.6 | 149.5 | 583.1 | ||||||||||||||||||||||||||||
Interest on debt and dividends on preferred stock subject to mandatory redemption |
| 71.3 |
| 98.2 |
| 88.1 |
| 93.4 |
| 351.0 |
| ||||||||||||||||||||||
| Long-term incentive compensation | Long-term incentive compensation | 248.1 | 250.3 | 6.2 | 61.3 | 565.9 |
| 88.0 |
| 161.7 |
| 30.5 |
| 41.0 |
| 321.2 |
| ||||||||||||||||
Pension and other benefit plan obligations |
| 19.7 |
| 2.8 |
| 3.5 |
| 12.7 |
| 38.7 |
| ||||||||||||||||||||||
| Operating leases | Operating leases | 41.8 | 71.8 | 26.3 | 28.6 | 168.5 |
| 43.1 |
| 58.9 |
| 25.5 |
| 21.3 |
| 148.8 |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
| Total contractual obligations | $ | 3,425.3 | $ | 3,684.4 | $ | 2,009.6 | $ | 3,746.6 | $ | 12,865.9 | |||||||||||||||||||||||
Total contractual obligations |
| $ | 3,208.6 |
| $ | 3,174.7 |
| $ | 1,711.9 |
| $ | 3,578.0 |
| $ | 11,673.2 |
| |||||||||||||||||
(1) Economically defeased in connection with the OneBeacon Offering.
(2)Represents expected future cash outflows resulting from loss and LAE payments. Accordingly, these balances excludeadd back the discount on OneBeacon'sOneBeacon’s workers compensation loss and LAE reserves of $259.4$191 million and the remaining purchase accounting fair value adjustment of $409.6$271 million related to the OneBeacon and Sirius acquisitionsacquisition as they are non-cash items. Further, the amounts presented includeare gross of reinsurance recoverables recordedon unpaid losses of $3,797.4 million.
$4,016 million as of December 31, 2006.
White Mountains'Mountains’ loss reserves do not have contractual maturity dates. However, based on historical payment patterns, the preceding table includes an estimate of when management expects White Mountains'Mountains’ loss reserves to be paid. The timing of claim payments is subject to significant uncertainty. White Mountains maintains a portfolio of marketable investments with varying maturities and a substantial amount of short-term investments to provide adequate cash flows for the payment of claims.
The balances included in the table above regarding White Mountains'Mountains’ long-term incentive compensation plans include amounts payable for performance shares and units, as well as deferred compensation balances. Exact amounts to be paid cannot be predicted, for performance shares, with certainty, as the ultimate amounts of these liabilities are based on the future performance of the Company and the market price of Common Sharesthe Company’s common shares at the time the payments are made. The estimated payments reflected in the table are based on current accrual factors (Common Share(common share price and pay-out percentage) and assume that all outstanding balances were 100% vested as of December 31, 2004.2006.
There are no provisions within White Mountains'Mountains’ leasing agreements that would trigger acceleration of future lease payments. White Mountains does not finance its operations through the securitization of its trade receivables, through special purpose entities or through synthetic leases. Further, except as noted in the following paragraph, White Mountains has not entered into any material arrangement requiring it to guarantee payment of third party debt, lease payments or to fund losses of an unconsolidated special purpose entity, except as noted in the following paragraph.entity.
Through Sirius International, White Mountains has a long termlong-term investment as a stockholder in LUC Holdings, an entity that has entered into a head lease to rent the London Underwriting Center ("LUC"(“LUC”) through 2016. LUC Holdings in turn subleases space in the LUC. In the LUC Holdings stockholders agreement, the stockholders have guaranteed any shortfall between the head lease and the sub-leases on a joint and several basis. As a consequence, in recent years the stockholders have funded an operating shortfall of LUC. At December 31, 2004,2006, White Mountains has recorded a liability of $10$9 million for its share of the expected future shortfall between LUC Holdings'Holdings’ head lease payments
and sub-lease receipts. White Mountains does not believe that future shortfalls, if any, will have a material impact on its results of operations.
White Mountains also has future binding commitments to fund certain limited partnership investments. These commitments, which total approximately $25.9$109 million, do not have fixed funding dates and are therefore excluded from the table above.
Detailed information concerning White Mountains'Mountains’ liquidity and capital resource activities during 2004, 20032006, 2005 and 20022004 follows:
For the year ended December 31, 2006
Financing and Other Capital Activities
During 2006, White Mountains declared and paid cash dividends of $86 million, $28 million and $2 million to holders of White Mountains' common shares, the Berkshire Preferred Stock and the Zenith Preferred Stock, respectively.
During 2006, OneBeacon Ltd. declared and paid a $12 million cash dividend to its immediate parent and OneBeacon paid $90 million of dividends to Fund American.. Also during 2006, White Mountains Re paid $46 million of dividends to its immediate parent.
During 2006, the Company, through various intermediate holding companies, contributed $100 million in cash and investments to White Mountains Re and $125 million in cash to Esurance.
During 2006, Fund American funded a trust account with $324 million of cash and investments to economically defease the Berkshire Preferred Stock and FAEH funded a trust account with $21 million of cash to economically defease the Zenith Preferred Stock.
During 2006, White Mountains paid a total of $41 million in interest under the Senior Notes.
During 2006, White Mountains borrowed and repaid $140 million under its previous credit facility and borrowed $320 million under its new WTM Bank Facility. In addition, OneBeacon drew an additional $22 million under its existing real estate construction loan.
During 2006, OneBeacon and Folksamerica repaid $8 million and $7 million, respectively, of loans to Dowling and Partners Connecticut Fund III LP.
During 2006, White Mountains Re received cash dividends from Symetra of $16 million on its common share investment and $9 million on its warrant investment.
Acquisitions and Dispositions
On December 22, 2006, White Mountains Re acquired Mutual Service for $34 million in cash.
On November 14, 2006, White Mountains closed on the OneBeacon Offering and received $650 million in net proceeds for the sale of 27.6% of its ownership interest in OneBeacon Ltd.
On August 2, 2006, White Mountains Re sold one of its subsidiaries, Sirius America, to an investor group for $139 million in cash. As part of the transaction, White Mountains acquired an equity interest of approximately 18% in the acquiring entity by investing $32 million into the investor group.
On September 29, 2006, OneBeacon transferred certain assets and the right to renew existing policies of its Agri division to QBE Insurance Group for $32 million in cash.
Other Liquidity and Capital Resource Activities
During the third quarter of 2006, White Mountains sold 5.4 million common shares of Montpelier Re for proceeds of $104 million in cash.
During 2006, the Company issued a total of 3,530 common shares to its employees through the exercise of Options during the period and received cash proceeds of $.6 million in connection with these Option exercises.
During 2006, White Mountains made payments totaling $57 million, in cash or by deferral into certain non-qualified compensation plans of the Company or its subsidiaries, to participants in its long-term incentive compensation plans. These payments were made with respect to 64,100 target performance shares at payout levels ranging from 142% to 181% of target.
For the year ended December 31, 2005
Financing and Other Capital Activities
During 2005, White Mountains declared and paid cash dividends of $86 million, $28 million and $2 million to holders of White Mountains' common shares, the Berkshire Preferred Stock and the Zenith Preferred Stock, respectively.
During 2005, OneBeacon declared and paid dividends of $340 million to Fund American and White Mountains Re declared and paid $98 million of dividends to its immediate parent.
During 2005, White Mountains contributed $250 million to White Mountains Re (which, in turn, contributed $250 million to Folksamerica) and $10 million to Esurance.
During 2005, White Mountains paid a total of $41 million in interest under the Senior Notes.
During 2005, OneBeacon drew down $18 million on an 18-year mortgage note that it entered into in connection with its purchase of land and a home office building.
Acquisitions and Dispositions
During 2005, OneBeacon sold two of its insurance subsidiaries, NFU and Traders and Pacific Insurance Company, to third parties for a total of $162 million in cash.
During 2005, White Mountains Re sold one of its subsidiaries, California Indemnity Insurance Company, to a third party for a total of $20 million, $19 million of which was paid in cash.
On April 29, 2005, OneBeacon purchased a 284,000 square foot office facility located in Canton, MA for $23 million.
Other Liquidity and Capital Resource Activities
During 2005, White Mountains received a total of $60 million in tax refunds and interest from the Internal Revenue Service related to the completion of an audit of White Mountains’ 1997-2000 tax years, the period during which the Company redomesticated to Bermuda.
During 2005, the Company issued a total of 7,750 common shares to its employees through the exercise of Options during the period and received cash proceeds of $1 million in connection with these Option exercises.
During the first quarter of 2005, White Mountains made payments totaling $235 million, in cash or by deferral into certain non-qualified compensation plans of the Company or its subsidiaries, to participants in its long-term incentive compensation plans. These payments were made with respect to 212,611 performance shares at payout levels ranging from 113% to 200% of target.
During the first quarter of 2005, White Mountains received a $74 million special dividend related to its common share and warrant investment in Montpelier Re. This dividend represented $5.50 per share and was in addition to Montpelier Re’s normal quarterly dividend of $.36 per share.
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For the year ended December 31, 2004
Financing and Other Capital Activities
On June 29, 2004, Berkshire exercised of all of its warrants to purchase 1,724,200 Common Sharescommon shares of White Mountains for $294 million. Berkshire acquired the warrants in connection with the financing of White Mountains'Mountains’ acquisition of OneBeacon in 2001. The warrants were exercisable at any time until May 2008 and callable by the Company on or after May 31, 2005. In consideration for the early exercise of the warrants, Berkshire and the Company agreed to reduce the exercise price by approximately 2%.
During 2004, White Mountains declared and paid dividends of $9 million, $28 million and $2 million to holders of Common Shares,White Mountains’ common shares, the Berkshire Preferred Stock and the Zenith Preferred Stock, respectively.
During 2004, Fund AmericanWhite Mountains restructured and re-syndicated the Bank Facility to extend its maturity and to increase the availability of the revolving credit facility to $400 million.
During 2004, White Mountains paid a total of $41 million in interest under the Senior Notes.
During 2004, OneBeacon declared and paid a total of $305 million in cash dividends to Fund American. Also during 2004, WMUWMRUS paid a total of $60 million of cash dividends to its immediate parent. On March 31, 2004, OneBeacon distributed Folksamerica to Fund American.
During 2004, the Company issued a net total of 3,938 Common Sharescommon shares to its employees through the exercise of Options during the year and the Company received cash proceeds of $.5 million in connection with these Option exercises. In addition, during the first quarter of 2004, White Mountains issued 27,772 Common Sharescommon shares to employees of OneBeacon in connection with OneBeacon'sOneBeacon’s employee stock ownership plan. OneBeacon paid $13 million to the Company in consideration for these Common Shares.common shares.
On August 27, 2004, White Mountains repaid the $25 million note that was issued as part of the financing of its 2001 acquisition of C-F Insurance Company.
Acquisitions and Dispositions
During 2004, White Mountains acquired Sirius for $428 million, 19% of Symetra for $195 million, Tryg-Baltica for $58 million, the Sierra Group for $14 million in cash and a $62 million note and Atlantic Specialty for $30 million in cash and a $20 million note.
During 2004, White Mountains sold Potomac for $22 million, Western States, as well as its boiler inspection service business, for $15 million (both subsidiaries of OneBeacon) and Peninsula for $23 million.
SeeNote 2—Significant Transactions2 - “Significant Transactions” of the accompanying Consolidated Financial Statements for further discussion of these transactions.
Other Liquidity and Capital Resource Activities
During the first quarter of 2004, White Mountains sold 4.5 million common shares of Montpelier Re to third parties for net proceeds of $155.3 million. Also during the first quarter of 2004, White Mountains purchased additional warrants to acquire 2.4 million common shares of Montpelier Re from an existing warrant holder for $54.1 million in cash.
During the first quarter of 2004, White Mountains made payments amounting to $127 million, in cash or by deferral into certain non-qualified compensation plans of the Company or its subsidiaries, to participants in its long-term incentive compensation plans. These payments were made with respect to 167,782 performance shares at payout levels ranging from 93% to 200% of target.
For the year ended December 31, 2003TRANSACTIONS WITH RELATED PERSONS
Financing and Other Capital Activities
In May 2003, Fund American issued the Senior Notes for net proceeds of $693 million. Using proceeds from the Senior Notes, Fund American repaid the entire $615 million of term loans outstanding under its previous bank facility. In addition, on May 27, 2003, using the remaining $78 million in proceeds from the Senior Notes and cash on hand, Fund American repaid the entire $125 million of revolving loans outstanding under its previous bank facility. In connectionSee Note 17 - “Transactions with the repayment of its previous bank facility, Fund American paid an aggregate $56 million to unwind all of its existing interest rate swap agreements.
In September 2003, Fund American established its $300 million revolving Bank Facility. As discussed earlier, this Bank Facility was restructured and re-syndicated in August 2004.
During 2003, White Mountains paid a total of $20 million in interest under the Senior Notes.
During 2003, White Mountains made scheduled principal amortization payments of $7 million and paid a total of $23 million in interest under its previous bank facility, including $11 million paid under the interest rate swap agreements, prior to its repayment.
During 2003, White Mountains declared and paid dividends of $8 million, $28 million and $2 million to holders of Common Shares, the Berkshire Preferred Stock and the Zenith Preferred Stock, respectively.
During 2003, White Mountains filed a shelf registration statement, which was declared effective by the SEC in July 2003, for offerings of up to $2.0 billion in debt and/or equity securities.
During 2003, OneBeacon declared and paid a total of $235 million in cash dividends to Fund American. Also during 2003, WMU paid a total of $35 million in cash dividends to its immediate parent, White Mountains Re, and WM Advisors paid a total of $10 million in cash dividends to Fund American.
During 2003, the Company issued a total of 11,116 Common Shares to its employees through the exercise of Options and, as a result, the Company received cash proceeds of $1.5 million in connection with these Option exercises.
Acquisitions and Dispositions
During 2003, OneBeacon sold one of its subsidiaries, NFU Standard, for $22 million.
Other Liquidity and Capital Resource Activities
During the first quarter of 2003, White Mountains paid a total of 45,000 performance shares (relating to the 2000-2002 performance period) at 200%, amounting to $29 million, to its participants in
cash, Common Shares or by deferral into certain non-qualified compensation plans of the Company or its subsidiaries. In the second quarter of 2003, White Mountains made performance share payments amounting to $13 million in cash or by deferral into certain non-qualified compensation plans of the Company. The payments on these additional performance shares in the second quarter represented accelerated payments to certain non-employee directors of the Company for performance periods originally scheduled to end on December 31, 2003, 2004 and 2005.
For the year ended December 31, 2002
Financing and Other Capital Activities
During 2002, White Mountains sold $225 million of its equity securities in a private transaction and used the proceeds, along with cash on hand, to repay in full the $260 million Seller Note to Aviva, along with approximately $23 million of related accrued interest.
During 2002, White Mountains made scheduled principal amortization payments of $78 million and interest payments of $55 million (including $18 million paid under related interest rate swap agreements) on its previous bank facility.
During 2002, OneBeacon declared and paid a total of $173 million in cash dividends to Fund American.
During 2002, White Mountains declared and paid a total of $31 million in dividends on the Berkshire Preferred Stock, the Zenith Preferred Stock and the Convertible Preference Shares. Also in 2002, the Company declared and paid an annual dividend of $8 million to its common shareholders
During 2002, the Company issued a total of 23,200 Common Shares to its employees in satisfaction of performance share and Option obligations under White Mountains' Long-Term Incentive Plan (the "Incentive Plan"). The Company received proceeds of $1.3 million as a result of exercises of Options to acquire 11,500 Common Shares during the period.
In December 2002, OBPP borrowed $8 million from a related third party.
Acquisitions and Dispositions
On April 25, 2002, Folksamerica acquired Imperial for $4 million including related expenses.
Other Liquidity and Capital Resource Activities
In July and August of 2002, White Mountains received federal tax refunds totaling $167 million representing accelerated recoveries of carryback losses from 2001 under the Job Creation and Worker Assistance Act of 2002.
During 2002, White Mountains paid a total of 31,300 performance shares (relating to the 1999-2001 performance period) at a 200% value, amounting to $21 million, to its participants in cash, Common Shares or by deferral into certain non-qualified compensation plans of the Company or its subsidiaries.
SeeNote 17—"Related Party Transactions"Persons” in the accompanying Consolidated Financial Statements.
Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations discusses the Company'sCompany’s consolidated financial statements, which have been prepared in accordance with GAAP.
The financial statements presented herein include all adjustments considered necessary by management to fairly present the financial position, results of operations and cash flows of White Mountains. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
In the current year presentation of financial information, certain amounts in the prior period financial statements have been reclassified to conform with the current presentation. White Mountains has completed numerous significant transactions during the periods presented that have affected the comparability of the financial statement information presented herein.
On an ongoing basis, management evaluates its estimates, including those related to loss and LAE reserves, purchase accounting, reinsurance estimates and its pension benefit obligations. Management bases its estimates on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgements about the carrying values of assets and liabilities that are not readily apparent from other sources.
Management believes that its critical accounting policies affect its more significant estimates used in the preparation of its consolidated financial statements. The descriptions below are summarized and have been simplified for clarity.
1. Loss and Loss Adjustment Expenses
Non-AsbestosReserves other than Asbestos and Environmental Reserves and Construction Defect Claim Reserves
OneBeacon establishes loss and LAE reserves that are estimates of amounts needed to pay claims and related expenses in the future for insured events that have already occurred. The process of estimating reserves involves a considerable degree of judgment by management and, as of any given date, is inherently uncertain.
ReservesLoss and LAE reserves are typically comprised of (1) case reserves for claims reported and (2) reserves for losses that have occurred but for which claims have not yet been reported, referred to as incurred but not reported ("IBNR"(“IBNR”) reserves, which include a provision for expected future development on case reserves. Case reserves are estimated based on the experience and knowledge of claims staff regarding the nature and potential cost of each claim and are adjusted as additional information becomes known or payments are made. IBNR reserves are derived by subtracting paid loss and LAE and case reserves from estimates of ultimate loss and LAE. Actuaries estimate ultimate loss and LAE using various generally accepted actuarial methods applied to known losses and other relevant information. Like case reserves, IBNR reserves are adjusted as additional information becomes known or payments are made.
Ultimate loss and LAE are generally determined by extrapolation of claim emergence and settlement patterns observed in the past that can reasonably be expected to persist into the future. In forecasting ultimate loss and LAE with respect to any line of business, past experience with respect to that line of business is the primary resource, but cannot be relied upon in isolation. OneBeacon'sOneBeacon’s own experience, particularly claims development experience, such as trends in case reserves, payments on and closings of claims, as well as changes in business mix and coverage limits, is the most important information for estimating its reserves. External data, available from organizations such as statistical bureaus, consulting firms and reinsurance companies, is sometimes used to supplement or corroborate OneBeacon'sOneBeacon’s own experience, and can be especially useful for estimating costs of new business. For some lines of business, such as "long-tail"“long-tail” coverages discussed below, claims data reported in the most recent accident year is often too limited to provide a meaningful basis for analysis due to the typical delay in reporting of claims. For this type of business, OneBeacon uses a selected loss ratio method for the initial accident year or years. This is a standard and accepted actuarial reserve estimation method
in these circumstances in which the loss ratio is selected based upon information used in pricing policies for that line of business, as well as any publicly available industry data, such as industry pricing, experience and trends, for that line of business.
Uncertainties in estimating ultimate loss and LAE are magnified by the time lag between when a claim actually occurs and when it is reported and settled. This time lag is sometimes referred to as the "claim-tail"“claim-tail”. The claim-tail for most property coverages is typically short (usually a few days up to a few months). The claim-tail for liability/casualty coverages, such as automobile liability, general liability, products liability, multiple peril coverage, and workers compensation, can be especially long as claims are often reported and ultimately paid or settled years, even decades, after the related loss events occur. During the long claims reporting and settlement period, additional facts regarding coverages written in prior accident years, as well as about actual claims and trends may become known and, as a result, OneBeacon may adjust its reserves. If management determines that an adjustment is appropriate, the adjustment is booked in the accounting period in which such determination is made in accordance with GAAP. Accordingly, should reserves need to be increased or decreased in the future from amounts currently established, future results of operations would be negatively or positively impacted, respectively.
In determining ultimate loss and LAE, the cost to indemnify claimants, provide needed legal defense and other services for insureds and administer the investigation and adjustment of claims are considered. These claim costs are influenced by many factors that change over time,overtime, such as expanded coverage definitions as a result of new court decisions, inflation in costs to repair or replace damaged property, inflation in the cost of medical services and legislated changes in statutory benefits, as well as by the particular, unique facts that pertain to each claim. As a result, the rate at which claims arose in the past and the costs to settle them may not always be representative of what will occur in the future. The factors influencing changes in claim costs are often difficult to isolate or quantify and developments in paid and incurred losses from historical trends are frequently subject to multiple and conflicting interpretations. Changes in coverage terms or claims handling practices may also cause future experience and/or development patterns to vary from the past. A key objective of actuaries in developing estimates of ultimate loss and LAE, and resulting IBNR reserves, is to identify aberrations and systemic changes occurring within historical experience and accurately adjust for them so that the future can be projected reliably. Because of the factors previously discussed, this process requires the use of informed judgment and is inherently uncertain.
OneBeacon'sOneBeacon’s actuaries use several generally accepted actuarial methods to evaluate its loss reserves, each of which has its own strengths and weaknesses. OneBeacon places more or less reliance on a particular method based on the facts and circumstances at the time the reserve estimates are made. These methods generally fall into one of the following categories or are hybrids of one or more of the following categories:
•·Historical paid loss development methods: These methods use historical loss payments over discrete periods of time to estimate future losses. Historical paid loss development methods assume that the ratio of losses paid in one period to losses paid in an earlier period will remain constant. These methods necessarily assume that factors that have affected paid losses in the past, such as inflation or the effects of litigation, will remain constant in the future. Because historical paid loss development methods do not use case reserves to estimate ultimate losses, they can be more reliable than the other methods discussed below that look to case reserves (such as actuarial methods that use incurred losses) in situations where there are significant changes in how case reserves are established by a
company'scompany’s claims adjusters. However, historical paid loss development methods are more leveraged,(meaningmeaning that small changes in payments have a larger impact on estimates of ultimatelosses)losses, than actuarial methods that use incurred losses because cumulative loss payments take much longer to equal the expected ultimate losses than cumulative incurred amounts. In addition, and for similar reasons, historical
•·Historical incurred loss development methods: These methods, like historical paid loss development methods, assume that the ratio of losses in one period to losses in an earlier period will remain constant in the future. However, instead of using paid losses, these methods use incurred losses (i.e., the sum of cumulative historical loss payments plus outstanding case reserves) over discrete periods of time to estimate future losses. Historical incurred loss development methods can be preferable to historical paid loss development methods because they explicitly take into account open cases and the claims
adjusters'adjusters’ evaluations of the cost to settle all known claims. However, historical incurred loss development methods necessarily assume that case reserving practices are consistently appliedover time.overtime. Therefore, when there have been significant changes in how case reserves are established, using incurred loss data to project ultimate losses can be less reliable than other methods.•·Expected loss ratio methods: These methods are based on the assumption that ultimate losses vary proportionately with premiums. Expected loss ratios are typically developed based upon the information used in pricing, and are multiplied by the total amount of premiums written to calculate ultimate losses. Expected loss ratio methods are useful for estimating ultimate losses in the early years of long-tailed lines of business, when little or no paid or incurred loss information is available.
•·Adjusted historical paid and incurred loss development methods: These methods take traditional historical paid and incurred loss development methods and adjust them for the estimated impact of changes from the past in factors such as inflation, the speed of claim payments or the adequacy of case reserves. Adjusted historical paid and incurred loss development methods are often more reliable methods of predicting ultimate losses in periods of significant change, provided the actuaries can develop methods to reasonably quantify the impact of changes.
paid loss development methods are often slow to react to situations when new or different factors arise than those that have affected paid losses in the past.
OneBeacon performs an actuarial review of its recorded reserves each quarter. OneBeacon’s actuaries compare the previous quarter’s estimates of paid loss and LAE, case reserves and IBNR to amounts indicated by actual experience. Differences between previous estimates and actual experience are evaluated to determine whether a given actuarial method for estimating loss and LAE should be relied upon to a greater or lesser extent than it had been in the past. While some variance is expected each quarter due to the inherent uncertainty in loss and LAE, persistent or large variances would indicate that prior assumptions and/or reliance on certain reserving methods may need to be revised going forward.
In its selection of recorded reserves, OneBeacon historically gave greater weight to adjusted paid loss development methods, which are not dependent on the consistency of case reserving practices, over methods that rely on incurred losses. In recent years, the amount of weight given to methods based on incurred losses has increased with OneBeacon’s confidence that its case reserving practices have been more consistently applied.
Upon completion of each quarterly review, OneBeacon’s actuaries select indicated reserve levels based on the results of the actuarial methods described previously, which are the primary consideration in determining management’s best estimate of required reserves. At December 31, 2006 and 2005, the differences between OneBeacon’s total held reserves, which represents management’s best estimate of required reserves, and the actuarially indicated reserve level were insignificant. However, in making its best estimate, management also considers other qualitative factors that may lead to a difference between held reserves and actuarially recommended levels in the future. Typically, these factors exist when management and OneBeacon’s actuaries conclude that there is insufficient historical incurred and paid loss information or that trends included in the historical incurred and paid loss information are unlikely to repeat in the future. Such factors include, among others, recent entry into new markets or new products, improvements in the claims department that are expected to lessen future ultimate loss costs and legal and regulatory developments.
Construction Defect Claims Reserves
OneBeacon'sConstruction defect claims are a non-A&E exposure that has proven to have a greater degree of uncertainty when estimating loss and LAE using generally accepted actuarial methods. OneBeacon’s general liability and multiple peril lines of business have been significantly impacted by an increasinga large number of construction defect claims. Construction defect is a liability allegation relating to defective work performed in the construction of structures such as apartments, condominiums, single family dwellings or other housing, as well as the sale of defective building materials. Such claims seek recovery due to damage caused by alleged deficient construction techniques or workmanship. Much of the increase inrecent claims activity has been generated by plaintiffs'plaintiffs’ lawyers who approach new homeowners, and in many cases homeowner associations with large numbers of homeowners in multi-residential complexes, about defects or other flaws in their homes. The increasing number of claimsClaims for construction defects began with claims relating to exposures in California. Then, as plaintiffs'plaintiffs’ lawyers organized suits in other states with high levels of multi-residential construction, construction defect claims were reported in nearby western states, such as Colorado and Nevada, and eventually throughout the country. The reporting of such claims can be quite delayed as the statute of limitations can be up to ten years. Court decisions have expanded insurers'insurers’ exposure to construction defect claims as well. For example, in 1995 California courts adopted a "continuous trigger"“continuous trigger” theory in which all companies that had ever insured a property that was alleged to have been damaged by defective construction must respond to the claimant, even if evidence of the alleged damage did not appear until after the insurance period had expired. As a result, construction defect claims may be reported more than ten years after a project has been completed as litigation can proceed for several years before an insurance company is identified as a potential contributor. Recently, claimsClaims have also emerged from parties claiming additional insured status on policies issued to other parties (e.g., such as contractors seeking coverage on a sub-contractor's policy).sub-contractor’s
policy). Further, in reserving for these claims, there is additional uncertainty due to the potential for further unfavorable judicial rulings and regulatory actions. The primary actuarial methods that are used to estimate loss and LAE reserves for construction defect claims are frequency and severity methods. These methods separately project the frequency of future reported claims and the average cost, or severity, of individual claims. The reserve is the product of the projected number of reported claims and the severity.
A large number of construction defect claims have been identified relating to coverages that OneBeacon had written in the past through Commercial Union Corporation and General Accident Corporation of America, which OneBeacon refers to as their legacy companies, and their subsidiaries in California, Colorado, Nevada, Washington and Oregon. ManagementOneBeacon’s management has sought to mitigate future construction defect risks in all states by no longer providing insurance to certain residential general contractors and sub-contractors involved in multi-habitational projects. Mitigating actions also included initiating the withdrawal from problematic sub-segments within OneBeacon'sOneBeacon’s construction book of business, such as street and road construction, water, sewer and pipeline construction, and dam, waterway, railroad and subway construction. Management has undertakenAs a result of these actions, to mitigate future risks related to construction defect claims andOneBeacon’s management believes that the number of reported construction defect claims relating to coverages written in the past peaked in 2004 and will begincontinue to decline. In addition, in reserving for these claims, there is additional uncertainty due to the potential for further unfavorable judicial rulings and regulatory actions.
Asbestos and Environmental ("(“A&E"&E”) Reserves
OneBeacon'sOneBeacon’s reserves include provisions made for claims that assert damages from A&E related exposures. Asbestos claims relate primarily to injuries asserted by those who allegedly came in contact with asbestos or products containing asbestos. Environmental claims relate primarily to pollution and related clean-up cost obligations, particularly as mandated by federal and state environmental protection agencies. In addition to the factors described above under"“Non-Asbestos and Environmental Reserves" Reserves” regarding the reserving process, OneBeacon estimates its A&E reserves based upon, among other factors, facts surrounding reported cases and exposures to claims, such as policy limits and deductibles, current law, past and projected claim activity and past settlement values for similar claims, as well as analysis of industry studies and events, such as recent settlements and asbestos-related bankruptcies. The cost of administering A&E claims, which is an important factor in estimating loss and LAE reserves, tends to be higher than in the case of non-A&E claims due to the higher legal costs typically associated with A&E claims. Due to the inherent difficulties in estimating ultimate A&E exposures, OneBeacon does not estimate a range for A&E incurred losses.
OneBeacon'sA large portion of OneBeacon’s A&E losses resulted primarily from the operations of the Employers Group, an entity acquired by one of the legacy companies in 1971. These operations, including business of Employers Surplus Lines Insurance Company and Employers Liability Assurance Corporation, provided primary and excess liability insurance for commercial insureds, including Fortune 500-sized accounts, some of whom subsequently experienced claims for A&E losses. OneBeacon stopped writing such coverage in 1984.
OneBeacon'sOneBeacon’s liabilities for AforA&E losses from business underwritten in the recent past are substantially limited by the application of exclusionary clauses in the policy language that eliminated coverage offor such claims. After 1987 for pollution and 1992 for asbestos, most liability policies contained industry-standard absolute exclusions of such claims. In earlier years, various exclusions were also applied, but the wording of those exclusions was less strict and subsequent court rulings have reduced their effectiveness.
OneBeacon also incurred A&E losses via its participation in industry pools and associations. The most significant of these pools was Excess Casualty Reinsurance Association ("ECRA"(“ECRA”), which provided excess liability reinsurance to U.S. insurers from 1950 until the early 1980s. ECRA incurred significant liabilities for AforA&E, of which OneBeacon bears approximately a 4.7% share, or $65 million at both December 31, 2004 (compared to $66 million at December 31, 2003),2006 and 2005, which is fully reflected in OneBeacon'sOneBeacon’s loss and LAE reserves.
More recently, since the 1990s, OneBeacon has experienced an influx ofincrease in claims from commercial insureds, including many non-Fortune 500-sized accounts written during the 1970s and 1980s, who are named as defendants in asbestos lawsuits. As a number of large well-known manufacturers of asbestos
and asbestos-containing products have gone into bankruptcy, plaintiffs have sought recoveries from peripheral defendants, such as installers, transporters or sellers of such products, or from owners of premises on which the plaintiffs'plaintiffs’ exposure to asbestos allegedly occurred. At December 31, 2004, 6642006, 520 policyholders had asbestos-related claims against OneBeacon. In 2004, 1122006, 121 new insureds with such peripheral involvement presented asbestos claims under prior OneBeacon policies.
Historically, most asbestos claims have been asserted as product liability claims. Recently, insureds who have exhausted the available products liability limits of their insurance policies have sought from insurers such as OneBeacon payment for asbestos claims under the premises and operations coverage of their liability policies. It ispolicies, which may not be subject to similar aggregate limits. OneBeacon expects this trend to continue. However, to date there have been fewer of these premises and operations coverage claims than product liability coverage claims. This may
be due to a variety of factors, including that it may be more difficult for underlying plaintiffs to establish losses as stemming from premises and operations exposures, which requires proof of the defendant'sdefendant’s negligence, rather than products liability under which strict legal liability applies. Hence, there are fewer ofPremises and operations claims may vary significantly and policyholders may seek large amounts, although such claims andfrequently settle for a fraction of the initial alleged amount. Accordingly, there is a great deal of variation in damages awarded for the actual injuries. Additionally, several accounts that seek such coverage find that previously paid losses exhausted the aggregate limits under their policies. In these situationsAs of December 31, 2006, there is no coverage for these claims. There are currently 148were approximately 323 active claims by insureds against OneBeaconus without product liability coverage asserting operations or premises coverage.coverage, which may not be subject to aggregate limits under the policies.
Immediately prior to White Mountains' acquisition ofthe OneBeacon Acquisition, OneBeacon purchased a reinsurance contract with NICO under which OneBeacon is entitled to recover from NICO up to $2.5 billion in the future for asbestos claims arising from business written by OneBeacon in 1992 and prior, environmental claims arising from business written by OneBeacon in 1987 and prior, and certain other exposures.exposures, including mass torts. Under the terms of the NICO Cover, NICO receives the economic benefit of reinsurance recoverables from certain of OneBeacon'sOneBeacon’s third party reinsurers in existence at the time the NICO Cover was executed ("(“Third Party Recoverables"Recoverables”). As a result, the Third Party Recoverables serve to protect the $2.5 billion limit of NICO coverage for the benefit of OneBeacon. Any amounts uncollectible from third party reinsurers due to dispute or the reinsurers'reinsurers’ financial inability to pay are covered by NICO under its agreement with OneBeacon. Third Party Recoverables are typically for the amount of loss in excess of a stated level each year. Of claim payments in the past 11 years,from 1995 through 2006, approximately 63%50% of asbestos losses and 39% of environmental losses have been recovered under the historical third party reinsurance.
In June 2005, OneBeacon completed an internal study of its A&E exposures. This study considered, among other items, (1) facts, such as policy limits, deductibles and available third party reinsurance, related to reported claims; (2) current law; (3) past and projected claim activity and past settlement values for similar claims; (4) industry studies and events, such as recent settlements and asbestos-related bankruptcies; and (5) collectibility of third-party reinsurance. Based on the study, OneBeacon increased its best estimate of its incurred losses ceded to NICO, net of underlying reinsurance, by $353 million ($841 million gross) to $2.1 billion, which is within the $2.5 billion coverage provided by the NICO Cover. Based on the study, OneBeacon estimated that the range of reasonable outcomes around its best estimate was $1.7 billion to $2.4 billion, versus a range of $1.5 billion to $2.4 billion from the previous study that was conducted in 2003. Due to the NICO Cover, there was no impact to income or equity from the change in estimate.
The increase in the estimate of incurred A&E losses was principally driven by raised projections for claims related to asbestos (particularly from assumed reinsurance business), and for mass torts other than asbestos and environmental, particularly lead poisoning and sexual molestation. The increase was partially offset by reduced projections of ultimate hazardous waste losses.
As part of its previously described actuarial review process, OneBeacon reviews A&E activity each quarter and compares that activity to what was assumed in the original internal study. As of December 31, 2006, OneBeacon estimated that the range of reasonable outcomes around its best estimate was $1.7 billion to $2.4 billion.
As noted above, OneBeacon estimates that on an incurred basis it has exhaustedceded estimated incurred losses of approximately $1.7$2.1 billion of the coverage provided by NICO at December 31, 2004. At December 31, 2004, $14.3December31, 2006. Since entering into the NICO Cover, $29 million of the $1.7$2.1 billion of exhaustedutilized coverage relates to uncollected amounts from NICO related to uncollectible Third Party Recoverables. third party reinsurers through December 31, 2006.Net losses paid totaled approximately $682$847 million as of December 31, 2004,2006, with $95$146 million paid in 2004.2006. Asbestos payments during 20042006 reflect payments resulting from intensified efforts by claimants to resolve asbestos claims prior to the potential enactment of potential Federal asbestos legislation. To the extent that OneBeacon'sOneBeacon’s estimate of ultimate A&E losses as well as the estimate and collectibility of Third Party Recoverables differs from actual experience, the remaining protection under the NICO Cover may be more or less than the approximate $757$404 million that OneBeacon estimates remained at December 31, 2004.2006.
For purposes of determining available reinsurance, product liability asbestos claims typically are aggregated as a single loss within each policy period. As a result, losses often exceed the retention level under the reinsurance agreement and reinsurance recoveries are obtained. However, for claims being asserted under premises and operations coverage, the losses are generally not aggregated for purposes of determining reinsurance recoveries, so OneBeacon expects that in the future a smaller percentage of these losses will be covered as Third Party Recoverables than has been true historically of products liability asbestos losses.
OneBeacon'sOneBeacon’s reserves for A&E losses, net of Third Party Recoverables but prior to NICO recoveries, are $1.0were $1.2 billion at December 31, 2004.2006. An industry benchmark of reserve adequacy is the "survival ratio"“survival ratio”, computed as a company'scompany’s reserves divided by its historical average yearly loss
payments. This ratio indicates approximately how many more years of payments the reserves can support, assuming future yearly payments are equal to historical levels. OneBeacon'sOneBeacon’s survival ratio was approximately 21.016.6 at December 31, 2004, which2006. This was computed as the ratio of A&E reserves, net of Third Party Recoverables prior to the NICO Cover of $1.0$1.2 billion plus the remaining unused portion of the NICO Cover of $757$404 million, to the average A&E loss payments inover the past three years. The average loss payments used to calculate OneBeacon'sthree-year period ended December 31, 2006, net of Third Party Recoverables. OneBeacon’s survival ratio were net of a large commutation ($64 million) in 2003 with a Third Party Reinsurer. White Mountainswas 18.6 at December 31, 2005. OneBeacon believes that as a result of the NICO Cover and its historical third party reinsurance programs, OneBeacon should not experience material financial loss from old A&E exposures under current coverage interpretations and that its survival ratio compares
favorably to industry survival ratios. However, the survival ratio is a simplistic measure estimating the number of years it would be before the current ending loss reserves for these claims would be paid using recent annual average payments. Many factors, such as aggressive settlement procedures, mix of business and coverage provided, have a significant effect on the amount of A&E reserves and payments and the resultant survival ratio. Thus, caution should be exercised in attempting to determine reserve adequacy for these claims based simply on this survival ratio.
OneBeacon'sOneBeacon’s reserves for A&E losses at December 31, 20042006 represent management'smanagement’s best estimate of its ultimate liability based on information currently available. Based on this estimate, OneBeacon believes the NICO Cover will be adequate to cover all of its A&E obligations. However, as case law expands, medical and clean-up costs increase and industry settlement practices change, OneBeacon may be subject to asbestos and environmentalA&E losses beyond currently estimated amounts. Therefore, OneBeacon cannot guarantee that its A&E loss and LAE reserves, plus the remaining coverage under the NICO Cover, will be sufficient to cover additional liability arising from any such unfavorable developments. See Note 3 to— “Reserves for Unpaid Loss and LAE—Asbestos and environmental loss and LAE reserve activity” of the accompanying historical consolidated financial statements for more information regarding White Mountains'its A&E reserves.
OneBeacon A&E Claims Activity
OneBeacon'sOneBeacon’s A&E claim activity for the last two years is illustrated in the table below.
| | Year Ended December 31, |
| Year Ended December 31, |
| ||||||
|---|---|---|---|---|---|---|---|---|---|---|
| A&E Claims Activity | ||||||||||
| 2004 | 2003 |
| 2006 |
| 2005 |
| ||||
| Asbestos |
|
|
|
|
| |||||
| Accounts with asbestos claims at the beginning of the year | 642 | 615 |
| 592 |
| 664 |
| |||
| Accounts reporting asbestos claims during the year | 112 | 178 |
| 121 |
| 128 |
| |||
| Accounts on which asbestos claims were closed during the year | (90 | ) | (151 | ) |
| (193 | ) | (200 | ) | |
| Accounts with asbestos claims at the end of the year | 664 | 642 |
| 520 |
| 592 |
| |||
| Environmental |
|
|
|
|
| |||||
| Accounts with environmental claims at the beginning of the year | 674 | 596 |
| 495 |
| 644 |
| |||
| Accounts reporting environmental claims during the year | 110 | 175 |
| 130 |
| 180 |
| |||
| Accounts on which environmental claims were closed during the year | (140 | ) | (97 | ) |
| (203 | ) | (329 | ) | |
| Accounts with environmental claims at the end of the year | 644 | 674 |
| 422 |
| 495 |
| |||
| Total |
|
|
|
|
| |||||
| Total accounts with A&E claims at the beginning of the year | 1,316 | 1,211 |
| 1,087 |
| 1,308 |
| |||
| Accounts reporting A&E claims during the year | 222 | 353 |
| 251 |
| 308 |
| |||
| Accounts on which A&E claims were closed during the year | (230 | ) | (248 | ) |
| (396 | ) | (529 | ) | |
| Total accounts with A&E claims at the end of the year | 1,308 | 1,316 |
| 942 |
| 1,087 |
| |||
OneBeacon'sOneBeacon’s Loss and LAE Reserves by Line of Business
OneBeacon'sThe process of establishing loss reserves is complex and imprecise as it must take into consideration many variables that are subject to the outcome of future events. As a result, informed subjective estimates and judgments as to OneBeacon’s ultimate exposure to losses are an integral component of its loss reserving process. OneBeacon, like other insurance companies, categorizes and tracks its insurance reserves by “line of business”, such as auto liability, multiple peril package business, and workers compensation. Furthermore, OneBeacon regularly reviews the appropriateness of reserve levels at the line of business level, taking into consideration the variety of trends that impact the ultimate settlement of claims for the subsets of claims in each particular line of business.
For loss and allocated loss adjustment expense reserves, excluding asbestos and environmental, the key assumption as of December 31, 2006 was that the impact of the various reserving factors, as described below, on future paid losses would be similar to the impact of those factors on the historical loss data with the following exceptions:
· Recent increases in paid loss trends were inflated due to changes in claim handling procedures that decreased the settlement time for claims. This resulted in some increases in paid loss activity that OneBeacon believes will not continue into the future.
· Increases in case reserve adequacy over the 2001-2004 calendar periods have resulted in trends in case incurred activity that OneBeacon believes will not continue into the future. Case incurred activity can be the result of underlying changes in expected claim costs or changes in the adequacy of the case reserves relative to the underlying expected claim cost. If the activity is the result of underlying changes in expected costs, it is more likely to repeat in the future, and would likely result in prior year reserve development, as the change in ultimate claim costs would not have been considered when making the previous selection of IBNR reserves. If the activity is the result of changes in case reserve adequacy, it would not indicate any change in the ultimate claim costs and would not be expected to repeat in the future. In these cases, it is unlikely that prior year reserve development would occur, as the change in case reserves would be offset by a corresponding change in IBNR reserves (i.e., deficiency or redundancy in case reserves was implicitly captured when making the previous selection of IBNR reserves).
· In 2004, OneBeacon established a separate claim group to manage run-off claims. Due to the recent nature of this event, OneBeacon does not believe that the impacts of this group on future losses have been reflected in historical losses. Therefore, OneBeacon has given considerable weight to the most recent loss experience for this segment.
The major causes of material uncertainty (“reserving factors”) generally will vary for each product line, as well as for each separately analyzed component of the product line. The following section details reserving factors by product line. There could be other reserving factors that may impact ultimate claim costs. Each reserving factor presented will have a different impact on estimated reserves. Also, reserving factors can have offsetting or compounding effects on estimated reserves. For example, in workers compensation, the use of expensive medical procedures that result in medical cost inflation may enable workers to return to work faster, thereby lowering indemnity costs. Thus, in almost all cases, it is impossible to discretely measure the effect of a single reserving factor and construct a meaningful sensitivity expectation. Actual results will likely vary from expectations for each of these assumptions, resulting in an ultimate claim liability that is different from that being estimated currently.
Workers compensation
Workers compensation is generally considered a long tail coverage, as it takes a relatively long period of time to finalize claims from a given accident year. While certain payments such as initial medical treatment or temporary wage replacement for the injured worker are made quickly, some other payments are made over the course of several years, such as awards for permanent partial injuries. In addition, some payments can run as long as the injured worker’s life, such as permanent disability benefits and ongoing medical care. Despite the possibility of long payment tails, the reporting lags are generally short, settlements are generally not complex, and most of the liability can be considered high frequency with moderate severity. The largest reserve risk generally comes from the low frequency, high severity claims providing lifetime coverage for medical expense arising from a worker’s injury. Examples of common reserving factors that can change and, thus, affect the estimated workers compensation reserves include:
General workers compensation reserving factors
· Mortality trends of injured workers with lifetime benefits and medical treatment or dependents entitled to survivor benefits
· Degree of cost shifting between workers compensation and health insurance
· Changes in claim handling philosophies (e.g., case reserving standards)
Indemnity reserving factors
· Time required to recover from the injury
· Degree of available transitional jobs
· Degree of legal involvement
· Changes in the interpretations and processes of various workers compensation bureaus’ oversight of claims
· Future wage inflation for states that index benefits
· Changes in the administrative policies of second injury funds
· Re-marriage rate for spouse in instances of death
Medical reserving factors
· Changes in the cost of medical treatments, including prescription drugs, and underlying fee schedules
· Frequency of visits to health providers
· Number of medical procedures given during visits to health providers
· Types of health providers used
· Type of medical treatments received
· Use of preferred provider networks and other medical cost containment practices
· Availability of new medical processes and equipment
· Changes in the use of pharmaceutical drugs
· Degree of patient responsiveness to treatment
Workers compensation book of business reserving factors
· Product mix
· Injury type mix
· Changes in underwriting standards
Personal automobile liability
The personal automobile product line is a mix of property and liability coverages and, therefore, includes both short and long tail coverages. The payments that are made quickly typically pertain to auto physical damage (property) claims and property damage (liability) claims. The payments that take longer to finalize and are more difficult to estimate relate to bodily injury claims. Personal automobile reserves are typically analyzed in three components: bodily injury liability, property damage liability, and collision/comprehensive claims. This last component has minimum reserve risk and fast payouts and, accordingly, separate factors are not presented. Reporting lags are relatively short and the claim settlement process for personal automobile liability generally is the least complex of the liability products. It is generally viewed as a high frequency, low to moderate severity product line.
Examples of common reserving factors that can change and, thus, affect the estimated personal automobile liability reserves include:
Personal automobile liability reserving factors
· Trends in jury awards
· Changes in the underlying court system and its philosophy
· Changes in case law
· Litigation trends
· Frequency of claims with payment capped by policy limits
· Change in average severity of accidents, or proportion of severe accidents
· Subrogation opportunities
· Degree of patient responsiveness to treatment
· Changes in claim handling philosophies (e.g., case reserving standards)
Personal automobile liability book of business reserving factors
· Changes in policy provisions (e.g., deductibles, policy limits, or endorsements)
· Changes in underwriting standards
Multiple peril
Commercial multiple peril provides a combination of property and liability coverage typically for small businesses and, therefore, includes both short and long tail coverages. For property coverage, it generally takes a relatively short period of time to close claims, while for the other coverages, generally for the liability coverages, it takes a longer period of time to close claims. The reserving risk for this line is dominated by the liability coverage portion of this product, except occasionally in the event of catastrophic or large single losses.
Multiple peril liability reserves here are generally analyzed as two components: bodily injury and property damage. Bodily injury payments reimburse the claimant for damages pertaining to physical injury as a result of the policyholder’s legal obligation arising from non-intentional acts such as negligence, subject to the insurance policy provisions. In some cases the damages can include future wage loss (which is a function of future earnings power and wage inflation) and future medical treatment costs. Property damage payments result from damages to the claimant’s private property arising from the policyholder’s legal obligation for non-intentional acts. In most cases, property damage losses are a function of costs as of the loss date, or soon thereafter. Defense costs are also a part of the insured costs covered by liability policies and can be significant, sometimes greater than the cost of the actual paid claims, though for some products this risk is mitigated by policy language such that the insured portion of defense costs erodes the amount of policy limit available to pay the claim.
Multiple peril liability is generally considered a long tail line, as it takes a relatively long period of time to finalize and settle claims from a given accident year. The speed of claim reporting and claim settlement is a function of the specific coverage provided and the jurisdiction, among other factors. There are numerous components underlying the multiple peril liability product line. Some of these have relatively moderate payment patterns (with most of the claims for a given accident year closed within 5 to 7 years), while others can have extreme lags in both reporting and payment of claims (e.g., a reporting lag of a decade for “construction defect” claims).
Examples of common reserving factors that can change and, thus, affect the estimated multiple peril liability reserves include:
Multiple peril liability reserving factors
· Changes in claim handling philosophies (e.g., case reserving standards)
· Changes in policy provisions or court interpretations of such provisions
· New theories of liability
· Trends in jury awards
· Changes in the propensity to sue, in general with specificity to particular issues
· Changes in statutes of limitations
· Changes in the underlying court system
· Distortions from losses resulting from large single accounts or single issues
· Changes in tort law
· Shifts in law suit mix between federal and state courts
· Changes in settlement patterns
Multiple peril liability book of business reserving factors
· Changes in policy provisions (e.g., deductibles, policy limits, or endorsements)
· Changes in underwriting standards
· Product mix (e.g., size of account, industries insured, or jurisdiction mix)
Commercial automobile liability
The commercial automobile product line is a mix of property and liability coverages and, therefore, includes both short and long tail coverages. The payments that are made quickly typically pertain to auto physical damage (property) claims and property damage (liability) claims. The payments that take longer to finalize and are more difficult to estimate relate to bodily injury claims. Commercial automobile reserves are typically analyzed in three components; bodily injury liability, property damage liability, and collision/comprehensive claims. This last component has minimum reserve risk and fast payouts and, accordingly, separate reserving factors are not presented. In general, claim reporting lags are minor, claim complexity is not a major issue, and the line is viewed as high frequency, low to moderate severity.
Examples of common reserving factors that can change and, thus, affect the estimated commercial automobile liability reserves include:
Bodily injury and property damage liability reserving factors
· Trends in jury awards
· Changes in the underlying court system
· Changes in case law
· Litigation trends
· Frequency of claims with payment capped by policy limits
· Change in average severity of accidents, or proportion of severe accidents
· Subrogation opportunities
· Changes in claim handling philosophies (e.g., case reserving standards)
· Frequency of visits to health providers
· Number of medical procedures given during visits to health providers
· Types of health providers used
· Types of medical treatments received
· Changes in cost of medical treatments
· Degree of patient responsiveness to treatment
Commercial automobile liability book of business reserving factors
· Changes in policy provisions (e.g., deductibles, policy limits, or endorsements)
· Changes in mix of insured vehicles (e.g., long-haul trucks versus local and smaller vehicles, or fleet risks versus non-fleet risks)
· Changes in underwriting standards
General liability
See the above discussions under the liability product lines with regard to reserving factors for multiple peril.
Homeowners/Farmowners
Homeowners/Farmowners is generally considered a short tail coverage. Most payments are related to the property portion of the policy, where the claim reporting and settlement process is generally restricted to the insured and the insurer. Claims on property coverage are typically reported soon after the actual damage occurs, although delays of several months are not unusual. The resulting settlement process is typically fairly short term, although exceptions do exist. The liability portion of the homeowners/farmowners policy generates claims which take longer to pay due to the involvement of litigation and negotiation, but with generally small reporting lags. Overall, the line is generally high frequency, low to moderate severity (except for catastrophes), with simple to moderate claim complexity.
Examples of common reserving factors that can change and, thus, affect the estimated homeowners/farmowners reserves include:
Non-catastrophe reserving factors
· Salvage opportunities
· Amount of time to return property to residential use
· Changes in weather patterns
· Local building codes
· Litigation trends
· Trends in jury awards
Catastrophe reserving factors
· Physical concentration of policyholders
· Availability and cost of local contractors
· Local building codes
· Quality of construction of damaged homes
· Amount of time to return property to residential use
· For the more severe catastrophic events, “demand surge” inflation, whereby the greatly increased demand for building materials such as plywood far surpasses the immediate supply, leading to short-term material increases in building material costs
Homeowners/Farmowners book of business reserving factors
· Policy provisions mix (e.g., deductibles, policy limits, or endorsements)
· Degree of concentration of policyholders
· Changes in underwriting standards
OneBeacon Loss and LAE Development
Loss and LAE development—2006
In 2006, OneBeacon experienced $23 million of unfavorable development on prior accident year loss and LAE reserves, primarily due to additional losses incurred on hurricanes Katrina, Rita and Wilma in OBSP.
Loss and LAE development—2005
In 2005, OneBeacon experienced $95 million of unfavorable development on prior accident year loss and LAE reserves, primarily due to higher than anticipated legal defense costs and higher damages from liability assessments in general liability and multiple peril reserves in its run-off operations.
Specifically, OneBeacon’s management had assumed at December 31, 2004 that the IBNR and known case development would be approximately 26% of actual case reserves for the 2001 and prior accident years for multiple peril and general liability. During 2005, case incurred loss and LAE was 72% of the entire future expected development which was unusually large for these long tail lines of business. As a result, OneBeacon’s management increased IBNR reserves for these lines so that as of year end 2005 the IBNR was approximately 40% relative to the remaining case reserves.
Loss and LAE development—2004
OneBeacon experienced $99 million of net unfavorable development on prior accident year loss and LAE reserves during 2004, relating primarily to 2002 and prior accident years. The net unfavorable development related primarily to personal auto liability, general liability and multiple peril reserves due in part to emerging trends in claims experienced in its run-off operations, including national account and program claims administered by third parties. These claim trends principally included higher defense costs and higher damages from liability assessments.
Prior to 2004, OneBeacon’s management had made assumptions that case reserving standards and settlement practices in the run-off operations would be consistent with the standards and practices that were observed in the ongoing operations. During 2004, multiple peril liability and general liability case incurred loss and LAE for run-off claims was double that for ongoing claims. As a result, OneBeacon’s management increased the overall level of reserves for run-off during 2004. In addition, OneBeacon’s management undertook a more in depth review of the standards and practices as they applied to run-off claims and formed a separate run-off claims unit.
OneBeacon’s Case and IBNR Reserves by Line of Business
OneBeacon’s net loss and LAE reserves by line of business at December 31, 20042006 and 20032005 were as follows:
| | December 31, 2004 | December 31, 2003 | |||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net loss and LAE reserves by class of business |
| December 31, 2006 |
| December 31, 2005 |
| ||||||||||||||||||||||||||||||||
| Case | IBNR | Total | Case | IBNR | Total | ||||||||||||||||||||||||||||||||
| | ($ in millions) | ||||||||||||||||||||||||||||||||||||
| Workers compensation | $ | 362.1 | $ | 135.5 | $ | 497.6 | $ | 600.8 | $ | 176.6 | $ | 777.4 | |||||||||||||||||||||||||
Millions |
| Case |
| IBNR |
| Total |
| Case |
| IBNR |
| Total |
| ||||||||||||||||||||||||
Workers compensation (1) |
| $ | 82.0 |
| $ | 136.3 |
| $ | 218.3 |
| $ | 195.2 |
| $ | 132.6 |
| $ | 327.8 |
| ||||||||||||||||||
| Personal automobile liability | 530.7 | 244.1 | 774.8 | 512.0 | 227.3 | 739.3 |
| 378.6 |
| 187.5 |
| 566.1 |
| 445.5 |
| 174.7 |
| 620.2 |
| ||||||||||||||||||
| Multiple peril | 359.3 | 264.3 | 623.6 | 398.5 | 296.1 | 694.6 | |||||||||||||||||||||||||||||||
Multiple peril (1)(2) |
| 237.9 |
| 193.0 |
| 430.9 |
| 310.4 |
| 236.0 |
| 546.4 |
| ||||||||||||||||||||||||
| Commercial automobile liability | 203.8 | 82.8 | 286.6 | 290.2 | 132.1 | 422.3 |
| 110.2 |
| 66.2 |
| 176.4 |
| 140.2 |
| 65.6 |
| 205.8 |
| ||||||||||||||||||
| General liability | 121.6 | 151.1 | 272.7 | 154.9 | 176.6 | 331.5 | |||||||||||||||||||||||||||||||
General liability (2) |
| 77.0 |
| 281.1 |
| 358.1 |
| 106.1 |
| 227.2 |
| 333.3 |
| ||||||||||||||||||||||||
| Homeowners/Farmowners | 82.2 | 41.8 | 124.0 | 102.1 | 68.0 | 170.1 |
| 72.7 |
| 33.4 |
| 106.1 |
| 81.1 |
| 41.4 |
| 122.5 |
| ||||||||||||||||||
| Other | 97.5 | 84.0 | 181.5 | 63.8 | 58.2 | 122.0 | |||||||||||||||||||||||||||||||
Other (1) |
| 105.2 |
| 67.4 |
| 172.6 |
| 115.5 |
| 59.9 |
| 175.4 |
| ||||||||||||||||||||||||
| Total | $ | 1,757.2 | $ | 1,003.6 | $ | 2,760.8 | $ | 2,122.3 | $ | 1,134.9 | $ | 3,257.2 |
| $ | 1,063.6 |
| $ | 964.9 |
| $ | 2,028.5 |
| $ | 1,394.0 |
| $ | 937.4 |
| $ | 2,331.4 |
| ||||||
For OneBeacon, the(1) Includes loss and LAE reserves related to A&E.
(2) Includes loss and LAE reserves related to construction defect claims.
OneBeacon’s Range of Reserves by Line of Business
OneBeacon’s range of reserve estimates at December 31, 20042006 was evaluated to consider the strengths and weaknesses of the actuarial methods applied against OneBeacon'sOneBeacon’s historical claims experience data. The following table shows the recorded reserves and the high and low ends of OneBeacon'sOneBeacon’s range of reasonable loss reserve estimates at December 31, 2004.2006. The high and low ends of OneBeacon'sOneBeacon’s range of reserve estimates in the table below are based on the results of various actuarial methods described above.
OneBeacon net loss and LAE reserves by line of business |
| December 31, 2006 |
| |||||||
Millions |
| Low |
| Recorded |
| High |
| |||
Workers compensation |
| $ | 183 |
| $ | 218.3 |
| $ | 304 |
|
Personal automobile liability |
| 502 |
| 566.1 |
| 582 |
| |||
Multiple peril |
| 401 |
| 430.9 |
| 526 |
| |||
Commercial automobile liability |
| 169 |
| 176.4 |
| 190 |
| |||
General liability |
| 283 |
| 358.1 |
| 382 |
| |||
Homeowners/Farmowners |
| 93 |
| 106.1 |
| 107 |
| |||
Other |
| 159 |
| 172.6 |
| 174 |
| |||
Total |
| $ | 1,790 |
| $ | 2,028.5 |
| $ | 2,265 |
|
The recorded reserve for eachreserves represent management’s best estimate of unpaid loss and LAE by line of business. OneBeacon uses the results of several different actuarial methods to develop its estimate of ultimate reserves. While OneBeacon has not determined the statistical probability of actual ultimate paid losses falling within the range, OneBeacon believes that it is reasonably likely that actual ultimate paid losses will fall within the result ofranges noted above because the ranges were developed by using several different generally accepted actuarial method that management believes to be most appropriate based on known facts and trends.methods.
| | December 31, 2004 | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| OneBeacon net loss and LAE reserves by line of business Range and recorded reserves | |||||||||
| Low | Recorded | High | |||||||
| | ($ in millions) | ||||||||
| Workers compensation | $ | 475 | $ | 498 | $ | 555 | |||
| Personal automobile liability | 665 | 774 | 780 | ||||||
| Multiple peril | 590 | 624 | 835 | ||||||
| Commercial automobile liability | 265 | 286 | 310 | ||||||
| General liability | 240 | 273 | 295 | ||||||
| Homeowners/Farmowners | 105 | 124 | 125 | ||||||
| Other | 155 | 182 | 185 | ||||||
| Total | $ | 2,495 | $ | 2,761 | $ | 3,085 | |||
The probability that ultimate losses will fall outside of the ranges of estimates by line of business is higher for each line of business individually than it is for the sum of the estimates for all lines taken together due to the effects of diversification. The diversification effects result from the fact that losses across OneBeacon’s different lines of business are not completely correlated. Although managementOneBeacon believes OneBeacon'sits reserves are reasonably stated, ultimate losses may deviate, perhaps materially, from the recorded reserve amounts and could be above the high end of the range of actuarial projections. This is because ranges are developed based on known events as of the valuation date, whereas the ultimate disposition of losses is subject to the outcome of events and circumstances that may be unknown as of the valuation date.
The recorded reservespercentages shown in the following table represent management's best estimatethe linear interpolation of unpaidwhere OneBeacon’s recorded loss and LAE reserves are within the range of reserves estimates by line of business. In its selection of recorded reserves, management has generally given greater weight to adjusted paid loss development methods, which are not dependent on the consistency of case reserving practices, rather than methods that rely on incurred losses, because of the increased adequacy of case reserving by OneBeacon's claim staff in the recent past. For multiple peril this resulted in OneBeacon recording reserves nearerbusiness at December 31, 2006 and 2005, where the low end of the range. range equals zero, the middle of the range equals 50% and the high end of the range equals 100%.
OneBeacon net loss and LAE reserves by line of business |
| December 31, |
| ||
(expressed as a percentage of the range) |
| 2006 |
| 2005 |
|
Workers compensation |
| 29 | % | 39 | % |
Personal automobile liability |
| 81 |
| 61 |
|
Multiple peril |
| 24 |
| 30 |
|
Commercial automobile liability |
| 33 |
| 37 |
|
General liability |
| 75 |
| 57 |
|
Homeowners/Farmowners |
| 93 |
| 83 |
|
Other |
| 91 |
| 78 |
|
Total |
| 50 | % | 46 | % |
For some types of claims, such as workers compensation, and construction defect, management also considered special purposeOneBeacon used forecasting models that its claims and actuarial staff have created that consider the unique loss development characteristics of these types of claims. As a result of the trends suggested by these models, OneBeacon chose a point estimate that was at a lower point in the range at December 31, 2006 as compared to the prior year. OneBeacon selected a point estimate higher in the range for newer and/or growing segments of business, in part based on OneBeacon’s view that actuarial methods that rely on historical loss and LAE patterns may have a higher degree of uncertainty for these businesses. As these segments accumulate more historical data, OneBeacon’s selections place greater reliance on the emerging experience. For personal automobile liability, this resulted in OneBeacon recording reserves at the higher end of the range in 2006, reflecting a more conservative view of recently emerging favorable loss experience. OneBeacon also selected a point estimate higher in the range for general liability in 2006 as the reserves in this line are increasingly related to OneBeacon’s growing professional liability business. For homeowners and "other"“other” (principally shorter
tailed lines of business such as ocean and inland marine insurance) recorded reserves remain ratherat the high in theend of their respective ranges, as management'sOneBeacon’s selections reflect a conservative approach to recognition of recent favorable incurred loss development experiencedpatterns.
80
Sensitivity Analysis
The following discussion includes disclosure of possible variations from current estimates of loss reserves due to a change in our ongoing businesses.certain key assumptions. Each of the impacts described below is estimated individually, without consideration for any correlation among key assumptions or among lines of business. Therefore, it would be inappropriate to take each of the amounts described below and add them together in an attempt to estimate volatility for OneBeacon’s reserves in total. It is important to note that the variations discussed are not meant to be a worst-case scenario, and therefore, it is possible that future variations may be more than amounts discussed below.
· Workers compensation: Recorded reserves for workers compensation were $218 million at December 31, 2006. The two most important assumptions for workers compensation reserves are loss development factors and loss cost trends, particularly medical cost inflation. Loss development patterns are dependent on medical cost inflation. Approximately half of the workers compensation net reserves are related to future medical costs. Across the entire reserve base, a 0.5 point change in calendar year medical inflation would have changed the estimated net reserve by $54 million at December 31, 2006, in either direction.
· Personal automobile liability: Recorded reserves for personal auto liability were $566 million across all lines at December 31, 2006. Personal auto liability reserves are shorter-tailed than other lines of business (such as workers compensation) and, therefore, less volatile. However, the size of the reserve base means that future changes in estimate could be material to OneBeacon’s results of operations in any given period. A key assumption for personal auto liability is the implicit loss cost trend, particularly the severity trend component of loss costs. A 2.0 point change in assumed annual severity for the two most recent accident years would have changed the estimated net reserve by $16 million at December31, 2006, in either direction. Assumed annual severity for accident years prior to the two most recent accident years is likely to have minimal variability.
· Multiple peril liability and general liability: Recorded reserves for multiple peril and general liability combined were $789 million at December 31, 2006. Reported loss development patterns are a key assumption for these lines of business, particularly for more mature accident years. Historically, assumptions on reported loss development patterns have been impacted by, among other things, emergence of new types of claims (e.g. construction defect claims) or a shift in the mixture between smaller, more routine claims and larger, more complex claims. If the severity trend for construction defect claims changed by 3.0 points this would have changed the estimated net reserve by $11 million at December 31, 2006, in either direction. Separately, if case reserve adequacy for non construction defect claims changed by 10.0 points this would have changed the estimated net reserve by $23 million at December 31, 2006, in either direction.
White Mountains Re
White Mountains Re A&E Reserves
White Mountains ReRe’s A&E exposure is primarily from reinsurance contracts written between 1974 through 1985 by Folksamerica predecessor companies (MONY Reinsurance and Christiania General). The exposures are mostly higher layer excess of loss treaty and facultative coverages with relatively low limits exposed for each claim. Folksamerica has a specialized unit that handles claims emanating fromrelating to A&E exposures. The issues presented by these types of claims require specialization, expertise and an awareness of the various trends and jurisdictional developments.
White Mountains Re's A&E exposure is primarily from reinsurance contracts written between 1974 through 1985 by predecessor companies (MONY Reinsurance and Christiania General). The exposures are predominately higher layer excess of loss treaty and facultative coverages with relatively low limits exposed for each claim. Net incurred loss activity for asbestos and environmental in the last two years was as follows:
| | December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net incurred loss and LAE activity |
| December 31, |
| ||||||||||
| 2004 | 2003 | ||||||||||||
| | ($ in millions) | ||||||||||||
Millions |
| 2006 |
| 2005 |
| ||||||||
| Asbestos | $ | 2.6 | $ | 32.0 |
| $ | (0.1 | ) | $ | 62.0 |
| ||
| Environmental | .1 | 3.7 |
| (0.2 | ) | (3.4 | ) | ||||||
| Total | $ | 2.7 | $ | 35.7 |
| $ | (0.3 | ) | $ | 58.6 |
| ||
In recent years, most of2004, White Mountains Re's reported activityRe experienced an increase in the number and amount of reported asbestos area has relatedclaims, primarily due to (1) higher layer excess policies that are being reached by larger target defendants, (2) new notices for smaller regional defendants that are nowincreased claim filings from uninjured claimants who may have been exposed becauseto asbestos. This resulted in a change in its assumption regarding the level of the larger defendant bankruptcies, and (3) new notices on "premises" and "non-products" cases, where coverage is being sought by insureds against the non-aggregating portion of the underlying policy. WM Re expectsprojected future asbestos claims to see a smaller percentage of these losses exceed the retention level under reinsurance agreements.
Approximately $25.0 million ofbe paid. During 2005, White Mountains Re's 2003 loss development forRe completed a detailed, ground up asbestos exposures wasstudy on all reported Folksamerica insureds that had over $250,000 of asbestos claims as well as a bulksignificant sample of all other insureds with reported asbestos claims of less than $250,000. Comparing estimates generated by the study to Folksamerica exposed limits by underwriting year led to an increase of approximately $50 million in IBNR resulting fromduring the completionthird quarter of a detailed A&E market share study. This study compared White Mountains Re's share of industry paid losses to estimated industry carried reserves.2005.
Generally, White Mountains Re sets up claim files for each reported claim by each cedent for each individual insured. In many instances, a single claim notification from a cedent could involve several years and layers of coverage resulting in a file being set up for each involvement. Precautionary claim notices are submitted by the ceding companies in order to preserve their right to pursue coverage under the reinsurance contract. Such notices do not contain an incurred loss amount, to White Mountains Re, accordingly, an open claim file is not established. As of December 31, 2004,2006, White Mountains Re had approximately 1,3681,173 open claim files for asbestos and 786512 open claim files for environmental exposures.
The costs associated with administering the underlying A&E claims by White Mountains Re'sRe’s clients tend to be higher than non-Anon A&E claims due to generally higher legal costs incurred by ceding companies in connection with A&E claims ceded to White Mountains Re under the reinsurance contracts.
White Mountains Re A&E Claims Activity
White Mountains Re'sRe’s A&E claim activity for the last two years is illustrated in the table below.
| | Year ended December 31, | ||||
|---|---|---|---|---|---|
| A&E Claims Activity | |||||
| 2004 | 2003 | ||||
| Asbestos | |||||
| Total asbestos claims at the beginning of the year | 1,185 | 1,069 | |||
| Incoming asbestos claims due to Sirius Acquisition | 199 | — | |||
| Asbestos claims reported during the year | 292 | 224 | |||
| Asbestos claims closed during the year | (308 | ) | (108 | ) | |
| Total asbestos claims at the end of the year | 1,368 | 1,185 | |||
| Environmental | |||||
| Total environmental claims at the beginning of the year | 743 | 768 | |||
| Incoming environmental claims due to Sirius Acquisition | 106 | — | |||
| Environmental claims reported during the year | 138 | 47 | |||
| Environmental claims closed during the year | (201 | ) | (72 | ) | |
| Total environmental claims at the end of the year | 786 | 743 | |||
| Total | |||||
| Total A&E claims at the beginning of the year | 1,928 | 1,837 | |||
| Incoming A&E claims due to Sirius Acquisition | 305 | — | |||
| A&E claims reported during the year | 430 | 271 | |||
| A&E claims closed during the year | (509 | ) | (180 | ) | |
| Total A&E claims at the end of the year | 2,154 | 1,928 | |||
|
| Year ended |
| ||
|
| December 31, |
| ||
A&E Claims Activity |
| 2006 |
| 2005 |
|
Asbestos |
|
|
|
|
|
Total asbestos claims at the beginning of the year |
| 1,339 |
| 1,401 |
|
Outgoing asbestos claims due to Sirius America divestiture |
| (20 | ) | — |
|
Incoming asbestos claims due to Mutual Service acquisition |
| 45 |
| — |
|
Asbestos claims reported during the year |
| 186 |
| 223 |
|
Asbestos claims closed during the year |
| (377 | ) | (285 | ) |
Total asbestos claims at the end of the year |
| 1,173 |
| 1,339 |
|
Environmental |
|
|
|
|
|
Total environmental claims at the beginning of the year |
| 750 |
| 900 |
|
Incoming environmental claims due to Mutual Service acquisition |
| 43 |
| — |
|
Environmental claims reported during the year |
| 46 |
| 65 |
|
Environmental claims closed during the year |
| (327 | ) | (215 | ) |
Total environmental claims at the end of the year |
| 512 |
| 750 |
|
Total |
|
|
|
|
|
Total A&E claims at the beginning of the year |
| 2,089 |
| 2,301 |
|
Outgoing A&E claims due to Sirius America divestiture |
| (20 | ) | — |
|
Incoming A&E claims due to Mutual Service acquisition |
| 88 |
| — |
|
A&E claims reported during the year |
| 232 |
| 288 |
|
A&E claims closed during the year |
| (704 | ) | (500 | ) |
Total A&E claims at the end of the year |
| 1,685 |
| 2,089 |
|
Loss and LAE Reserves by Class of Business
White Mountains Re establishes loss and LAE reserves that are estimates of amounts needed to pay claims and related expenses in the future for reinsured events that have already occurred. The estimation of net reinsurance loss and LAE reserves is subject to the same risk as the estimation of insurance loss and LAE reserves. In addition to those risk factors which give rise to inherent uncertainties in establishing insurance loss and LAE reserves, the inherent uncertainties of estimating such reserves are even greater for the reinsurer, due primarily to: (1) the claim-tail for reinsurers being further extended because claims are first reported to the cedingoriginal primary insurance company and then through one or more intermediary insurersintermediaries or reinsurers, (2) the diversity of loss development patterns among different types of reinsurance treaties or facultative contracts, (3) the necessary reliance on the ceding companies for information regarding reported claims and (4) the differing reserving practices among ceding companies.
As with insurance reserves, the process of estimating reinsurance reserves involves a considerable degree of judgment by management and, as of any given date, is inherently uncertain. Based on the above, such uncertainty may be larger relative to the reserve for a reinsurer compared to an insurance company, and may take a longer time to emerge.
In order to reduce the potential uncertainty of loss reserve estimation, White Mountains Re obtains information from numerous sources to assist in the process. White Mountains Re'sRe’s pricing actuaries devote considerable effort to understanding and analyzing a ceding company'scompany’s operations and loss history during the underwriting of the business, using a combination of ceding company and industry statistics. Such statistics normally include historical premium and loss data by class of business, individual claim information for larger claims, distributions of insurance limits provided, loss reporting
and payment patterns, and rate change history. This analysis is used to project expected loss ratios for each treaty during the upcoming contract period. These expected ultimate loss ratios are aggregated across all treaties and are input directly into the loss reserving process to generate the expected loss ratios that are used to estimate IBNR.
Upon notification of a loss from a ceding company, White Mountains Re establishes case reserves, including LAE reserves, based upon White Mountains Re'sRe’s share of the amount of reserves established by the ceding company and ourits independent evaluation of the loss. In cases where available information indicates that reserves established by the ceding company are inadequate, White Mountains Re establishes case reserves or IBNR in excess of its share of the reserves established by the ceding company. In addition, specific claim information reported by ceding companies or obtained through claim audits can alert us to emerging trends such as changing legal interpretations of coverage and liability, claims from unexpected sources or classes of business, and significant changes in the frequency or severity of individual claims. Such information is often used to supplement estimates of IBNR.
As mentioned above, there can be a considerable time lag from the time a claim is reported to a ceding company to the time it is reported to the reinsurer. The lag can be several years in some cases. This lag can be due to a number of reasons, including the time it takes to investigate a claim, delays associated with the litigation process, the deterioration in a claimant'sclaimant’s physical condition many years after an accident occurs, etc. In its loss reserving process, White Mountains Re assumes that such lags are predictable, on average, over time and therefore the lags are contemplated in the loss reporting patterns used in its actuarial methods. This means that, as a reinsurer, White Mountains Re must rely on such actuarial estimates for a longer period of time after reserves are first estimated than does a primary insurance company.
Backlogs in the recording of assumed reinsurance can also complicate the accuracy of loss reserve estimation. As of December 31, 2004,2006, there were no significant backlogs related to the processing of assumed reinsurance information at White Mountains Re.
White Mountains Re relies heavily on information reported by ceding companies, as discussed above. In order to determine the accuracy and completeness of such information, White Mountains Re's U.S.Re underwriters, actuaries, and claims personnel perform regular audits of Folksamerica'scertain ceding companies. While regularcompanies where customary. Generally, ceding company audits are not customary outside the United States, Sirius International's staff regularlyStates. In such cases, White Mountains Re reviews information from ceding companies for unusual or unexpected results. Any material findings are discussed with the ceding companies. White Mountains Re sometimes encounters situations where we determine that a claim presentation from a ceding company is not in accordance with contract terms. In these situations, White Mountains Re attempts to resolve the dispute directly with the ceding company. Most situations are resolved amicably and without the need for litigation or arbitration. However, in the infrequent situations where a resolution is not possible, White Mountains Re will vigorously defend ourits position in such disputes.
Although loss and LAE reserves are initially determined based on underwriting and pricing analysis, White Mountains Re constantly tests the accuracy of reserves using a variety of generally accepted actuarial methods, including historical incurred and paid loss development methods. If actual loss activity differs substantially from expectations based on historical information, an adjustment to loss reserves may be warranted. As time passes, loss reserve estimates for a given accident year will rely more on actual loss activity and historical patterns than on initial assumptions based on pricing indications.
White Mountains Re also obtainobtains reinsurance whereby another reinsurer contractually agrees to indemnify White Mountains Re for all or a portion of the reinsurance risks underwritten by White Mountains Re. Such arrangements, where one reinsurer provides reinsurance to another reinsurer, are usually referred to as "retrocessional reinsurance"“retrocessional reinsurance” arrangements. White Mountains Re establishes estimates of amounts recoverable from retrocessional reinsurance in a manner consistent with the loss
and LAE liability associated with reinsurance contracts offered to its customers (the "ceding companies"“ceding companies”), net of an allowance for uncollectible amounts, if any. Net reinsurance loss reserves represent loss and LAE reserves reduced by retrocessional reinsurance recoverable on unpaid losses.
Although loss and LAE reserves are initially determined based on underwriting and pricing analyses, White Mountains Re'sRe regularly reviews the adequacy of its recorded reserves by using a variety of generally accepted actuarial methods, including historical incurred and paid loss development methods. If actual loss activity differs substantially from expectations, an adjustment to recorded reserves may be warranted. As time passes, loss reserve estimates for a given accident year will rely more on actual loss activity and historical patterns than on initial assumptions based on pricing indications.
White Mountains Re’s expected annual loss reporting assumptions are updated once a year, at year end. These assumptions are applied to year-end IBNR to generate expected reported losses for the subsequent year. Interpolation methods are applied to estimate quarterly reported losses, which are then compared to actual reported losses each quarter. Significant differences may result in a change in estimates or a revision in the loss reporting pattern. Expected loss ratios underlying the current accident year are updated quarterly, to reflect new business that is underwritten by the company.
During 2006, White Mountains Re increased its estimate for net losses from hurricanes Katrina, Rita, and Wilma by $86 million following the receipt of new claims information from several ceding companies and subsequent reassessment of ultimate loss exposures. The company also entered into an indemnity agreement with Olympus, which resulted in an additional $137 million in losses and loss expenses. Also in 2006, White Mountains Re increased prior year loss and LAE reserves by $55 million for casualty losses associated with the Risk Capital acquisition, primarily as a result of a detailed study of loss exposure by individual contract. Reserves for 2004 and prior years were decreased by $46 million at Sirius in 2006, as we have seen lower than expected loss emergence across all lines of business and have reduced IBNR accordingly.
In 2005, White Mountains Re changed its assumptions relating to asbestos reserves, as discussed above in the A&E section. In 2004, White Mountains Re reduced its loss ratio assumptions for property and other short-tailed business written at Sirius in 2002 and 2003, resulting in a decrease of $35 million in loss reserves related to prior years. This was due to improved terms and conditions in reinsurance contracts written after the terrorist attacks of September 11, 2001, which had a greater impact on lowering loss ratios than had been expected in the original loss ratio assumptions. Also in 2004, White Mountains Re increased its estimates of prior year loss reserves by $55 million on long-tailed U.S. casualty contracts written between 1997 and 2001 at Folksamerica and Scandinavian Re. This was due to a higher than expected level of loss reporting, which caused White Mountains Re to raise its expected loss ratio assumptions and to lengthen the expected reporting tail for those contracts.
White Mountains Re’s net loss and LAE reserves by class of business at December 31, 20042006 and 20032005 were as follows:
| | December 31, 2004 | December 31, 2003 | |||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net loss and LAE reserves by class of business ($ in millions) | |||||||||||||||||||||||||||||||||||||
| Case | IBNR | Total | Case | IBNR | Total | ||||||||||||||||||||||||||||||||
Net loss and LAE reserves by class of business |
| December 31, 2006 |
| December 31, 2005 |
| ||||||||||||||||||||||||||||||||
Millions |
| Case |
| IBNR |
| Total |
| Case |
| IBNR |
| Total |
| ||||||||||||||||||||||||
| Liability (excluding A&E) | $ | 920.4 | $ | 900.0 | $ | 1,820.4 | $ | 364.6 | $ | 276.4 | $ | 641.0 |
| $ | 544.9 |
| $ | 964.4 |
| $ | 1,509.3 |
| $ | 829.3 |
| $ | 782.9 |
| $ | 1,612.2 |
| ||||||
| Property | 143.3 | 318.0 | 461.3 | 68.5 | 149.0 | 217.5 |
| 332.3 |
| 196.1 |
| 528.4 |
| 357.7 |
| 342.2 |
| 699.9 |
| ||||||||||||||||||
| Accident & Health and Other | 279.5 | 187.5 | 467.0 | 25.9 | 66.4 | 92.3 | |||||||||||||||||||||||||||||||
Specialty |
| 273.0 |
| 143.3 |
| 416.3 |
| 233.9 |
| 138.4 |
| 372.3 |
| ||||||||||||||||||||||||
| A&E | 50.2 | 24.8 | 75.0 | 35.0 | 44.2 | 79.2 |
| 44.0 |
| 68.4 |
| 112.4 |
| 42.0 |
| 75.4 |
| 117.4 |
| ||||||||||||||||||
| Total | $ | 1,393.4 | $ | 1,430.3 | $ | 2,823.7 | $ | 494.0 | $ | 536.0 | $ | 1,030.0 |
| $ | 1,194.2 |
| $ | 1,372.2 |
| $ | 2,566.4 |
| $ | 1,462.9 |
| $ | 1,338.9 |
| $ | 2,801.8 |
| ||||||
The actuarial methods described above are used to calculate a point estimate of loss and LAE reserves for each company within White Mountains Re establishes loss reserves based on a singleRe. These point estimates are then aggregated to produce an actuarial point estimate which is management's best estimate of ultimate losses and loss expenses. This "best estimate" is derived from a combination of methods as described above.for the entire segment. Once a point estimate is established, White Mountains Re'sRe’s actuaries estimate loss reserve ranges to measure the sensitivity of the actuarial assumptions used to set the point estimates. These ranges are calculated using similar methods to the point estimate calculation, but with different expected loss ratio and loss reporting pattern assumptions. For the low estimate, more optimistic loss ratios and faster reporting patterns are
assumed, while the high estimate uses more conservative loss ratios and slower reporting patterns. These variable assumptions are derived from historical variations in loss ratios and reporting patterns by class and type of business. Due
The actuarial point estimate is management’s primary consideration in determining its best estimate of loss and LAE reserves. In making its best estimate, management also considers other qualitative factors that may lead to a difference between its best estimate of loss and LAE reserves and the inherent difficultiesactuarial point estimate. Typically, these factors exist when management and the company’s actuaries conclude that there is insufficient historical incurred and paid loss information or that trends included in estimating ultimate A&E exposures, White Mountains Re does notthe historical incurred and paid loss information are unlikely to repeat in the future. These factors may include, among others, changes in the techniques used to assess underwriting risk, more accurate and detailed levels of data submitted with reinsurance applications, the uncertainty of the current reinsurance pricing environment, the level of inflation in loss costs, changes in ceding company reserving practices, and legal and regulatory developments. At December 31, 2006 and 2005, total carried reserves were 2.2% and 0.7% above the actuarial point estimate, ranges for these reserves. The growth in reserves from 2003 to 2004 was driven by acquisitions made during 2004.respectively.
The following table illustrates White Mountains Re'sRe’s recorded net loss and LAE reserves and high and low estimates for those classes of business for which a range is calculated, at December 31, 2004.2006.
| | December 31, 2004 | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net loss and LAE reserves by class of business ($ in millions) | ||||||||||||||||||||
| Low | Recorded | High | ||||||||||||||||||
Net loss and LAE reserves by class of business |
| December 31, 2006 |
| |||||||||||||||||
Millions |
| Low |
| Recorded |
| High |
| |||||||||||||
| Liability (excluding A&E) | Liability (excluding A&E) | $ | 1,670 | $ | 1,821 | $ | 1,990 |
| $ | 1,342 |
| $ | 1,509.3 |
| $ | 1,676 |
| |||
| Property | Property | 420 | 461 | 490 |
| 503 |
| 528.4 |
| 553 |
| |||||||||
| Accident & Health and Other | 400 | 467 | 550 | |||||||||||||||||
| Sub-total | $ | 2,490 | $ | 2,749 | $ | 3,030 | ||||||||||||||
Specialty |
| 354 |
| 416.3 |
| 486 |
| |||||||||||||
| A&E | A&E | 75 |
| 80 |
| 112.4 |
| 154 |
| |||||||||||
| Total | Total | $ | 2,824 |
| $ | 2,279 |
| $ | 2,566.4 |
| $ | 2,869 |
| |||||||
The probability that ultimate losses will fall outside of the rangesrange of estimates by class of business is higher for each class of business individually than it is for the sum of the estimates for all classes taken together due to the effects of diversification. While White Mountains Re has not determined the statistical probability of actual ultimate losses falling within the range, management believes that it is reasonably likely that actual ultimate losses will fall within the ranges noted above because the ranges were developed by using generally accepted actuarial methods.Although management believes reserves for White Mountains Re are reasonably stated, ultimate losses may deviate, perhaps materially, from the recorded reserve amounts and could be above the high end of the range of actuarial projections.
2. White Mountains Re Reinsurance Estimates
There is a time lag from the point when premium and related commission and expense activity is recorded by a ceding company to the point when such information is reported by the ceding company, through its reinsurance intermediary, to White Mountains Re. This time lag can vary from one to
several contractual reporting periods (i.e. quarterly/monthly). This lag is common in the broker market reinsurance business.business, but slightly longer when a reinsurance intermediary is involved.
As a result of this time lag in reporting, White Mountains Re estimates a portion of its written premium and related commissions and expenses. Given the nature of White Mountains Re'sRe’s business, estimated premium balances, net of related commissions and expenses, comprise a large portion of total premium balances receivable. The estimation process begins by identifying which major accounts have not reported activity at the most recent period end. In general, premium estimates for excess of loss business are based on minimum deposit premium information included in the contractual terms. For proportional business, White Mountains Re'sRe’s estimates are derived based on a variety of factors and assumptions, including: prior reporting from the broker or ceding company, historical reporting patterns, expected premium volume based on contractual terms or ceding company reports and other correspondence and communication with underwriters, brokers, intermediaries and ceding companies. companies, prior reporting from the intermediary or ceding company and historical reporting patterns. Once premium estimates are determined, related commission and expense estimates are derived using contractual terms.
White Mountains Re closely monitors its estimation process on a quarterly basis and adjusts its estimates as more information and actual amounts become known. There is no assurance that the amounts estimated by White Mountains Re will not deviate from the amounts reported by the ceding company or reinsurance broker.intermediary. Any such deviations are reflected in the results of operations when they become known.
The following table summarizes White Mountains Re'sRe’s premium estimates and related commissions and expenses:
| | December 31, 2004 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Millions | Liability | Property | Accident & Health | Other | Total | ||||||||||
| Gross premium estimates | $ | 150.7 | $ | 234.8 | $ | 41.9 | $ | 72.9 | $ | 500.3 | |||||
| Net premium estimates | 148.5 | 129.1 | 33.6 | 65.5 | 376.7 | ||||||||||
| Net commission and expense estimates | 43.3 | 12.9 | 8.4 | 15.9 | 80.5 | ||||||||||
| Net amount included in reinsurance balances receivable | $ | 105.2 | $ | 116.2 | $ | 25.2 | $ | 49.6 | $ | 296.2 | |||||
| | December 31, 2003 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Millions | Liability | Property | Accident & Health | Other | Total | ||||||||||
| Gross premium estimates | $ | 126.6 | $ | 159.1 | $ | 22.5 | $ | 21.0 | $ | 329.2 | |||||
| Net premium estimates | 126.6 | 75.5 | 22.5 | 10.4 | 235.0 | ||||||||||
| Net commission and expense estimates | 41.5 | 6.0 | 7.1 | 2.1 | 56.7 | ||||||||||
| Net amount included in reinsurance balances receivable | $ | 85.1 | $ | 69.5 | $ | 15.4 | $ | 8.3 | $ | 178.3 | |||||
|
| December 31, 2006 |
| ||||||||||
Millions |
| Liability |
| Property |
| Specialty |
| Total |
| ||||
Gross premium estimates |
| $ | 86.7 |
| $ | 162.1 |
| $ | 158.4 |
| $ | 407.2 |
|
|
|
|
|
|
|
|
|
|
| ||||
Net premium estimates |
| $ | 86.0 |
| $ | 93.7 |
| $ | 140.4 |
| $ | 320.1 |
|
Net commission and expense estimates |
| 40.6 |
| 29.4 |
| 41.0 |
| 111.0 |
| ||||
|
| $ | 45.4 |
| $ | 64.3 |
| $ | 99.4 |
| $ | 209.1 |
|
| December 31, 2005 |
| |||||||||||
Millions |
| Liability |
| Property |
| Specialty |
| Total |
| ||||
Gross premium estimates |
| $ | 123.1 |
| $ | 245.0 |
| $ | 101.3 |
| $ | 469.4 |
|
|
|
|
|
|
|
|
|
|
| ||||
Net premium estimates |
| $ | 111.2 |
| $ | 123.0 |
| $ | 77.5 |
| $ | 311.7 |
|
Net commission and expense estimates |
| 38.3 |
| 26.0 |
| 25.5 |
| 89.8 |
| ||||
|
| $ | 72.9 |
| $ | 97.0 |
| $ | 52.0 |
| $ | 221.9 |
|
The net amounts recorded in reinsurance balances receivable may not yet be due from the ceding company at the time of the estimate since actual reporting from the ceding company has not yet occurred. Therefore, based on the process described above, White Mountains Re believes all of its estimated balances are collectible, and as such no allowance has been recorded.
White Mountains'Mountains’ insurance and reinsurance subsidiaries purchase reinsurance from time to time to protect their businesses from losses due to exposure aggregation, to manage their operating leverage ratios and to limit ultimate losses arising from catastrophic events. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured
policies. Amounts related to reinsurance contracts are recorded in accordance with SFAS No. 113, "Accounting“Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts" ("Contracts” (“SFAS 113"113”).
The collectibility of reinsurance recoverables is subject to the solvency and willingness to pay of the reinsurer. The Company is selective in choosing its reinsurers, placing reinsurance principally with those reinsurers with a strong financial condition, industry ratings and underwriting ability. Management monitors the financial condition and ratings of its reinsurers on an ongoing basis. SeeNote 4—Third4 - “Third Party ReinsuranceReinsurance” in the accompanying Consolidated Financial Statements for additional information on White Mountains'Mountains’ reinsurance programs.
4. Pension and Post-Retirement Medical Plans
White Mountains accounts for its pension plans in accordance with SFAS No. 87, "Employers' Accounting for Pensions" ("SFAS 87") and accounts for its retiree medical plan in accordance with SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS 106"). SFAS 87 and SFAS 106 require that the cost of pension/retiree medical benefits be accrued over the period during which an employee provides service.
The majority of OneBeacon's pension and retiree medical plans were curtailed in the fourth quarter of 2002. The OneBeacon Pension Plan no longer adds new participants or increases benefits for existing participants. Non-vested participants already in the plan continue to vest during their employment with OneBeacon. Retirees are also eligible for medical benefits if they meet certain age and service requirements. However, due to the curtailment, the plan no longer accepts new participants. The majority of retiree medical costs are capped at defined dollar amounts, with retirees contributing the remainder.
The projected benefit obligation as of a particular date represents the actuarial present value of all benefits attributed by the plan's benefit formula to employee service rendered prior to that date. Therefore, future cash payments from pension and retiree medical plans are discounted using a discount rate based on published investment grade, long-term corporate bond yields. Many of the factors which are used to determine a plan's projected benefit obligation as of a particular date and the cost of pension/retiree medical benefits for a particular period are dependent upon future events, such as how long the employee and any survivors live, how many years of service the employee is expected to render and the employee's compensation in the years immediately before retirement or termination. Accordingly, the effects of such future factors are estimated. Further, since the projected benefit obligation and the periodic cost of pension/retiree medical benefits are based on actuarial present values, they are also sensitive to changes in the discount rate used to determine such amounts.
A hypothetical 1% increase in the discount rate would result in a decrease in pension and retiree medical projected benefit obligations of approximately $63 million. A hypothetical 1% decrease in the discount rate would result in an increase in pension and retiree medical projected benefit obligations of approximately $63 million. The impact of a hypothetical 1% change to the discount rate on periodic cost of pension/retiree medical benefits is not significant.
Additionally, the rate of return that is assumed on plan assets affects OneBeacon's pension expense during a particular period. Since the retiree medical plan is unfunded, it is not affected by changes in the rate of return assumption. OneBeacon performed an analysis of expected long-term rates of return based on the allocation of its pension plan assets as of both December 31, 2004 and December 31, 2003 to develop expected rates of return for each significant asset class or economic indicator. A range of returns was developed based both on forecasts and on broad-market historical benchmarks for expected return, correlation, and volatility for each asset class. Although the expected investment return assumption is long-term in nature, the range of reasonable returns has dropped over the past few years as a consequence of lower inflation and lower bond yields. As a result of the most
recent review, for 2004 OneBeacon elected to keep the expected return on its pension assets at 7.0%, as was used in 2003. At December 31, 2004, 36% of plan assets were invested in fixed maturity securities, 45% in equities and the remainder in cash, cash equivalents and convertible securities. A hypothetical 1% increase or decrease in the assumed rate of return would result in a pretax change in OneBeacon's pension expense (or income as the case may be) for 2004 of approximately $4.7 million.
During 2004, OneBeacon recognized pension expense of $3.3 million, which was comprised of net periodic benefit cost of $.4 million and special termination benefits of $2.9 million. Included in the net periodic benefit cost is $32.2 million of expected return on pension plan assets. OneBeacon contributed $4.2 million to the pension plan in 2004. No unrecognized losses on pension assets were recorded since the Company uses the market value method to value plan assets.
When White Mountains acquires another company, management must estimate the fair values of the assets and liabilities acquired, as prescribed by SFAS No. 141, "Business Combinations" ("SFAS 141").“Business Combinations.” Certain assets and liabilities require little judgment to estimate their fair values, particularly those that are quoted on a market exchange, such as publicly-traded investment securities. Other assets and liabilities, however, require a substantial amount of judgment to estimate their fair values. The most significant of these is the estimation required to fair value loss and LAE reserves.
White Mountains estimates the fair value of loss and LAE reserves obtained in an acquisition following the principles contained within FASB Statement of Financial Accounting Concepts No. 7: "Using“Using Cash Flow Information and Present Value in Accounting Measurements" ("Measurements” (“CON 7"7”). Under CON 7, the fair value of a particular asset or liability essentially contains five elements: (1) an estimate of the future cash flows, (2) expectations about possible variations in the amount or timing of those cash flows; (3) the time value of money, represented by the risk-free rate of interest; (4) the
price for bearing the uncertainty inherent in the asset or liability; and (5) other, sometimes unidentifiable, factors including illiquidity and market imperfections.
White Mountains'Mountains’ actuaries estimate the fair value of loss and LAE reserves obtained in an acquisition by taking the acquired company'scompany’s recorded reserves and discounting them based on expected reserve payout patterns using the current risk-free rate of interest. Then, White Mountains'Mountains’ actuaries develop additional cash flow scenarios that use different payout and ultimate reserve assumptions deemed to be reasonably possible based upon the inherent uncertainties present in determining the amount and timing of payment of such reserves. In each scenario, the risk-free rate of interest is used to discount future cash flows. These scenarios are put in a statistical model that assigns a probability to each cash flow scenario. White Mountains'Mountains’ actuaries then choose the scenario that best represents the price for bearing the uncertainty inherent within the acquired company'scompany’s recorded reserves. The "price"“price” for bearing the uncertainty inherent within the acquired company'scompany’s reserves is measured as the difference between the selected cash flow scenario and the expected cash flow scenario. The scenario selected has typically been between 1.5 and 2 standard deviations from the expected cash flow outcome. The fair value of the acquired company'scompany’s loss and LAE reserves is determined to be the sum of the expected cash flow scenario (i.e., the acquired company'scompany’s discounted loss and LAE reserves) and the uncertainty "price"“price”.
The difference between an acquired company'scompany’s loss and LAE reserves and White Mountains'Mountains’ best estimate of the fair value of such reserves at the acquisition date is amortized ratably over the payout period of the acquired loss and LAE reserves. Historically, the fair value of an acquired company'scompany’s loss and LAE reserves has been less than the it's recordedits nominal reserves at acquisition. Accordingly, the amortization has been and will continue to be recorded as an expense on White Mountains'Mountains’ income statement until fully amortized.
The information contained in this report may contain "forward-looking statements"“forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E21 E of the Securities Exchange Act of 1934. All statements, other than statements of historical facts, included or referenced in this report which address activities, events or developments which White Mountains expects or anticipates will or may occur in the future are forward-looking statements. The words "will"“will”, "believe," "intend," "expect," "anticipate," "project," "estimate," "predict"“believe,” “intend,” “expect,” “anticipate,” “project,” “estimate,” “predict” and similar expressions are also intended to identify forward-looking statements. These forward-looking statements include, among others, statements with respect to White Mountains'Mountains’:
•·growth in book value per share or return on equity;
•·business strategy;
•·financial and operating targets or plans;
•·incurred losses and the adequacy of its
losslosses and LAEreserves;•- reserves and related reinsurance;
·projections of revenues, income (or loss), earnings (or loss) per share, dividends, market share or other financial forecasts;
•·expansion and growth of its business and operations; and
•·future capital expenditures.
These statements are based on certain assumptions and analyses made by White Mountains in light of its experience and perception of historical trends, current conditions and expected future developments, as well as other factors believed to be appropriate in the circumstances. However, whether actual results and developments will conform with its expectations and predictions is subject to a number of risks and uncertainties that could cause actual results to differ materially from expectations, including:
•· the risks discussed in Item 1A of this Form 10-K;
·claims arising from catastrophic events, such as hurricanes, earthquakes, floods or terrorist attacks;
•- the continued availability of capital and financing;
•·general economic, market or business conditions;
•·business opportunities (or lack thereof) that may be presented to it and pursued;
•·competitive forces, including the conduct of other property and casualty insurers and reinsurers;
•·changes in domestic or foreign laws or regulations, or their interpretation, applicable to White Mountains, its competitors or its clients;
•·an economic downturn or other economic conditions adversely affecting its financial position;
•- recorded loss reserves
establishedsubsequently proving to have been inadequate; and •·other factors, most of which are beyond White
Mountains'Mountains’ control.
Consequently, all of the forward-looking statements made in this report are qualified by these cautionary statements, and there can be no assurance that the actual results or developments anticipated by White Mountains will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, White Mountains or its business or operations. White Mountains assumes no obligation to update publicly any such forward-looking statements, whether as a result of new information, future events or otherwise.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
White Mountains'Mountains’ consolidated balance sheet includes a substantial amount of assets and liabilities whose fair values are subject to market risk. The term market risk refers to the risk of loss arising from adverse changes in interest rates and other relevant market rates and prices. Due to White Mountains'Mountains’ sizable balances of interest rate sensitive instruments, market risk can have a significant effect on White Mountains'Mountains’ consolidated financial position.
Fixed Maturity Portfolio.In connection with the Company'sCompany’s consolidated insurance and reinsurance subsidiaries, White Mountains invests in interest rate sensitive securities, primarily debt securities. White Mountains'Mountains strategy is to purchase fixed maturity investments that are attractively priced in relation to perceived credit risks. White Mountains'Mountains’ fixed maturity investments are held as available for sale in accordance with SFAS No. 115, "Accounting“Accounting for Certain Investments in Debt and Equity Securities" ("Securities” (“SFAS 115"115”), whereby these investments are carried at fair value on the balance sheet with net unrealized gains or losses reported net of tax in a separate component of common shareholders'shareholders’ equity. White Mountains generally manages its interest rate risk associated with its portfolio of fixed maturity investments by monitoring the average duration of the portfolio, which allows White Mountains to achieve an adequate yield without subjecting the portfolio to an unreasonable level of interest rate risk. White Mountains'Mountains’ fixed maturity portfolio is comprised of primarily investment grade corporate securities, U.S. government and agency securities, municipal obligations and mortgage-backed securities (e.g., those receiving an investment grade rating from S&PStandard & Poor’s or Moody's)Moody’s).
Increases and decreases in prevailing interest rates generally translate into decreases and increases in fair values of fixed maturity investments, respectively. Additionally, fair values of interest rate sensitive instruments may be affected by the credit worthinesscreditworthiness of the issuer, prepayment options, relative values of alternative investments, the liquidity of the instrument and other general market conditions.
The table below summarizes the estimated effects of hypothetical increases and decreases in market interest rates on White Mountains'Mountains’ fixed maturity portfolio and fixed maturity investments in the pension plan.
| $ in millions | Fair Value at December 31, 2004 | Assumed Change in Relevant Interest Rate | Estimated Fair Value After Change in Interest Rate | After-Tax Increase (Decrease) in Carrying Value | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
($ in millions) |
| Fair Value at |
| Assumed Change in |
| Estimated Fair Value |
| After-Tax Increase |
| |||||||||||||||
| Fixed maturity investments | $ | 7,900.0 | 100 bp decrease | $ | 8,110.6 | $ | 142.8 |
| $ | 7,911.5 |
| 100 bp decrease |
| $ | 8,058.7 |
| $ | 98.0 |
| |||||
| 50 bp decrease | 8,005.8 | 71.7 |
|
|
| 50 bp decrease |
| 7,988.2 |
| 51.1 |
| |||||||||||||
| 50 bp increase | 7,795.8 | (70.7 | ) |
|
|
| 50 bp increase |
| 7,837.6 |
| (49.2 | ) | ||||||||||||
| 100 bp increase | 7,706.0 | (132.1 | ) |
|
|
| 100 bp increase |
| 7,759.6 |
| (101.1 | ) | ||||||||||||
| Pension fixed maturity investments | $ | 259.4 | 100 bp decrease | $ | 267.5 | $ | 5.3 |
| $ | 285.1 |
| 100 bp decrease |
| $ | 293.6 |
| $ | 5.6 |
| |||||
| 50 bp decrease | 263.5 | 2.7 |
|
|
| 50 bp decrease |
| 289.3 |
| 2.8 |
| |||||||||||||
| 50 bp increase | 255.3 | (2.7 | ) |
|
|
| 50 bp increase |
| 280.8 |
| (2.8 | ) | ||||||||||||
| 100 bp increase | 251.2 | (5.3 | ) |
|
|
| 100 bp increase |
| 276.5 |
| (5.5 | ) | ||||||||||||
Long-term obligations.As of December 31, 2004,2006, White Mountains'Mountains’ interest and dividend bearing long-term obligations consisted primarily of the Senior Notes, and the Berkshire Preferred Stock and the Zenith Preferred Stock obligations, which have fixed interest and dividend rates. As a result, White MountainsMountains’ exposure to interest rate risk resulting from variable interest rate obligations is insignificant.limited to the $320 million that it had drawn under the WTM Bank Facility as of December 31, 2006.
The Senior Notes were issued in 2003 and mature on May 15, 2013. At December 31, 2004,December31, 2006, the fair value of White Mountains'the Senior Notes was approximately $714$693 million, which compared to a carrying value of $698$699 million.
The Berkshire Preferred Stock and Zenith Preferred Stock obligations were issued in 2001 and mature on May 31, 2008 and May 31, 2011, respectively. At the Company's option, the Zenith Preferred Stock may be redeemed on June 30, 2007. At December 31, 2004,2006, the fair values of the Berkshire Preferred Stock and Zenith Preferred Stock obligations were approximately $341$320 million and $23$21 million, respectively, which compared to carrying values of $192$242 million and $20 million, respectively.
The fair values of these obligations were estimated by discounting future cash flows using current market rates for similar obligations or using quoted market prices.
The carrying values of White Mountains'Mountains’ common equity securities and its other investments are based on quoted market prices or management'smanagement’s estimates of fair value (which is based, in part, on quoted market prices) as of the balance sheet date. Market prices of common equity securities, in general, are subject to fluctuations which could cause the amount to be realized upon sale or exercise of the instruments to differ significantly from the current reported value. The fluctuations may result from perceived changes in the underlying economic characteristics of the investee, the relative price of alternative investments, general market conditions and supply and demand imbalances for a particular security.
Foreign Currency Exchange Rates
Risk
White Mountains'Mountains’ foreign assets and liabilities are valued using period-end exchange rates and its foreign revenues and expenses are valued using average exchange rates. Foreign currency exchange rate risk is the risk that White Mountains will incur losses on a U.S. Dollardollar basis due to adverse changes in foreign currency exchange rates.
At December 31, 2004,2006, OneBeacon held approximately $384$259 million in bonds denominated in foreign currencies, mostly those denominated in British Pounds.Pounds and Australian dollars. Assuming a hypothetical 10% increase or decrease in the rate of exchange from the British Pound and Australian dollar to the U.S. Dollardollar as of December 31, 2004,2006, the carrying value of OneBeacon'sOneBeacon’s foreign currency-denominated bond portfolio would have respectively decreased or increased by approximately $37$26 million.
As a result of the Sirius Acquisition during 2004, White Mountains has a higher concentration of assets, liabilities, revenues and expenses denominated in foreign currencies than in prior periods. The functional currency of Sirius International is the Swedish Krona. Assuming a hypothetical 10% increase or decrease in the rate of exchange from the Swedish Krona to the U.S. Dollardollar as of December 31, 2004,2006, the carrying value of White Mountains'Mountains’ net assets denominated in Swedish Kronor would have respectively decreased or increased by approximately $40$58 million.
Weather Derivative Risk
Weather derivatives, which can be structured as either swaps or options, are typically purchased by corporations and governments exposed to volatility in earnings due to variable weather. Weather derivatives are products with financial settlements linked to an underlying index that measures a quantifiable weather element such as temperature, precipitation, snowfall and windspeed, typically over the course of a six-month summer or winter season. Galileo manages its exposure to weather and market risks based on guidelines established by senior management. Galileo manages its weather portfolio through the employment of a variety of strategies. These strategies include geographical diversification of risk exposures and economic hedging within the over-the-counter and exchange traded derivative markets. Additionally, Galileo economically hedges its risk exposure by buying and selling similar weather risk contracts with different counterparties. For example, Galileo may sell an option to protect a customer if it becomes too cold in a certain location and then purchase an option from another counterparty that pays Galileo if it becomes too cold in that same location. Galileo also diversifies its risk exposure by entering into contracts that protect different clients with opposite exposures to the same quantifiable weather element. For example, Galileo may sell an option to protect a customer if it becomes too cold in a certain location and then sell another option that protects a different customer if it becomes too warm in that same location. Risk management is undertaken on a product portfolio-wide basis, to maintain a portfolio that Galileo believes is well diversified and that remains within the aggregate risk tolerance established by senior management.
Galileo uses value-at-risk (“VaR”) analysis to monitor the risks associated with its weather derivative contracts. VaR is a tool that measures the potential loss that could occur over a defined period of time, calculated at a given statistical confidence level. Galileo’s portfolio VaR analyses are calculated using a Monte Carlo simulation model that uses historical weather data, actual weather data since each contract’s inception, forecasted weather conditions and prevailing market rates as inputs. Galileo performs a VaR analysis for each of its portfolios using both a seasonal and 20-day holding period. The average, low and high of amounts produced by Galileo’s 20 day VaR analyses performed during the period ended December 31, 2006, calculated at a 99% confidence level, were approximately $3 million, zero, and $8 million, respectively. White Mountains did not offer weather risk management products prior to 2006.
Variable Annuity Guarantee Risk
White Mountains entered into an agreement to reinsure death and living benefit guarantees associated with certain variable annuities issued in Japan, commencing September 1, 2006. The reinsurance agreement assumes risk related to a shortfall between the account value and the guaranteed value that must be paid by the ceding company to an annuitant or to an annuitant’s beneficiary in accordance with the underlying annuity contracts. Generally, the liabilities associated with these guarantees increase with declines in the equity markets, interest rates and currencies against the Japanese Yen, as well as with increases in market volatilities. The liability is also affected by annuitant-related actuarial assumptions, including surrender and mortality rates. At December 31, 2006, the total liability for the reinsured variable annuity guarantees was $(14) million.
White Mountains purchases derivative instruments, including futures and over-the counter option contracts on interest rates, major equity indices, and foreign currencies, to mitigate the risks associated with changes in the fair value of the reinsured variable annuity guarantees. At December 31, 2006, the fair value of these derivative instruments was $21 million and had an inception to date loss of $16 million.
White Mountains measures its net exposure to changes in relevant interest rates, foreign exchange rates and equity markets on a daily basis and adjusts its economic hedge positions within risk guidelines established by senior management. At December 31, 2006, White Mountains’ modeled net exposure to a 10% change in each of these factors were as follows:
|
| ($ in millions) |
| |||||||
|
|
|
|
|
| Foreign Exchange Rates |
| |||
Change |
| Equity Markets |
| Interest Rates |
| Against the Japanese Yen |
| |||
+ 10 Percent |
| $ | .3 |
| $ | .4 |
| $ | (1.5 | ) |
-10 Percent |
| (1.8 | ) | (.3 | ) | (4.4 | ) | |||
White Mountains also monitors the effects of annuitant-related experience against actuarial assumptions (including surrender and mortality rates) on a weekly basis and adjusts relevant assumptions and economic hedge positions if required. While White Mountains actively manages its economic hedge positions, several factors, including policyholder behavior and mismatches between underlying variable annuity funds and the hedge indices, may result in economic hedge ineffectiveness.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data have been filed as a part of this Annual Report on Form 10-K as indicated in the Index to Consolidated Financial Statements and Financial Statement Schedules appearing on page 8897 of this report.
Item 9.Changes in and Disagreements withWith Accountants on Accounting and Financial Disclosure
None.
None.
Item 9A. Controls and Procedures
The Principal Executive Officer ("PEO"(“PEO”) and the Principal Financial Officer ("PFO"(“PFO”) of White Mountains have evaluated the effectiveness of its disclosure controls and procedures (as defined in Rule 13a-15(e)13a-1 5(e) of the Exchange Act) as of December 31, 2004.2006. Based on that evaluation, the PEO and
PFO have concluded that White Mountains'Mountains’ disclosure controls and procedures are adequate and effective.
The PEO and the PFO of White Mountains have evaluated the effectiveness of its internal control over financial reporting as of December 31, 2004.2006. Based on that evaluation, the PEO and PFO have concluded that White Mountains'Mountains’ internal control over financial reporting is effective. Management'sManagement’s annual report on internal control over financial reporting is included on page F-71F-97 of this report. The attestation report on management'smanagement’s assessment of its internal control over financial reporting by PricewaterhouseCoopers LLP is containedincluded on page F-72pages F-94 through F-95 of this report.
There havehas been no significant changeschange in White Mountains'Mountains’ internal controls over financial reporting that occurred during the fourth quarter of 2006 that has materially affected, or in factors that could significantlyis reasonably likely to materially affect White Mountains’ internal controls, subsequent to their most recent evaluation of such controls.control over financial reporting.
None.
Item 10. Directors, and Executive Officers
and Corporate Governance
a.Directors
Reported under the caption "Electioncaptions “The Board Of Directors”, “Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate Governance - Committees of the Company's Directors" ofBoard - Audit Committee” in the Company's 2005Company’s 2007 Proxy Statement, herein incorporated by reference.
b.Executivereference, and under the caption “Executive Officers
Reported of the Registrant” in Part I pursuant to General Instruction G toof this Annual Report on Form 10-K.
c.Audit Committee Financial Expert
Reported under the caption "Committees of the Board—Audit Committee" of the Company's 2005 Proxy Statement, herein incorporated by reference.
d.Code of Business Conduct and Ethics
The Company'sCompany’s Code of Business Conduct, which applies to all directors, officers and employees in carrying out their responsibilities to and on behalf of the Company, has been filed hereinis available at www.whitemountains.com and is included as Exhibit 14.
e.Compliance with Section 16(a)14 to the Company’s 2004 Annual Report on Form 10-K. The Company’s Code of Business Conduct is also available in print free of charge to any shareholder upon request.There have been no material changes to the
Exchange Act
Reportedprocedures by which shareholders may recommend nominees to the Company’s Board of Directors. The procedures for shareholders to nominate directors are reported under the caption "Compliance with Section 16(a)“Corporate Governance - Committees of the Exchange Act" ofBoard - Nominating and Governance Committee” in the Company's 2005Company’s 2007 Proxy Statement, herein incorporated by reference.
Item 11. Executive Compensation
Reported under the captions "Compensation of Executive Officers", "Reports of“Executive Compensation” and “Corporate Governance - Compensation Committee Interlocks and Insider Participation” in the Committee on Executive Compensation", "Member Return Graph" and "Compensation Plans" of the Company's 2005Company’s 2007 Proxy Statement, herein incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
Reported under the caption "Votingcaptions “Voting Securities and Principal Holders Thereof" ofThereof” and “Equity Compensation Plan Information” in the Company's 2005Company’s 2007 Proxy Statement, herein incorporated by reference.
Item 13. Certain Relationships, and Related Transactions
and Director Independence
Reported under the captions "Other Compensation Arrangements", "Certain Relationshipscaption “Transactions with Related Persons, Promoters and Related Transactions"Certain Control Persons” and "Compensation Committee Interlocks and Insider Participation“Corporate Governance - Director Independence” in Compensation Decisions" of the Company's 2005Company’s 2007 Proxy Statement, herein incorporated by reference.
Item 14. Principal Accountant Fees and Services
Reported under the caption "Independent Registered Public“Principal Accountant Fees and Services" ofServices” in the Company's 2005Company’s 2007 Proxy Statement, herein incorporated by reference.
Item 15. Exhibits and Financial Statement Schedules and Reports on Form 8-K
a.
- Documents Filed as Part of the Report
The financial statements and financial statement schedules and reports of independent auditors have been filed as part of this Annual Report on Form 10-K as indicated in the Index to Consolidated Financial Statements and Financial Statement Schedules appearing on page 8897 of this report. A listing of exhibits filed as part of the report appear on pages 8394 through 8595 of this report.
93
b.
Exhibit |
| Name | |||
2 | Plan of Reorganization (incorporated by reference herein to the | ||||
3.1 | Memorandum of Continuance of the Company (incorporated by reference herein to Exhibit (3)(I) of the | ||||
3.2 | Bye-Laws of the Company (incorporated by reference herein to Annex III of the | ||||
4 | Amended and Restated Certificate of Designation of Series A Preferred Stock of Fund American (incorporated by reference herein to Exhibit 99.1 of the | ||||
10.1 | Amendment Agreement dated as of November 30, 2004, between General Reinsurance Corporation, a Delaware corporation, the Company and Fund American (incorporated by reference herein to Exhibit 99.2 of the | ||||
10.2 | Keep-Well Agreement, dated as of November 30, 2004, by and between the Company and Fund American (incorporated by reference herein to Exhibit 99.3 of the | ||||
10.3 | $500,000,000 Credit Agreement, | ||||
10.4 | $ | ||||
10.5 |
Adverse Development Agreement of Reinsurance No. 8888 between Potomac Insurance Company and GRC dated April 13, 2001 (incorporated by reference herein to Exhibit 99(m) of the | ||
10.6 | Adverse Development Agreement of Reinsurance between NICO (and certain of its affiliates) and Potomac Insurance Company dated April 13, 2001 and related documents (incorporated by reference herein to Exhibits 99(n), 99(o), 99(p) and 99(q) of the | |
10.7 | ||
Subscription Agreement among Berkshire, Fund American and the Registrant dated May 30, 2001 (incorporated by reference herein to Exhibits 99(t) of the | ||
10.8 | Master Agreement by and among the Company, OneBeacon and Liberty Mutual including the Liberty RRA and related documents (incorporated by reference herein to Exhibits 99(d), 99(e), 99(f), 99(g) and 99(h) of the | |
10.9 | Investment Management Agreement between Prospector Partners, LLC and | |
White Mountains | ||
10.10 | Amendment to the Investment Management Agreement between Prospector Partners, LLC and White Mountains | |
10.11 | Investment Management Agreement between Prospector Partners, LLC and OneBeacon dated November14, 2006 (*) | |
10.12 | Consulting Letter Agreement between Prospector Partners, LLC and White Mountains Advisors LLC (incorporated by reference herein to Exhibit 99.2 of the Company’s Report on Form 8-K dated June 20, 2005) | |
10.13 | Folksamerica Holding Company, Inc. Voluntary Deferred Compensation Plan | |
10.14 | Folksamerica Holding Company, Inc. Deferred Benefit Plan | |
10.15 | White Mountains Long-Term Incentive Plan | |
10.16 | White Mountains Bonus Plan | |
10.17 | The | |
10.18 | White Mountains Insurance Group Deferred Compensation Plan (incorporated by reference herein to Exhibit 10.14 of the | |
10.19 | Fund American Deferred Compensation Plan (incorporated by reference herein to Exhibit 10.15 of the |
10.20 | OneBeacon | |
10.21 | OneBeacon Insurance | |
10.22 |
OneBeacon Insurance Deferred Compensation Plan (incorporated by reference herein to Exhibit 10.18 of the | ||
10.23 | OneBeacon Phantom WTM Share Plan (*) | |
10.24 | OneBeacon Long-Term Incentive Plan (*) | |
10.25 | OneBeacon Insurance Group, Ltd. Non-Qualified Stock Option Agreement for T. Michael Miller (*) | |
10.26 | Amended and Restated Revenue Sharing Agreement among John D. Gillespie, Fund American Companies, Inc. and Folksamerica Reinsurance Company | |
11 | Statement Re Computation of Per Share Earnings (**) | |
12 | Statement Re Computation of Ratio of Earnings to Fixed Charges (*) | |
14 | The | |
21 | Subsidiaries of the Registrant (*) | |
23 | Consent of PricewaterhouseCoopers LLP dated | |
24 | Powers of Attorney (*) | |
31.1 | Principal Executive Officer Certification Pursuant to Rule 13a-14 (a) of the Securities Exchange Act of 1934 (*) | |
31.2 | Principal Financial Officer Certification Pursuant to Rule 13a-14 (a) of the Securities Exchange Act of 1934 (*) | |
32.1 | Principal Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (*) | |
32.2 | Principal Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (*) | |
99 | Text entitled |
(*)Included herein.
(**)
c.
- Financial Statement Schedules
The financial statement schedules and report of independent registered public accounting firm have been filed as part of this Annual Report on Form 10-K as indicated in the Index to Consolidated Financial Statements and Financial Statement Schedules appearing on page 8897 of this report.
95
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.