XNYS:WTM White Mountains Insurance Group Ltd Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the period ended March 31, 2012

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from          to         

 

Commission file number 1-8993

 

WHITE MOUNTAINS INSURANCE GROUP, LTD.

(Exact name of Registrant as specified in its charter)

 

Bermuda

 

94-2708455

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

80 South Main Street,

 

 

Hanover, New Hampshire

 

03755-2053

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (603) 640-2200

 

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes   x   No   o

 

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months. Yes   x    No   o

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o   No  x

 

As of April 26, 2012, 6,638,873 common shares with a par value of $1.00 per share were outstanding (which includes 93,460 restricted common shares that were not vested at such date).

 

 

 



Table of Contents

 

WHITE MOUNTAINS INSURANCE GROUP, LTD.

 

Table of Contents

 

 

 

Page No.

 

 

 

PART I.

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

 

 

 

Consolidated Balance Sheets, March 31, 2012 and December 31, 2011

1

 

 

 

 

Consolidated Statements of Operations and Comprehensive Income, Three Months Ended March 31, 2012 and 2011

2

 

 

 

 

Consolidated Statements of Changes in Equity, Three Months Ended March 31, 2012 and 2011

3

 

 

 

 

Consolidated Statements of Cash Flows, Three Months Ended March 31, 2012 and 2011

4

 

 

 

 

Notes to Consolidated Financial Statements

5

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

36

 

 

 

 

Results of Operations — Three Months Ended March 31, 2012 and 2011

36

 

 

 

 

Liquidity and Capital Resources

45

 

 

 

 

Fair Value Considerations

51

 

 

 

 

Non-GAAP Financial Measures

52

 

 

 

 

Critical Accounting Estimates

53

 

 

 

 

Forward-Looking Statements

53

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

54

 

 

 

Item 4.

Controls and Procedures

54

 

 

 

PART II.

OTHER INFORMATION

54

 

 

 

Items 1 through 6.

54

 

 

 

SIGNATURES

 

56

 



Table of Contents

 

PART I. FINANCIAL INFORMATION.

 

Item 1. Financial Statements

 

WHITE MOUNTAINS INSURANCE GROUP, LTD.

CONSOLIDATED BALANCE SHEETS

 

 

 

March 31,

 

December 31,

 

(Millions, except share amounts)

 

2012

 

2011

 

 

 

Unaudited

 

 

 

Assets

 

 

 

 

 

Fixed maturity investments, at fair value

 

$

5,411.3

 

$

6,221.9

 

Short-term investments, at amortized cost (which approximates fair value)

 

877.5

 

846.0

 

Common equity securities, at fair value

 

868.7

 

755.0

 

Convertible fixed maturity investments, at fair value

 

152.8

 

143.8

 

Other long-term investments

 

306.7

 

301.3

 

Total investments

 

7,617.0

 

8,268.0

 

Cash (restricted: $360.1 and $453.5)

 

605.4

 

705.4

 

Reinsurance recoverable on unpaid losses

 

2,465.4

 

2,507.3

 

Reinsurance recoverable on paid losses

 

39.1

 

30.5

 

Insurance and reinsurance premiums receivable

 

737.3

 

489.2

 

Funds held by ceding companies

 

111.1

 

106.5

 

Investments in unconsolidated affiliates

 

294.9

 

275.3

 

Deferred acquisition costs

 

198.8

 

187.0

 

Deferred tax asset

 

524.7

 

536.9

 

Ceded unearned insurance and reinsurance premiums

 

145.5

 

87.3

 

Accrued investment income

 

52.0

 

51.4

 

Accounts receivable on unsettled investment sales

 

6.5

 

4.7

 

Other assets

 

580.9

 

681.9

 

Assets held for sale

 

 

132.6

 

Total assets

 

$

13,378.6

 

$

14,064.0

 

Liabilities

 

 

 

 

 

Loss and loss adjustment expense reserves

 

$

5,510.8

 

$

5,702.3

 

Unearned insurance and reinsurance premiums

 

1,074.4

 

846.9

 

Variable annuity benefit guarantee

 

548.5

 

768.5

 

Debt

 

677.2

 

677.5

 

Deferred tax liability

 

384.1

 

365.5

 

Accrued incentive compensation

 

90.0

 

187.9

 

Ceded reinsurance payable

 

194.0

 

134.6

 

Funds held under reinsurance treaties

 

45.2

 

42.9

 

Accounts payable on unsettled investment purchases

 

103.5

 

34.6

 

Other liabilities

 

441.4

 

527.8

 

Liabilities held for sale

 

 

107.6

 

Total liabilities

 

9,069.1

 

9,396.1

 

Equity

 

 

 

 

 

White Mountains’ common shareholders’ equity

 

 

 

 

 

White Mountains’ common shares at $1 par value per share - authorized 50,000,000 shares;

 

 

 

 

 

issued and outstanding 6,638,873 and 7,577,855 shares

 

6.6

 

7.6

 

Paid-in surplus

 

1,099.5

 

1,253.7

 

Retained earnings

 

2,553.7

 

2,789.7

 

Accumulated other comprehensive income, after-tax:

 

 

 

 

 

Equity in net unrealized losses from investments in unconsolidated affiliates

 

(1.2

)

 

Net unrealized foreign currency translation gains

 

69.4

 

46.1

 

Pension liability and other

 

(9.2

)

(9.4

)

Total White Mountains’ common shareholders’ equity

 

3,718.8

 

4,087.7

 

Noncontrolling interests

 

 

 

 

 

Noncontrolling interest - OneBeacon Ltd.

 

281.9

 

273.1

 

Noncontrolling interest - SIG Preference Shares

 

250.0

 

250.0

 

Noncontrolling interest - other

 

58.8

 

57.1

 

Total noncontrolling interests

 

590.7

 

580.2

 

Total equity

 

4,309.5

 

4,667.9

 

Total liabilities and equity

 

$

13,378.6

 

$

14,064.0

 

 

See Notes to Consolidated Financial Statements

 

1



Table of Contents

 

 

WHITE MOUNTAINS INSURANCE GROUP, LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

Unaudited

 

 

 

Three Months Ended

 

 

 

March 31,

 

(Millions, except per share amounts)

 

2012

 

2011

 

Revenues:

 

 

 

 

 

Earned insurance and reinsurance premiums

 

$

499.0

 

$

467.8

 

Net investment income

 

41.8

 

49.5

 

Net realized and unrealized investment gains (losses)

 

58.6

 

(9.2

)

Other revenue

 

31.2

 

21.5

 

 

 

 

 

 

 

Total revenues

 

630.6

 

529.6

 

Expenses:

 

 

 

 

 

Loss and loss adjustment expenses

 

262.7

 

358.4

 

Insurance and reinsurance acquisition expenses

 

108.4

 

90.7

 

Other underwriting expenses

 

74.8

 

73.1

 

General and administrative expenses

 

45.5

 

28.0

 

Interest expense on debt

 

10.9

 

13.1

 

 

 

 

 

 

 

Total expenses

 

502.3

 

563.3

 

 

 

 

 

 

 

Pre-tax income (loss) from continuing operations

 

128.3

 

(33.7

)

 

 

 

 

 

 

Income tax (expense) benefit

 

(28.0

)

7.7

 

 

 

 

 

 

 

Net income (loss) from continuing operations

 

100.3

 

(26.0

)

 

 

 

 

 

 

Net income from discontinued operations, net of tax

 

.1

 

2.5

 

 

 

 

 

 

 

Income (loss) before equity in earnings of unconsolidated affiliates

 

100.4

 

(23.5

)

 

 

 

 

 

 

Equity in earnings of unconsolidated affiliates

 

10.2

 

6.7

 

 

 

 

 

 

 

Net income (loss)

 

110.6

 

(16.8

)

Net income attributable to noncontrolling interests

 

(16.8

)

(11.4

)

 

 

 

 

 

 

Net income (loss) attributable to White Mountains’ common shareholders

 

93.8

 

(28.2

)

 

 

 

 

 

 

Comprehensive income (loss), net of tax:

 

 

 

 

 

Change in equity in net unrealized losses from investments in unconsolidated affiliates

 

(1.2

)

 

Change in foreign currency translation and other

 

23.5

 

62.0

 

 

 

 

 

 

 

Comprehensive income

 

116.1

 

33.8

 

Comprehensive income attributable to noncontrolling interests

 

 

 

Comprehensive income attributable to White Mountains’ common shareholders

 

$

116.1

 

$

33.8

 

 

 

 

 

 

 

Income (loss) per share attributable to White Mountains’ common shareholders Basic income (loss) per share

 

 

 

 

 

Continuing operations

 

$

12.59

 

$

(3.82

)

Discontinued operations

 

.02

 

.31

 

Total consolidated operations

 

$

12.61

 

$

(3.51

)

 

 

 

 

 

 

Diluted income (loss) per share

 

 

 

 

 

Continuing operations

 

$

12.59

 

$

(3.82

)

Discontinued operations

 

.02

 

.31

 

Total consolidated operations

 

$

12.61

 

$

(3.51

)

 

 

 

 

 

 

Dividends declared per White Mountains’ common share

 

$

1.00

 

$

1.00

 

 

See Notes to Consolidated Financial Statements

 

2



Table of Contents

 

WHITE MOUNTAINS INSURANCE GROUP, LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

Unaudited

 

 

 

White Mountains’ Common Shareholders’ Equity

 

 

 

 

 

 

 

Common 

 

 

 

Accum. other

 

 

 

 

 

Common

 

shares and

 

 

 

comprehensive

 

Non-

 

 

 

shareholders’

 

paid-in

 

Retained

 

income (loss),

 

controlling

 

(Millions)

 

equity

 

surplus

 

earnings

 

after-tax

 

interest

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at January 1, 2012

 

$

4,087.7

 

$

1,261.3

 

$

2,789.7

 

$

36.7

 

$

580.2

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

93.8

 

 

93.8

 

 

16.8

 

Other comprehensive income, after-tax

 

22.3

 

 

 

22.3

 

 

Dividends declared on common shares

 

(6.6

)

 

(6.6

)

 

 

Dividends to noncontrolling interests

 

 

 

 

 

(5.0

)

Repurchases and retirements of common shares

 

(485.8

)

(162.6

)

(323.2

)

 

 

Issuances of common shares

 

4.6

 

4.6

 

 

 

 

Net distributions to noncontrolling interests

 

 

 

 

 

(1.5

)

Amortization of restricted share and option awards

 

2.8

 

2.8

 

 

 

.2

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at March 31, 2012

 

$

3,718.8

 

$

1,106.1

 

$

2,553.7

 

$

59.0

 

$

590.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

White Mountains’ Common Shareholders’ Equity

 

 

 

 

 

 

 

Common

 

 

 

Accum. other

 

 

 

 

 

Common

 

shares and

 

 

 

comprehensive

 

Non-

 

 

 

shareholders’

 

paid-in

 

Retained

 

income (loss),

 

controlling

 

(Millions)

 

equity

 

surplus

 

earnings

 

after-tax

 

interest

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at January 1, 2011

 

$

3,653.0

 

$

1,359.0

 

$

2,175.6

 

$

118.4

 

$

607.8

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

(28.2

)

 

(28.2

)

 

11.4

 

Other comprehensive income, after-tax

 

62.0

 

 

 

62.0

 

 

Dividends declared on common shares

 

(8.0

)

 

(8.0

)

 

 

Dividends to noncontrolling interests

 

 

 

 

 

(4.8

)

Repurchases and retirements of common shares

 

(86.1

)

(40.9

)

(45.2

)

 

 

Net distributions to noncontrolling interests

 

 

 

 

 

(.6

)

Amortization of restricted share and option awards

 

2.5

 

2.5

 

 

 

.1

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at March 31, 2011

 

$

3,595.2

 

$

1,320.6

 

$

2,094.2

 

$

180.4

 

$

613.9

 

 

See Notes to Consolidated Financial Statements

 

3



Table of Contents

 

WHITE MOUNTAINS INSURANCE GROUP, LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

 

 

 

Three Months Ended

 

 

 

March 31,

 

(Millions)

 

2012

 

2011

 

 

 

 

 

 

 

Cash flows from operations:

 

 

 

 

 

Net income (loss)

 

$

110.6

 

$

(16.8

)

Charges (credits) to reconcile net income to net cash (used for) provided from operations:

 

 

 

 

 

Net realized and unrealized investment gains (losses)

 

(58.6

)

9.2

 

Net income from discontinued operations

 

(0.1

)

(2.5

)

Deferred income tax expense (benefit)

 

26.3

 

(32.8

)

Undistributed equity in earnings from unconsolidated affiliates, after-tax

 

(10.2

)

(6.7

)

Other operating items:

 

 

 

 

 

Net change in loss and loss adjustment expense reserves

 

(226.5

)

(40.5

)

Net change in reinsurance recoverable on paid and unpaid losses

 

40.2

 

86.1

 

Net change in unearned insurance and reinsurance premiums

 

214.9

 

115.7

 

Net change in funds held by ceding companies

 

(0.6

)

22.0

 

Net change in variable annuity benefit guarantee liabilities

 

(220.0

)

(55.3

)

Net change in deferred acquisition costs

 

(10.0

)

(6.0

)

Net change in ceded unearned premiums

 

(54.4

)

2.0

 

Net change in funds held under reinsurance treaties

 

1.3

 

(4.9

)

Net change in insurance and reinsurance premiums receivable

 

(235.6

)

(165.4

)

Net change in ceded reinsurance payable

 

54.5

 

(1.5

)

Net change in other assets and liabilities, net

 

35.8

 

(39.9

)

 

 

 

 

 

 

Net cash used for operations - continuing operations

 

(332.4

)

(137.3

)

Net cash (used for) provided from operations - discontinued operations

 

(2.0

)

7.7

 

 

 

 

 

 

 

Net cash used for operations

 

(334.4

)

(129.6

)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Net change in short-term investments

 

(88.1

)

88.4

 

Sales of fixed maturity and convertible fixed maturity investments

 

2,450.2

 

1,040.7

 

Maturities, calls and paydowns of fixed maturity and convertible fixed maturity investments

 

194.9

 

460.5

 

Sales of common equity securities

 

22.2

 

58.0

 

Distributions and redemptions of other long-term investments

 

11.1

 

54.0

 

Purchases of other long-term investments

 

(6.1

)

(6.9

)

Contributions to discontinued operations

 

 

(56.4

)

Purchases of common equity securities

 

(98.7

)

(65.5

)

Purchases of fixed maturity and convertible fixed maturity investments

 

(1,737.1

)

(1,398.4

)

Net change in unsettled investment purchases and sales

 

67.1

 

64.3

 

Net acquisitions of property and equipment

 

(0.6

)

(2.2

)

 

 

 

 

 

 

Net cash provided from investing activities - continuing operations

 

814.9

 

236.5

 

Net cash used for investing activities - discontinued operations

 

 

(3.5

)

 

 

 

 

 

 

Net cash provided from investing activities

 

814.9

 

233.0

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Cash dividends paid to the Company’s common shareholders

 

 

(8.0

)

Cash dividends paid to OneBeacon Ltd.’s noncontrolling common shareholders

 

(5.0

)

(4.8

)

Common shares repurchased

 

(485.8

)

(86.1

)

Net cash used for financing activities - continuing operations

 

(490.8

)

(98.9

)

Net cash provided from financing activities - discontinued operations

 

 

 

 

 

 

 

 

 

Net cash used for financing activities

 

(490.8

)

(98.9

)

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

1.7

 

2.3

 

 

 

 

 

 

 

Net change in cash during the period

 

(6.6

)

2.6

 

Net change in cash from discontinued operations

 

(2.0

)

4.2

 

Cash reclassified from assets held for sale (net of cash sold of $3.5)

 

2.0

 

 

Cash balances at beginning of period (excludes restricted cash balances of $453.5 and $286.7)

 

251.9

 

148.1

 

Cash balances at end of period (excludes restricted cash balances of $360.1 and $297.6)

 

$

245.3

 

$

154.9

 

 

 

 

 

 

 

Supplemental cash flows information:

 

 

 

 

 

Interest paid

 

$

(12.8

)

$

(12.8

)

Net income tax payments to national governments

 

$

(8.7

)

$

(10.8

)

 

See Notes to Consolidated Financial Statements

 

4



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Note 1. Summary of Significant Accounting Policies

 

Basis of Presentation

 

These interim consolidated financial statements include the accounts of White Mountains Insurance Group, Ltd. (the “Company” or the “Registrant”) and its subsidiaries (collectively, with the Company, “White Mountains”) and have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The Company is an exempted Bermuda limited liability company whose principal businesses are conducted through its property and casualty insurance and reinsurance subsidiaries and affiliates. The Company’s headquarters is located at 14 Wesley Street, Hamilton, Bermuda HM 11, its principal executive office is located at 80 South Main Street, Hanover, New Hampshire 03755-2053 and its registered office is located at Clarendon House, 2 Church Street, Hamilton, Bermuda HM 11.  White Mountains’ reportable segments are OneBeacon, Sirius Group (formerly White Mountains Re) and Other Operations.  As discussed further in Note 2, on October 7, 2011, White Mountains completed its sale of Esurance Holdings, Inc. and its subsidiaries (“Esurance Insurance”) and Answer Financial Inc. and its subsidiaries (“AFI”) (collectively, “Esurance”).  Esurance has been presented as discontinued operations. Prior year amounts have been reclassified to conform to the current year’s presentation.  (See Note 14 for discontinued operations).

 

The OneBeacon segment consists of OneBeacon Insurance Group, Ltd. (“OneBeacon Ltd.”), an exempted Bermuda limited liability company that owns a family of U.S. based property and casualty insurance companies (collectively “OneBeacon”), most of which operate in a multi-company pool. OneBeacon is a specialty property and casualty insurance writer that offers a wide range of insurance products through independent agencies, regional and national brokers, wholesalers and managing general agencies. As of March 31, 2012 and December 31, 2011, White Mountains owned 75.2% and 75.5% of OneBeacon Ltd.’s outstanding common shares.  As discussed further in Note 2, OneBeacon sold the AutoOne business (“AutoOne”) in February 2012.  Accordingly, effective for March 31, 2012, AutoOne is presented as discontinued operations and assets and liabilities held for sale in the financial statements (see Note 14). Prior year income statement and cash flow amounts have been reclassified to conform to the current year’s presentation.

 

The Sirius Group segment consists of Sirius International Insurance Group, Ltd. (formerly White Mountains Re Ltd.), an exempted Bermuda limited liability company, and its subsidiaries (collectively, “Sirius Group”). Sirius Group provides insurance and reinsurance products for property, accident and health, aviation and space, trade credit, marine, agriculture and certain other exposures on a worldwide basis through its subsidiaries, Sirius International Insurance Corporation (“Sirius International”), Sirius America Insurance Company (“Sirius America”) and Lloyds Syndicate 1945 (“Syndicate 1945”). Sirius Group also specializes in the acquisition and management of run-off insurance and reinsurance companies both in the United States and internationally through its White Mountains Solutions division.  On December 30, 2011, Sirius Group completed a transaction led by White Mountains Solutions to acquire the run-off loss reserve portfolio of Old Lyme Insurance Company Ltd. (“Old Lyme”).  Sirius Group also includes Scandinavian Reinsurance Company, Ltd. (“Scandinavian Re”) and Central National Insurance Company of Omaha (“Central National”), which are both in run-off.

 

White Mountains’ Other Operations segment consists of the Company and its intermediate holding companies, its wholly-owned investment management subsidiary, White Mountains Advisors LLC (“WM Advisors”), , White Mountains’ variable annuity reinsurance business, White Mountains Life Reinsurance (Bermuda) Ltd. (“WM Life Re”), which is in run-off, as well as various other entities not included in other segments. For 2011, the Other Operations segment also includes the consolidated results of the Tuckerman Capital, LP fund (“Tuckerman Fund I”). On December 31, 2011, the Tuckerman Fund I liquidated and distributed all of its assets, which consisted of shares two small manufacturing companies, Hamer, LLC (“Hamer”) and Bri-Mar Manufacturing, LLC (“Bri-Mar”), to White Mountains. Commencing on January 1, 2012, the consolidated results of Hamer and Bri-Mar are included in the Other Operations segment.

 

White Mountains’ discontinued operations consist of Esurance Insurance, AFI and AutoOne.  Esurance Insurance wrote personal auto insurance directly to customers in 30 states through its website and over the phone and also sold other lines of personal insurance for unaffiliated insurance companies.  Esurance Insurance also wrote personal auto policies through select online agents and provided other insurance products through partnerships with industry leading online providers.  Esurance Insurance earned commissions and fees by referring to unaffiliated insurance companies those shoppers that it could not underwrite because of pricing or underwriting eligibility.  AFI is one of the largest independent personal insurance agencies in the United States.  AFI sold insurance online and through call centers for both Esurance Insurance and unaffiliated companies utilizing a comparison quoting platform.  AutoOne was formed by OneBeacon in 2001 to provide products and services to automobile assigned risk markets primarily in New York and New Jersey.

 

All significant intercompany transactions have been eliminated in consolidation. These interim financial statements include all adjustments considered necessary by management to fairly present the financial position, results of operations and cash flows of White Mountains that are of a normal recurring nature. These interim financial statements may not be indicative of financial results for the full year and should be read in conjunction with the Company’s 2011 Annual Report on Form 10-K.

 

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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 and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.  Refer to the Company’s 2011 Annual Report on Form 10-K for a complete discussion regarding White Mountains’ significant accounting policies.

 

Noncontrolling Interests

 

Noncontrolling interests consist of the ownership interests of noncontrolling parties in consolidated subsidiaries and are presented separately as a component of equity on the balance sheet.

 

The percentage of the noncontrolling equity interests in OneBeacon Ltd. at March 31, 2012 and December 31, 2011 was 24.8% and 24.5%.

 

On May 24, 2007, Sirius International Group, Ltd. (“SIG”), an intermediate holding company of Sirius Group, issued 250.0 million non-cumulative perpetual preference shares with a $1,000 per share liquidation preference (the “SIG Preference Shares”). Proceeds of $245.7 million, net of $4.3 million of issuance costs and commissions, were received from the issuance.  The SIG Preference Shares are included in noncontrolling interests on the balance sheet.

 

At March 31, 2012 and December 31, 2011, the noncontrolling equity interest in limited partnerships that are consolidated with White Mountains (the Prospector Offshore Fund, the Prospector Turtle Fund and Tuckerman Fund I prior to December 31, 2011) was $52.3 million and $54.2 million.  On December, 31, 2011, Tuckerman Fund I was dissolved and all of the net assets of the fund, which consisted of common stock of Hamer and Bri-Mar, were distributed.  At March 31, 2012, the noncontrolling equity interest in Hamer and Bri-Mar was $3.9 million.  At March 31, 2012 and December 31, 2011, the noncontrolling equity interest in A.W.G. Dewar Inc, a subsidiary of OneBeacon, was $2.2 million and $2.3 million. At March 31, 2012 and December 31, 2011, the noncontrolling equity interest in Passage2Health Limited, a subsidiary of Sirius Group, was $0.5 million and $0.6 million.

.

Recently Adopted Changes in Accounting Principles

 

Policy Acquisition Costs

 

On January 1, 2012, White Mountains adopted ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts (ASC 944). The new standard changes the types of policy acquisition costs that are eligible for deferral. Specifically, the new guidance limits deferrable costs to those that are incremental direct costs of contract acquisition and certain costs related to acquisition activities performed by the insurer, such as underwriting, policy issuance and processing, medical and inspection costs and sales force contract selling. The ASU defines incremental direct costs as those costs that result directly from and were essential to the contract acquisition and would not have been incurred absent the acquisition. Accordingly, under the new guidance, deferrable acquisition costs are limited to costs related to successful contract acquisitions. Acquisition costs that are not eligible for deferral are to be charged to expense in the period incurred.

 

White Mountains adopted ASU 2010-26 prospectively. Upon adoption, certain acquisition costs, primarily a portion of the profit sharing commissions associated with OneBeacon’s collector car and boats business, no longer meet the criteria for deferral.  Deferred aquisition costs of $5.6 million at January 1, 2012 that no longer meet the criteria for deferral under ASU 2010-26 will be recognized in expense over the original amortization periods.  For the three months ended March 31, 2012, White Mountains recognized $2.4 million of expense related to such previously deferrable acquisition costs.  If White Mountains had adopted ASU 2010-26 retrospectively, $1.8 million of acquisition costs that were deferred would have been recognized in expense for the three month period ended March 31, 2011.

 

Fair Value Measurements

 

On January 1, 2012, White Mountains adopted ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. The ASU clarifies existing guidance with respect to the concepts of highest and best use and valuation premise and measuring instruments classified within a reporting entity’s shareholders’ equity.  The ASU also clarifies disclosure requirements, requiring disclosure of quantitative information about unobservable inputs used in Level 3 fair value measurements. The ASU also amends existing guidance. In circumstances where a reporting entity manages a portfolio of financial assets and liabilities based on the net market and counterparty credit risk exposures, the ASU permits determination of the fair value of those instruments to be based on the net risk exposure. In addition, the ASU permits the application of premiums or discounts to be applied in a fair value measurement to the extent that market participants would consider them in valuing the financial instruments. The ASU also expands the required disclosures for Level 3 measurements, requiring that reporting entities provide a narrative description of the sensitivity of Level 3 fair value measurements to changes in unobservable inputs and the interrelationships between those inputs, if any.  As a result of adopting ASU 2011-04, White Mountains expanded its fair value disclosures. (See Note 5).

 

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Comprehensive Income

 

On January 1, 2012, White Mountains adopted ASU 2011-05, Comprehensive Income which requires all components of comprehensive income to be reported in a continuous financial statement or in two consecutive statements displaying the components of net income and the components of other comprehensive income.  Since White Mountains already presents comprehensive income in a continuous financial statement, adoption of ASU 2011-05 had no effect on White Mountains’ financial statement presentation.

 

Recently Issued Accounting Pronouncements

 

Offsetting Assets and Liabilities

 

On December 16, 2011, the FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities (ASC 210).The new standard expands the required disclosures in circumstances where either balances have been offset or the right of offset exists. The required disclosures are intended to provide information to enable financial statement users to evaluate the effect or potential effect of netting arrangements on a reporting entity’s financial position. Disclosures required under the new standard include the gross amount of assets and liabilities recognized; the amounts that have been offset to arrive at the amounts presented in the statement of financial position; and any amounts subject to an enforceable master netting arrangement, whether or not such amounts have been offset. In addition, a description of the rights of set off should be disclosed. ASU 2011-11 is effective for periods beginning on or after January 1, 2013. White Mountains is party to master netting arrangements in connection with the derivative instruments held by WM Life Re and is currently evaluating the effect of adoption will have on its disclosures, but does not expect adoption to have a material effect on its financial position, results of operations or cash flows.

 

Note 2. Significant Transactions

 

Sale of Esurance

 

On October 7, 2011, White Mountains completed the sale of Esurance Insurance and AFI to The Allstate Corporation (“Allstate”) for $700 million in excess of tangible book value.  White Mountains recorded a gain on the sale of $677.5 million in discontinued operations in the fourth quarter of 2011.  The transaction is subject to a true-up of the estimated tangible book value of the entities sold through the date of closing and certain other contingencies.

 

Tender Offers

 

On March 22, 2012, White Mountains completed a fixed-price tender offer and repurchased 816,829 of its common shares at $500 per share.  The total cost of the share repurchase was $408.6 million, including fees and expenses.  During 2011, White Mountains completed two “modified Dutch auction” self-tender offers and repurchased 332,346 of its common shares at an average price of $418 per share.  The total cost of the share repurchases was $138.8 million, including fees and expenses.

 

Sale of AutoOne

 

On February 22, 2012, OneBeacon sold AutoOne to Interboro Holdings, Inc. (“Interboro”). OneBeacon formed AutoOne in 2001 to provide products and services to automobile assigned risk markets primarily in New York and New Jersey. OneBeacon transferred to the buyer AutoOne Insurance Company (“AOIC”) and AutoOne Select Insurance Company (“AOSIC”), which contained the assets, liabilities (including loss reserves and unearned premiums), and the capital of the business, and transferred substantially all of the AutoOne infrastructure including systems and office space as well as certain staff.  As a result of the sale, AutoOne is now reported as discontinued operations (see Note 14).

 

Acquisition of Old Lyme

 

On December 30, 2011, Sirius Group acquired the run-off loss reserve portfolio of Old Lyme, a Bermuda-based reinsurer in run-off, for $6.0 million in cash and a purchase note for $2.1 million (see Note 6).

 

Share Repurchase Program

 

In addition to the tender offers, which were separately authorized, the board of directors has authorized the Company to repurchase its common shares, from time to time, subject to market conditions.  In 2006, White Mountains’ board of directors authorized the Company to repurchase up to 1 million of its common shares and in 2010 White Mountains’ board of directors authorized the Company to repurchase an additional 600,000 of its common shares. Shares may be repurchased on the open market or through privately negotiated transactions. The repurchase authorization does not obligate the Company to acquire any specific number of shares, nor is there a stated expiration date.  During the first three months of 2012 and 2011, the Company repurchased 157,629 and 246,284 common shares for $76.0 million and $86.0 million exclusive of the self tender offers described under “Tender Offers”.  At March 31, 2012, 30,668 shares may still be repurchased under this program.

 

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Note 3.  Loss and Loss Adjustment Expense Reserves

 

The following table summarizes the loss and loss adjustment expense (“LAE”) reserve activities of White Mountains’ insurance and reinsurance subsidiaries for the three months ended March 31, 2012 and 2011:

 

 

 

Three Months Ended
March 31,

 

Millions

 

2012

 

2011

 

Gross beginning balance

 

$

  5,702.3

 

$

 5,736.8

 

Less beginning reinsurance recoverable on unpaid losses

 

(2,507.3

)

(2,344.0

)

Net loss and LAE reserves

 

3,195.0

 

3,392.8

 

 

 

 

 

 

 

Less:  Beginning net loss and LAE reserves for AutoOne (1)

 

 

(77.3

)

 

 

 

 

 

 

Loss and LAE incurred relating to:

 

 

 

 

 

Current year losses

 

257.9

 

375.7

 

Prior year losses

 

4.8

 

(17.3

)

Total incurred losses and LAE

 

262.7

 

358.4

 

 

 

 

 

 

 

Accretion of fair value adjustment to loss and LAE reserves

 

7.1

 

2.1

 

Foreign currency translation adjustment to loss and LAE reserves

 

11.8

 

21.1

 

 

 

 

 

 

 

Loss and LAE paid relating to:

 

 

 

 

 

Current year losses

 

(46.7

)

(44.5

)

Prior year losses

 

(384.5

)

(269.7

)

Total loss and LAE payments

 

(431.2

)

(314.2

)

 

 

 

 

 

 

Plus:  Ending net loss and LAE reserves for AutoOne (1)

 

 

72.7

 

 

 

 

 

 

 

Net ending balance

 

3,045.4

 

3,455.6

 

Plus ending reinsurance recoverable on unpaid losses

 

2,465.4

 

2,304.1

 

Gross ending balance

 

$

 5,510.8

 

$

 5,759.7

 

 


(1)          Loss and LAE reserve balances for AutoOne prior to December 31, 2011 were not classified as held for sale for the three months ended March 31, 2011.  Adjustment is to present loss and LAE reserve activities from continuing operations.

 

Loss and LAE incurred relating to prior year losses for the three months ended March 31, 2012

 

During the three months ended March 31, 2012, White Mountains experienced $4.8 million of net unfavorable loss reserve development.  OneBeacon had net unfavorable loss reserve development of $10.5 million and Sirius Group had net favorable loss reserve development of $5.7 million.

 

The unfavorable loss reserve development at OneBeacon was primarily driven by unfavorable development in the run-off business, including development related to multiple peril lines and general liability lines and the impact of an adverse court ruling in Mississippi regarding a disputed assessment from an involuntary pool for hurricane Katrina claims in 2005.  The net favorable loss reserve development at Sirius Group included reductions for the 2011 Japan earthquake and tsunami of $8.1 million, partially offset by increases to asbestos and environmental reserves and reserves for other prior period catastrophe losses.

 

Loss and LAE incurred relating to prior year losses for the three months ended March 31, 2011

 

During the three months ended March 31, 2011, White Mountains experienced $17.3 million of net favorable loss reserve development.  OneBeacon and Sirius Group had net favorable loss reserve development of $5.1 million and $12.2 million, respectively.

 

The favorable loss reserve development at OneBeacon was primarily due to lower than expected severity on losses related to professional liability lines, multiple peril liability lines and other general liability lines.  The favorable loss reserve development at Sirius Group was primarily due to a $5.0 million reduction from the 2010 Chilean earthquake and $9.0 million of favorable loss reserve development on a 1999 aviation loss.

 

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Fair value adjustment to loss and LAE reserves

 

In connection with purchase accounting for acquisitions, White Mountains was required to adjust loss and LAE reserves and the related reinsurance recoverables to fair value on their respective acquired balance sheets.  The net reduction to loss and LAE reserves is being recognized through an income statement charge ratably with and over the period the claims are settled.  White Mountains recognized $7.1 million and $2.1 million of such charges, recorded as loss and LAE for the three months ended March 31, 2012 and 2011.  Accretion of fair value adjustment to losses and LAE reserves increased by $5.0 million in the first quarter of 2012 due to the acceleration of the amortization of the purchase accounting established for the acquisition of Scandinavian Re.  This acceleration was a result of a final settlement and commutation of Scandinavian Re’s multi-year retrocessional Casualty Aggregate Stop Loss Agreement with St. Paul Fire & Marine Insurance Company (“St Paul”). As of March 31, 2012, the remaining unamortized fair value adjustment for Scandinavian Re was $4.0 million.

 

Note 4. Third Party Reinsurance

 

In the normal course of business, White Mountains’ insurance and reinsurance subsidiaries may seek to limit losses that may arise from catastrophes or other events by reinsuring with third party reinsurers. White Mountains remains liable for risks reinsured in the event that the reinsurer does not honor its obligations under reinsurance contracts.

 

OneBeacon

 

At March 31, 2012, OneBeacon had $25.9 million of reinsurance recoverables on paid losses and $2,269.0 million (gross of $160.0 million in purchase accounting adjustments) that will become recoverable if claims are paid in accordance with current reserve estimates. The collectability of balances due from OneBeacon’s reinsurers is critical to OneBeacon’s financial strength because reinsurance contracts do not relieve OneBeacon of its primary obligation to its policyholders. OneBeacon is selective with its reinsurers, placing reinsurance with only those reinsurers having a strong financial condition. OneBeacon monitors the financial strength of its reinsurers on an ongoing basis. Uncollectible amounts historically have not been significant.

 

The following table provides a listing of OneBeacon’s top reinsurers, excluding industry pools and associations, based upon recoverable amounts, the percentage of total paid and unpaid reinsurance recoverables and the reinsurer’s A.M Best Company, Inc. (“A.M. Best”) rating.

 

Top Reinsurers (Millions)

 

Balance at
March 31, 2012

 

% of Total

 

A.M. Best
Rating(1)

 

National Indemnity Company and General Reinsurance Corporation (2)

 

$

1,504.9

 

66

%

A

++

 

Hanover Insurance Company

 

79.9

 

3

%

A

 

 

Tokio Marine and Nichido Fire (3)

 

55.0

 

2

%

A

++

 

Tower Insurance Company

 

29.9

 

1

%

A

-

 

Munich Reinsurance America

 

24.0

 

1

%

A

+

 

 


(1)     A.M. Best ratings as detailed above are: “A++” (Superior, which is the highest of fifteen ratings), “A+” (Superior, which is the second highest of fifteen ratings), “A” (Excellent, which is the third highest of fifteen ratings), and “A-” (Excellent, which is the fourth highest of fifteen ratings).

(2)     Includes $198.3 of Third Party Recoverables (as defined below), which NICO (as defined below) would pay under the terms of the NICO Cover (as defined below) if they are unable to collect from third party reinsurers.

(3)     Includes $29.0 of reinsurance recoverables from various third party reinsurers that are guaranteed by Tokio Marine and Nichido Fire under the terms of a 100% quota share reinsurance agreement between Houston General Insurance Company and Tokio Marine and Nichido Fire.

 

Immediately prior to White Mountains’ acquisition of OneBeacon, the seller caused OneBeacon to purchase two reinsurance contracts from subsidiaries of Berkshire Hathaway Inc. (“Berkshire”): a full risk-transfer cover from National Indemnity Company (“NICO”) for up to $2.5 billion in old asbestos and environmental (“A&E”) claims and certain other exposures (the “NICO Cover”) and an adverse loss reserve development cover (the “GRC Cover”) from General Reinsurance Corporation (“GRC”) for up to $570.0 million, comprised of $400.0 million of adverse loss reserve development on losses occurring in years 2000 and prior and $170.0 million of reserves ceded as of the date of the OneBeacon acquisition. The NICO Cover and GRC Cover, which were contingent on and occurred contemporaneously with the OneBeacon acquisition, were put in place in lieu of a seller guarantee of loss and LAE reserves and are therefore accounted for under GAAP as a seller guarantee.

 

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Under the terms of the NICO Cover, NICO receives the economic benefit of reinsurance recoverables (“Third Party Recoverables”) from certain of OneBeacon’s third party reinsurers in existence at the time the NICO Cover was executed. As a result, the Third Party Recoverables serve to protect the $2.5 billion limit of NICO coverage for the benefit of OneBeacon. White Mountains estimates that on an incurred basis, net of Third Party Recoverables, as of March 31, 2012 it has used approximately $2.3 billion of the coverage provided by NICO. To the extent that actual experience differs from White Mountains’ estimate of ultimate A&E losses and Third Party Recoverables, future losses could utilize some or all of the protection remaining under the NICO 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 its 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 own investments. This cost, if any, is expected to be nominal.  As of March 31, 2012, OneBeacon has $423.7 million of reinsurance recoverable on unpaid losses outstanding under the GRC Cover.

 

Effective May 1, 2011, OneBeacon renewed its property catastrophe reinsurance program through April 30, 2012. The program provides coverage for OneBeacon’s property business as well as certain acts of terrorism. Under the program, the first $50.0 million of losses resulting from any single catastrophe are retained and the next $175.0 million of losses resulting from the catastrophe are reinsured in three layers, although OneBeacon retains a co-participation of 26% of losses from $50.0 million to $100.0 million and 10% of losses from $100.0 million to $175.0 million. Losses from $175.0 million to $225.0 million are fully reinsured. Any loss above $225.0 million would be retained in full. In the event of a catastrophe, OneBeacon’s property catastrophe reinsurance program is reinstated for the remainder of the original contract term by paying a reinstatement premium that is based on the percentage of coverage reinstated and the original property catastrophe coverage premium. OneBeacon is currently placing its new property catastrophe reinsurance program, which it expects to be on substantially similar terms as those contained in its expiring property catastrophe reinsurance program.

 

Sirius Group

 

At March 31, 2012 Sirius Group had $13.2 million of reinsurance recoverables on paid losses and $356.4 million of reinsurance that will become recoverable if claims are paid in accordance with current reserve estimates. Because reinsurance contracts do not relieve Sirius Group of its obligation to its ceding companies, the collectability of balances due from its reinsurers is critical to Sirius Group’s financial strength. Sirius Group monitors the financial strength of its reinsurers on an ongoing basis. The following table provides a listing of Sirius Group’s top reinsurers based upon recoverable amounts, the percentage of total paid and unpaid reinsurance recoverables and the reinsurers’ A.M. Best ratings.

 

Top Reinsurers (Millions)

 

Balance at
March 31, 2012

 

% of Total

 

A.M. Best
Rating (1)

 

% Collateralized

 

General Reinsurance Corporation

 

$

42.6

 

12

%

A++

 

1

%

Swiss Re Group

 

41.8

 

11

%

A+

 

4

%

Olympus (2)

 

33.3

 

9

%

NR-5

 

100

%

Lloyds of London (3)

 

26.8

 

7

%

A

 

9

%

General Insurance Company of India

 

14.8

 

4

%

A-

 

2

%

 


(1)     A.M. Best ratings as detailed above are: “A++” (Superior, which is the highest of fifteen financial strength ratings), “A+” (Superior, which is the second highest of fifteen financial strength ratings), “A” (Excellent, which is the third highest of fifteen financial strength ratings) and “A-” (Excellent, which is the fourth highest of fifteen financial strength ratings), “NR-5” (Not formally followed).

(2)     Non-U.S. insurance entity. The balance is fully collateralized through funds held, letters of credit or trust agreements.

(3)     Represents the total of reinsurance recoverables due to Sirius Group from all Lloyds Syndicates.

 

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Note 5.  Investment Securities

 

White Mountains’ invested assets consist of securities and other long-term investments held for general investment purposes.  The portfolio of investment securities includes fixed maturity investments, convertible fixed maturities and equity securities which are all classified as trading securities. Trading securities are reported at fair value as of the balance sheet date.  Realized and unrealized investment gains and losses on trading securities are reported pre-tax in revenues. White Mountains’ investments in debt securities, including mortgage-backed and asset-backed securities, are generally valued using industry standard pricing models. Key inputs include benchmark yields, benchmark securities, reported trades, issuer spreads, bids, offers, credit ratings and prepayment speeds. Income on mortgage-backed and asset-backed securities is recognized using an effective yield based on anticipated prepayments and the estimated economic life of the securities. When actual prepayments differ significantly from anticipated prepayments, the estimated economic life is recalculated and the remaining unamortized premium or discount is amortized prospectively over the remaining economic life.

 

Realized investment gains and losses resulting from sales of investment securities are accounted for using the specific identification method.  Premiums and discounts on all fixed maturity investments are amortized or accreted to income over the anticipated life of the investment.  Short-term investments consist of money market funds, certificates of deposit and other securities which, at the time of purchase, mature or become available for use within one year.  Short-term investments are carried at amortized or accreted cost, which approximated fair value as of March 31, 2012 and December 31, 2011.

 

Other long-term investments primarily comprise White Mountains’ investments in hedge funds and private equity funds.

 

Net Investment Income

 

Pre-tax net investment income for the three months ended March 31, 2012 and 2011 consisted of the following:

 

 

 

Three Months Ended
March 31,

 

Millions

 

2012

 

2011

 

Investment income:

 

 

 

 

 

Fixed maturity investments

 

$

36.7

 

$

46.0

 

Short-term investments

 

1.0

 

.7

 

Common equity securities

 

4.4

 

3.5

 

Convertible fixed maturity investments

 

1.9

 

1.4

 

Other long-term investments

 

.8

 

.8

 

Interest on funds held under reinsurance treaties

 

 

(.6

)

Total investment income

 

44.8

 

51.8

 

Less third-party investment expenses

 

(3.0

)

(2.3

)

Net investment income, pre-tax

 

$

41.8

 

$

49.5

 

 

Net Realized and Unrealized Investment Gains and Losses

 

 

 

Three Months Ended
March 31,

 

Millions

 

2012

 

2011

 

Net realized investment gains (losses), pre-tax

 

$

39.2

 

$

(1.2

)

Net unrealized investment gains (losses), pre-tax

 

19.4

 

(8.0

)

Net realized and unrealized investment gains (losses), pre-tax

 

58.6

 

(9.2

)

Income taxes attributable to realized and unrealized investment gains (losses)

 

(14.0

)

.9

 

Net realized and unrealized investment gains (losses), after-tax

 

$

44.6

 

$

(8.3

)

 

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Table of Contents

 

Net realized investment gains (losses)

 

Net realized investment gains (losses) for the three months ended March 31, 2012 and 2011 consisted of the following:

 

 

 

Three Months Ended
March 31,

 

Millions

 

2012

 

2011

 

Fixed maturity investments

 

$

31.5

 

$

(13.6

)

Short-term investments

 

(.3

)

(12.2

)

Common equity securities

 

4.2

 

2.3

 

Convertible fixed maturity investments

 

1.5

 

4.1

 

Other long-term investments

 

2.3

 

18.2

 

Net realized investment gains (losses), pre-tax

 

39.2

 

(1.2

)

Income taxes attributable to realized investment gains (losses)

 

(11.7

)

(5.0

)

Net realized investment gains (losses), after-tax

 

$

27.5

 

$

(6.2

)

 

Net unrealized investment gains (losses)

 

The following table summarizes changes in the carrying value of investments measured at fair value:

 

 

 

Three Months Ended
March 31, 2012

 

Three Months Ended
March 31, 2011

 

Millions

 

Net
unrealized
gains
(losses)

 

Net
foreign
exchange
gains
(losses)

 

Total
changes in
fair value
reflected in
earnings

 

Net
unrealized
gains
(losses)

 

Net
foreign
exchange
gains
(losses)

 

Total
changes in
fair value
reflected in
earnings

 

Fixed maturities

 

$

(2.9

)

$

(19.3

)

$

(22.2

)

$

(8.0

)

$

(15.3

)

$

(23.3

)

Short-term investments

 

 

 

 

 

(.6

)

(.6

)

Common equity securities

 

32.4

 

 

32.4

 

24.7

 

(.8

)

23.9

 

Convertible fixed maturity investments

 

4.7

 

 

4.7

 

(2.1

)

 

(2.1

)

Other long-term investments

 

7.8

 

(3.3

)

4.5

 

(.8

)

(5.1

)

(5.9

)

Net unrealized investment gains (losses), pre-tax

 

42.0

 

(22.6

)

19.4

 

13.8

 

(21.8

)

(8.0

)

Income taxes attributable to unrealized investment gains (losses)

 

(8.2

)

5.9

 

(2.3

)

.2

 

5.7

 

5.9

 

Net unrealized investment gains (losses), after-tax

 

$

33.8

 

$

(16.7

)

$

17.1

 

$

14.0

 

$

(16.1

)

$

(2.1

)

 

The following table summarizes the amount of total pre-tax gains (losses) included in earnings attributable to unrealized investment gains (losses) for Level 3 investments for the three months ended March 31, 2012 and 2011:

 

 

 

Three Months Ended
March 31,

 

Millions

 

2012

 

2011

 

Fixed maturities

 

$

7.8

 

$

1.9

 

Common equity securities

 

.5

 

(1.8

)

Convertible fixed maturities

 

 

 

Other long-term investments

 

7.2

 

(7.7

)

Total unrealized investment gains (losses), pre-tax - Level 3 investments

 

$

15.5

 

$

(7.6

)

 

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Table of Contents

 

Investment Holdings

 

The cost or amortized cost, gross unrealized investment gains and losses, net foreign currency gains and losses and carrying values of White Mountains’ fixed maturity investments as of March 31, 2012 and December 31, 2011, were as follows:

 

 

 

March 31, 2012

 

Millions

 

Cost or
amortized
cost

 

Gross
unrealized
gains

 

Gross
unrealized
losses

 

Net foreign
currency
gains (losses)

 

Carrying
value

 

U.S. Government and agency obligations

 

$

265.1

 

$

1.8

 

$

 

$

 

$

266.9

 

Debt securities issued by corporations

 

2,269.8

 

79.5

 

(4.5

)

(12.4

)

2,332.4

 

Municipal obligations

 

2.7

 

 

 

 

2.7

 

Mortgage-backed and asset-backed securities

 

2,138.4

 

15.3

 

(3.5

)

1.0

 

2,151.2

 

Foreign government, agency and provincial obligations

 

569.4

 

7.5

 

(1.5

)

(3.8

)

571.6

 

Preferred stocks

 

82.4

 

4.5

 

(.3

)

(.1

)

86.5

 

Total fixed maturity investments

 

$

5,327.8

 

$

108.6

 

$

(9.8

)

$

(15.3

)

$

5,411.3

 

 

 

 

December 31, 2011

 

Millions

 

Cost or
amortized
cost

 

Gross
unrealized
gains

 

Gross
unrealized
losses

 

Net foreign
currency
gains (losses)

 

Carrying
value

 

U.S. Government and agency obligations

 

$

299.4

 

$

5.3

 

$

(.1

)

$

.4

 

$

305.0

 

Debt securities issued by corporations

 

2,072.1

 

73.7

 

(7.8

)

(2.9

)

2,135.1

 

Municipal obligations

 

2.7

 

 

 

 

2.7

 

Mortgage-backed and asset-backed securities

 

3,190.5

 

25.9

 

(3.9

)

10.4

 

3,222.9

 

Foreign government, agency and provincial obligations

 

581.2

 

11.0

 

(.1

)

(2.9

)

589.2

 

Preferred stocks

 

82.3

 

3.2

 

(6.7

)

 

78.8

 

Total fixed maturity investments including assets held for sale

 

$

6,228.2

 

$

119.1

 

$

(18.6

)

$

5.0

 

$

6,333.7

 

Fixed maturity investments reclassified to assets held for sale related to AutoOne

 

 

 

 

 

 

 

 

 

(111.8

)

Total fixed maturity investments

 

 

 

 

 

 

 

 

 

$

6,221.9

 

 

The cost or amortized cost, gross unrealized investment gains and losses, net foreign currency gains and losses and carrying values of White Mountains’ common equity securities, convertible fixed maturities and other long-term investments as of March 31, 2012 and December 31, 2011, were as follows:

 

 

 

March 31, 2012

 

Millions

 

Cost or
amortized
cost

 

Gross
unrealized
gains

 

Gross
unrealized
losses

 

Net foreign
currency
gains (losses)

 

Carrying
value

 

Common equity securities

 

$

773.0

 

$

108.6

 

$

(12.9

)

$

 

$

868.7

 

Convertible fixed maturity investments

 

$

143.4

 

$

9.8

 

$

(.4

)

$

 

$

152.8

 

Other long-term investments

 

$

275.3

 

$

58.6

 

$

(20.5

)

$

(6.7

)

$

306.7

 

 

 

 

December 31, 2011

 

Millions

 

Cost or
amortized
cost

 

Gross
unrealized
gains

 

Gross
unrealized
losses

 

Net foreign
currency
gains (losses)

 

Carrying
value

 

Common equity securities

 

$

691.7

 

$

72.0

 

$

(8.7

)

$

 

$

755.0

 

Convertible fixed maturity investments

 

$

139.2

 

$

6.2

 

$

(1.6

)

$

 

$

143.8

 

Other long-term investments

 

$

274.4

 

$

55.5

 

$

(25.2

)

$

(3.4

)

$

301.3

 

 

13



Table of Contents

 

Other long-term investments

 

White Mountains holds investments in hedge funds and private equity funds, which are included in other long-term investments. The fair value of these investments has been estimated using the net asset value of the funds. At March 31, 2012, White Mountains held investments in 17 hedge funds and 32 private equity funds.  The largest investment in a single fund was $24.4 million at March 31, 2012. The following table summarizes investments in hedge funds and private equity interests by investment objective and sector at March 31, 2012 and December 31, 2011:

 

 

 

March 31, 2012

 

December 31, 2011

 

Millions

 

Fair Value

 

Unfunded
Commitments

 

Fair Value

 

Unfunded
Commitments

 

Hedge funds

 

 

 

 

 

 

 

 

 

Long/short equity

 

$

52.8

 

$

 

$

48.8

 

$

 

Long/short credit & distressed

 

33.6

 

 

32.3

 

 

Long diversified strategies

 

16.9

 

 

16.9

 

 

Long/short equity REIT

 

14.2

 

 

14.5

 

 

Long/short equity activist

 

13.5

 

 

12.3

 

 

Long bank loan

 

.4

 

 

.5

 

 

Total hedge funds

 

131.4

 

 

125.3

 

 

 

 

 

 

 

 

 

 

 

 

Private equity funds

 

 

 

 

 

 

 

 

 

Multi-sector

 

28.3

 

7.7

 

26.9

 

8.2

 

Energy infrastructure & services

 

26.4

 

9.4

 

28.0

 

9.9

 

Distressed residential real estate

 

24.4

 

 

27.4

 

 

Real estate

 

12.2

 

3.3

 

9.5

 

3.3

 

Private equity secondaries

 

10.9

 

3.6

 

11.3

 

4.0

 

International multi-sector, Europe

 

6.5

 

4.9

 

7.8

 

4.7

 

Manufacturing/Industrial

 

6.5

 

 

6.2

 

 

Healthcare

 

3.5

 

6.4

 

2.3

 

7.0

 

International multi-sector, Asia

 

3.3

 

2.7

 

3.6

 

2.6

 

Insurance

 

3.3

 

41.3

 

3.5

 

41.3

 

Venture capital

 

2.6

 

.5

 

2.4

 

.5

 

Total private equity funds

 

127.9

 

79.8

 

128.9

 

81.5

 

 

 

 

 

 

 

 

 

 

 

Total hedge and private equity funds included in other long-term investments

 

$

259.3

 

$

79.8

 

$

254.2

 

$

81.5

 

 

Redemption of investments in certain hedge funds is subject to restrictions including lock-up periods where no redemptions or withdrawals are allowed, restrictions on redemption frequency and advance notice periods for redemptions.  Amounts requested for redemptions remain subject to market fluctuations until the redemption effective date, which generally falls at the end of the defined redemption period. The following summarizes the March 31, 2012 fair value of hedge funds subject to restrictions on redemption frequency and advance notice period requirements for investments in active hedge funds:

 

 

 

Notice Period

 

Millions
Redemption frequency

 

30-59 days
notice

 

60-89 days
notice

 

90-119 days
notice

 

120+ days
notice

 

Total

 

Monthly

 

$

 

$

 

$

 

$

6.6

 

$

6.6

 

Quarterly

 

27.6

 

31.8

 

20.4

 

 

79.8

 

Semi-annual

 

 

5.4

 

 

14.2

 

19.6

 

Annual

 

16.9

 

 

8.1

 

.4

 

25.4

 

Total

 

$

44.5

 

$

37.2

 

$

28.5

 

$

21.2

 

$

131.4

 

 

Certain of the hedge fund investments in which White Mountains is invested are no longer active and are in process of disposing of their underlying investments. Distributions from such funds are remitted to investors as the fund’s underlying investments are liquidated.  At March 31, 2012, distributions of $3.2 million were outstanding from these investments. The actual amount of the final distribution remittances remain subject to market fluctuations. The date at which such remittances will be received is not determinable at March 31, 2012.

 

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Table of Contents

 

White Mountains has also submitted redemption requests for certain of its investments in active hedge funds.  At March 31, 2012, redemptions of $2.5 million are outstanding and are subject to market fluctuations. The date at which such remittances will be received is not determinable at March 31, 2012.  Redemptions are recorded as receivables when approved by the hedge funds and no longer subject to market fluctuations.

 

Investments in private equity funds are generally subject to a “lock-up” period during which investors may not request a redemption. Distributions prior to the expected termination date of the fund may be limited to dividends or proceeds arising from the liquidation of the fund’s underlying investments. In addition, certain private equity funds provide an option to extend the lock-up period at either the sole discretion of the fund manager or upon agreement between the fund and the investors. At March 31, 2012, investments in private equity funds were subject to lock-up periods as follows:

 

Millions

 

1-3 years

 

3 – 5 years

 

5 – 10 years

 

>10 years

 

Total

 

Private Equity Funds — expected lock-up period remaining

 

$

38.2

 

$

15.4

 

$

67.8

 

$

6.5

 

$

127.9

 

 

Fair value measurements at March 31, 2012

 

White Mountains’ invested assets measured at fair value include fixed maturity securities, common and preferred equity securities, convertible fixed maturity securities and other long-term investments which primarily consist of hedge funds and private equity funds. Fair value measurements reflect management’s best estimate of the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements fall into a hierarchy with three levels based on the nature of the inputs. Fair value measurements based on quoted prices in active markets for identical assets are at the top of the hierarchy (“Level 1”), followed by fair value measurements based on observable inputs that do not meet the criteria for Level 1, including quoted prices in inactive markets and quoted prices in active markets for similar, but not identical instruments (“Level 2”). Measurements based on unobservable inputs, including a reporting entity’s estimates of the assumptions that market participants would use are at the bottom of the hierarchy (“Level 3”).

 

White Mountains uses quoted market prices or other observable inputs to estimate fair value for the vast majority of its investment portfolio. Investments valued using Level 1 inputs include fixed maturities, primarily investments in U.S. Treasuries, common equities and short-term investments, which include U.S. Treasury Bills. Investments valued using Level 2 inputs consist of fixed maturities including corporate debt, state and other governmental debt, convertible fixed maturity securities and mortgage and asset-backed securities. Fair value estimates for investments that trade infrequently and have few or no observable market prices are classified as Level 3 measurements. Level 3 fair value estimates based upon unobservable inputs include White Mountains’ investments in hedge funds and private equity funds, as well as investments in certain debt securities where quoted market prices are unavailable. White Mountains uses brokers and outside pricing services to assist in determining fair values. For investments in active markets, White Mountains uses the quoted market prices provided by outside pricing services to determine fair value. The outside pricing services used by White Mountains have indicated that if no observable inputs are available for a security, they will not provide a price. In those circumstances, White Mountains estimates the fair value using industry standard pricing models and observable inputs such as benchmark interest rates, matrix pricing, market comparables, broker quotes, issuer spreads, bids, offers, credit rating, prepayment speeds and other relevant inputs. White Mountains performs procedures to validate the market prices obtained from the outside pricing sources. Such procedures, which cover substantially all of its fixed maturity investments include, but are not limited to, evaluation of model pricing methodologies and review of the pricing services’ quality control processes and procedures on at least an annual basis, comparison of market prices to prices obtained from different independent pricing vendors on at least a semi-annual basis, monthly analytical reviews of certain prices, and review of assumptions utilized by the pricing service for selected measurements on an ad hoc basis throughout the year. White Mountains also performs back-testing of selected sales activity to determine whether there are any significant differences between the market price used to value the security prior to sale and the actual sale price on an ad-hoc basis throughout the year. Prices provided by the pricing services that vary by more than 5% and $1 million from the expected price based on these procedures are considered outliers. In circumstances where the results of White Mountains’ review process do not appear to support the market price provided by the pricing services, White Mountains challenges the price. If White Mountains cannot gain satisfactory evidence to support the challenged price, it relies upon its own pricing methodologies to estimate the fair value of the security in question. The fair values of such securities are considered to be Level 3 measurements.

 

White Mountains’ investments in debt securities are generally valued using matrix and other pricing models. Key inputs include benchmark yields, benchmark securities, reported trades, issuer spreads, bids, offers, credit ratings and prepayment speeds.  Income on mortgage-backed and asset-backed securities is recognized using an effective yield based on anticipated prepayments and the estimated economic life of the securities. When actual prepayments differ significantly from anticipated prepayments, the estimated economic life is recalculated and the remaining unamortized premium or discount is amortized or accreted prospectively over the remaining economic life.

 

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Table of Contents

 

White Mountains employs a number of procedures to assess the reasonableness of the fair value measurements for its other long-term investments, including obtaining and reviewing the audited annual financial statements of each hedge fund and private equity fund and periodically discussing each fund’s pricing with the fund manager. However, since the fund managers do not provide sufficient information to evaluate the pricing inputs and methods for each underlying investment, the inputs are considered to be unobservable. Accordingly, the fair values of White Mountains’ investments in hedge funds and private equity funds have been classified as Level 3 measurements. The fair value of White Mountains’ investments in hedge funds and private equity funds has been determined using net asset value.

 

In addition to the investments described above, White Mountains has $75.5 million and $68.1 million of investment-related liabilities recorded at fair value and included in other liabilities as of March 31, 2012 and December 31, 2011.  These liabilities relate to securities that have been sold short by limited partnerships in which White Mountains has investments and is required to consolidate under GAAP.  All of the liabilities included have a Level 1 designation.

 

Fair Value Measurements by Level

 

The following tables summarize White Mountains’ fair value measurements for investments at March 31, 2012 and December 31, 2011, by level.  The fair value measurements for derivative assets associated with White Mountains’ variable annuity reinsurance business are presented in Note 8.

 

 

 

March 31, 2012

 

Millions

 

Fair value

 

Level 1 Inputs

 

Level 2 Inputs

 

Level 3 Inputs

 

Fixed maturity investments:

 

 

 

 

 

 

 

 

 

US Government and agency obligations

 

$

266.9

 

$

259.9

 

$

7.0

 

$

 

 

 

 

 

 

 

 

 

 

 

Debt securities issued by corporations:

 

 

 

 

 

 

 

 

 

Consumer

 

746.6

 

 

725.6

 

21.0

 

Industrial

 

436.8

 

 

436.8

 

 

Financials

 

315.2

 

3.1

 

312.1

 

 

Communications

 

262.7

 

 

262.7

 

 

Energy

 

193.1

 

 

193.1

 

 

Basic materials

 

183.3

 

 

183.3

 

 

Utilities

 

165.9

 

 

165.9

 

 

Technology

 

25.1

 

 

25.1

 

 

Diversified

 

3.7

 

 

3.7

 

 

Total debt securities issued by corporations:

 

2,332.4

 

3.1

 

2,308.3

 

21.0

 

 

 

 

 

 

 

 

 

 

 

Municipal obligations

 

2.7

 

 

2.7

 

 

Mortgage-backed and asset-backed securities

 

2,151.2

 

 

2,062.9

 

88.3

 

Foreign government, agency and provincial obligations

 

571.6

 

65.6

 

506.0

 

 

Preferred stocks

 

86.5

 

 

16.7

 

69.8

 

Total fixed maturity investments

 

5,411.3

 

328.6

 

4,903.6

 

179.1

 

 

 

 

 

 

 

 

 

 

 

Short-term investments

 

877.5

 

877.5

 

 

 

 

 

 

 

 

 

 

 

 

 

Common equity securities:

 

 

 

 

 

 

 

 

 

Financials

 

296.0

 

261.9

 

1.2

 

32.9

 

Consumer

 

197.5

 

197.1

 

.4

 

 

Basic materials

 

123.4

 

122.2

 

1.2

 

 

Energy

 

80.1

 

80.1

 

 

 

Utilities

 

44.0

 

43.8

 

.2

 

 

Technology

 

29.5

 

29.5

 

 

 

Other

 

98.2

 

42.6

 

55.6

 

 

Total common equity securities

 

868.7

 

777.2

 

58.6

 

32.9

 

 

 

 

 

 

 

 

 

 

 

Convertible fixed maturity investments

 

152.8

 

 

152.8

 

 

Other long-term investments(1) 

 

273.5

 

 

 

273.5

 

Total investments

 

$

7,583.8

 

$

1,983.3

 

$

5,115.0

 

$

485.5

 

 


(1)     Excludes carrying value of $33.2 associated with other long-term investment limited partnerships accounted for using the equity method.

 

16