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White Mountains Insurance Group 10-Q 2007

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2

 

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 September 30, 2007

 

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 (or for such shorter period that the registrant was required to file such reports), 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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x          Accelerated filer o                                                   Non-accelerated filer 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 November 2, 2007, 10,560,272 common shares with a par value of $1.00 per share were outstanding (which includes 54,000 restricted common shares that were not vested at such date).

 

 



 

WHITE MOUNTAINS INSURANCE GROUP, LTD.

 

Table of Contents

 

 

 

Page No.

PART I.

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements (Unaudited)

3

 

 

 

 

Consolidated Balance Sheets,
September 30, 2007 and December 31, 2006

3

 

 

 

 

Consolidated Statements of Income and Comprehensive Income,
Three and Nine Months Months Ended September 30, 2007 and 2006

4

 

 

 

 

Consolidated Statements of Common Shareholders’ Equity,
Nine Months Ended September 30, 2007 and 2006

5

 

 

 

 

Consolidated Statements of Cash Flows,
Nine Months Ended September 30, 2007 and 2006

6

 

 

 

 

Notes to Consolidated Financial Statements

7

 

 

 

Item 2.

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

29

 

 

 

 

Results of Operations - Three and Nine Months Ended
September 30, 2007 and 2006

29

 

 

 

 

Non-GAAP Financial Measures

42

 

 

 

 

Liquidity and Capital Resources

43

 

 

 

 

Critical Accounting Estimates

48

 

 

 

 

Forward-Looking Statements

48

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

49

 

 

 

Item 4.

Controls and Procedures

49

 

 

 

PART II.

OTHER INFORMATION

49

 

 

 

Items 1 through 6.

49

 

 

 

SIGNATURES

 

51

 

2



 

PART I. FINANCIAL INFORMATION.

Item 1. Financial Statements

WHITE MOUNTAINS INSURANCE GROUP, LTD.

CONSOLIDATED BALANCE SHEETS

 

 

 

September 30,

 

December 31,

 

(Millions, except share and per share amounts)

 

2007

 

2006

 

 

 

Unaudited

 

 

 

Assets

 

 

 

 

 

Fixed maturity investments, at fair value (amortized cost: $7,291.7 and $7,377.0)

 

$

7,436.7

 

$

7,475.3

 

Common equity securities, at fair value (cost: $1,232.8 and $972.0)

 

1,471.3

 

1,212.6

 

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

 

1,614.8

 

1,344.9

 

Other investments (cost: $484.5 and $467.1)

 

549.3

 

524.8

 

Convertible fixed maturity investments, at fair value (amortized cost: $529.5 and $435.9)

 

529.5

 

436.2

 

Trust account investments, at amortized cost (fair value $309.5 and $337.9)

 

308.7

 

338.9

 

Total investments

 

11,910.3

 

11,332.7

 

Cash

 

185.6

 

159.0

 

Reinsurance recoverable on unpaid losses

 

1,789.3

 

2,134.5

 

Reinsurance recoverable on unpaid losses - Berkshire Hathaway Inc.

 

1,792.6

 

1,881.2

 

Reinsurance recoverable on paid losses

 

58.1

 

159.4

 

Insurance and reinsurance premiums receivable

 

971.1

 

913.6

 

Securities lending collateral

 

824.6

 

649.8

 

Funds held by ceding companies

 

352.3

 

452.8

 

Investments in unconsolidated affiliates

 

404.4

 

335.5

 

Deferred acquisition costs

 

358.6

 

320.3

 

Deferred tax asset

 

238.7

 

276.0

 

Ceded unearned premiums

 

129.2

 

87.9

 

Accrued investment income

 

89.1

 

87.4

 

Accounts receivable on unsettled investment sales

 

21.7

 

8.5

 

Other assets

 

593.1

 

645.1

 

Total assets

 

$

19,718.7

 

$

19,443.7

 

Liabilities

 

 

 

 

 

Loss and loss adjustment expense reserves

 

$

8,249.3

 

$

8,777.2

 

Unearned insurance and reinsurance premiums

 

1,743.2

 

1,584.9

 

Debt

 

1,192.8

 

1,106.7

 

Securities lending payable

 

824.6

 

649.8

 

Deferred tax liability

 

327.2

 

311.5

 

Long-term incentive compensation payable

 

202.5

 

285.2

 

Reserves for structured contracts

 

78.8

 

147.1

 

Funds held under reinsurance treaties

 

99.5

 

141.6

 

Ceded reinsurance payable

 

124.0

 

138.4

 

Accounts payable on unsettled investment purchases

 

85.4

 

66.8

 

Other liabilities

 

901.5

 

913.7

 

Preferred stock subject to mandatory redemption:

 

 

 

 

 

Held by Berkshire Hathaway Inc. (redemption value $300.0)

 

268.5

 

242.3

 

Held by others (redemption value $20.0)

 

 

20.0

 

Total liabilities

 

14,097.3

 

14,385.2

 

Minority interest - OneBeacon, Ltd.

 

536.3

 

490.7

 

Minority interest - WMRe Group Preference Shares

 

250.0

 

 

Minority interest - consolidated limited partnerships

 

102.5

 

112.5

 

Total minority interest

 

888.8

 

603.2

 

Common shareholders’ equity

 

 

 

 

 

Common shares at $1 par value per share - authorized 50,000,000 shares; issued and outstanding 10,842,613 and 10,782,753 shares

 

10.8

 

10.8

 

Paid-in surplus

 

1,723.9

 

1,716.7

 

Retained earnings

 

2,737.3

 

2,496.0

 

Accumulated other comprehensive income, after-tax:

 

 

 

 

 

Net unrealized gains on investments

 

184.3

 

194.0

 

Net unrealized foreign currency translation gains

 

79.1

 

37.2

 

Other

 

(2.8

)

.6

 

Total common shareholders’ equity

 

4,732.6

 

4,455.3

 

Total liabilities, minority interest and common shareholders’ equity

 

$

19,718.7

 

$

19,443.7

 

 

See Notes to Consolidated Financial Statements

 

3



 

WHITE MOUNTAINS INSURANCE GROUP, LTD.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

Unaudited

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

(Millions, except per share amounts)

 

2007

 

2006

 

2007

 

2006

 

Revenues:

 

 

 

 

 

 

 

 

 

Earned insurance and reinsurance premiums

 

$

936.3

 

$

918.9

 

$

2,835.0

 

$

2,773.4

 

Net investment income

 

128.9

 

108.7

 

373.6

 

311.6

 

Net realized investment gains

 

29.9

 

67.8

 

192.9

 

202.8

 

Other revenue

 

60.3

 

90.8

 

130.6

 

157.1

 

Total revenues

 

1,155.4

 

1,186.2

 

3,532.1

 

3,444.9

 

Expenses:

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses

 

591.9

 

558.1

 

1,797.3

 

1,885.9

 

Insurance and reinsurance acquisition expenses

 

183.9

 

189.3

 

580.1

 

562.6

 

Other underwriting expenses

 

103.6

 

122.8

 

377.5

 

361.5

 

General and administrative expenses

 

43.0

 

53.1

 

158.3

 

120.0

 

Accretion of fair value adjustment to loss and loss adjustment expense reserves

 

5.4

 

6.6

 

16.0

 

18.2

 

Interest expense on debt

 

19.8

 

12.9

 

54.9

 

36.5

 

Interest expense - dividends on preferred stock subject to mandatory redemption

 

7.1

 

7.6

 

22.2

 

22.7

 

Interest expense - accretion on preferred stock subject to mandatory redemption

 

9.2

 

7.3

 

26.2

 

20.6

 

Total expenses

 

963.9

 

957.7

 

3,032.5

 

3,028.0

 

Pre-tax income

 

191.5

 

228.5

 

499.6

 

416.9

 

Income tax provision

 

(64.3

)

(69.3

)

(151.3

)

(66.9

)

Income before minority interest and equity in earnings of unconsolidated affiliates

 

127.2

 

159.2

 

348.3

 

350.0

 

Minority interest

 

(24.0

)

(2.7

)

(69.4

)

(5.5

)

Equity in earnings of unconsolidated affiliates

 

8.2

 

5.6

 

27.3

 

29.4

 

Net income

 

111.4

 

162.1

 

306.2

 

373.9

 

Change in net unrealized gains and losses for investments held

 

43.1

 

151.8

 

83.3

 

55.6

 

Change in foreign currency translation and other

 

24.4

 

1.0

 

38.5

 

33.9

 

Recognition of net unrealized gains and losses for investments sold

 

(2.8

)

(39.2

)

(93.0

)

(114.6

)

Comprehensive net income

 

$

176.1

 

$

275.7

 

$

335.0

 

$

348.8

 

Basic earnings per share

 

$

10.33

 

$

15.05

 

$

28.40

 

$

34.72

 

Diluted earnings per share

 

10.32

 

15.01

 

28.35

 

34.61

 

Dividends declared and paid per common share

 

$

2.00

 

$

2.00

 

$

6.00

 

$

6.00

 

 

See Notes to Consolidated Financial Statements

 

4



 

WHITE MOUNTAINS INSURANCE GROUP, LTD.

CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS’ EQUITY

Unaudited

 

 

 

 

 

Common

 

 

 

Accum. other

 

 

 

 

 

Common

 

shares and

 

 

 

comprehensive

 

 

 

 

 

shareholders’

 

paid-in

 

Retained

 

income,

 

Unearned

 

(Millions)

 

equity

 

surplus

 

earnings

 

after-tax

 

compensation

 

Balances at January 1, 2007

 

$

4,455.3

 

$

1,727.5

 

$

2,496.0

 

$

231.8

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative effect adjustment - taxes (FIN 48)

 

.2

 

 

.2

 

 

 

Net income

 

306.2

 

 

306.2

 

 

 

Other comprehensive income, after-tax

 

28.8

 

 

 

28.8

 

 

Dividends declared on common shares

 

(65.1

)

 

(65.1

)

 

 

Issuances of common shares

 

1.8

 

1.8

 

 

 

 

Repurchases and retirements of common shares

 

(2.5

)

(2.5

)

 

 

 

Amortization of restricted share and option awards

 

7.9

 

7.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at September 30, 2007

 

$

4,732.6

 

$

1,734.7

 

$

2,737.3

 

$

260.6

 

$

 

 

 

 

 

 

 

Common

 

 

 

Accum. other

 

 

 

 

 

Common

 

shares and

 

 

 

comprehensive

 

 

 

 

 

shareholders’

 

paid-in

 

Retained

 

income,

 

Unearned

 

(Millions)

 

equity

 

surplus

 

earnings

 

after-tax

 

compensation

 

Balances at January 1, 2006

 

$

3,833.2

 

$

1,727.2

 

$

1,899.8

 

$

208.1

 

$

(1.9

)

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

373.9

 

 

373.9

 

 

 

Other comprehensive income, after-tax

 

(25.1

)

 

 

(25.1

)

 

Cumulative effect adjustment - hybrid instruments (FAS 155)

 

 

 

9.2

 

(9.2

)

 

Cumulative effect adjustment - share-based compensation (FAS 123R)

 

 

(1.9

)

 

 

1.9

 

Dividends declared on common shares

 

(64.7

)

 

(64.7

)

 

 

Issuances of common shares

 

.1

 

.1

 

 

 

 

Amortization of restricted share and option awards

 

1.3

 

1.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at September 30, 2006

 

$

4,118.7

 

$

1,726.7

 

$

2,218.2

 

$

173.8

 

$

 

 

See Notes to Consolidated Financial Statements

 

5



 

WHITE MOUNTAINS INSURANCE GROUP, LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

 

 

 

Nine Months Ended
September 30,

 

(Millions)

 

2007

 

2006

 

Cash flows from operations:

 

 

 

 

 

Net income

 

$

306.2

 

$

373.9

 

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

 

 

 

 

 

Net realized investment gains

 

(192.9

)

(202.8

)

Minority interest

 

69.4

 

5.5

 

Other operating items:

 

 

 

 

 

Net change in loss and loss adjustment expense reserves

 

(572.1

)

(833.7

)

Net change in reinsurance recoverable on paid and unpaid losses

 

544.5

 

519.5

 

Net change in unearned insurance and reinsurance premiums

 

136.6

 

168.2

 

Net change in funds held by ceding companies

 

110.1

 

157.5

 

Net change in deferred acquisition costs

 

(34.0

)

(50.0

)

Net change in ceded unearned premiums

 

(38.7

)

65.1

 

Net change in funds held under reinsurance treaties

 

(42.4

)

(49.9

)

Net change in insurance and reinsurance premiums receivable

 

(45.1

)

16.0

 

Net change in other assets and liabilities, net

 

(78.9

)

(108.2

)

Net cash provided from operations

 

162.7

 

61.1

 

Cash flows from investing activities:

 

 

 

 

 

Net change in short-term investments

 

(267.7

)

(472.4

)

Sales of fixed maturity investments

 

3,940.6

 

3,398.4

 

Maturities, calls and paydowns of fixed maturity investments

 

980.2

 

613.4

 

Maturities of trust account investments

 

33.8

 

 

Sales of common equity securities

 

365.9

 

557.7

 

Sales of other investments

 

120.6

 

49.9

 

Purchases of other investments

 

(47.1

)

(80.6

)

Sales of consolidated affiliates, net of cash sold

 

47.2

 

121.1

 

Sale of Agri renewal rights

 

 

32.0

 

Purchases of common equity securities

 

(622.4

)

(435.8

)

Purchases of fixed maturity investments

 

(4,823.1

)

(3,671.6

)

Purchases of unconsolidated affiliates

 

(51.6

)

 

Sale of shares of OneBeacon Ltd.

 

16.7

 

 

Net change in unsettled investment purchases and sales

 

5.5

 

(72.2

)

Net acquisitions of property and equipment

 

(19.9

)

(11.9

)

Net cash (used for) provided from investing activities

 

(321.3

)

28.0

 

Cash flows from financing activities:

 

 

 

 

 

Issuance of WMRe Group Preference Shares, net of issuance costs

 

246.6

 

 

Issuance of debt

 

394.4

 

65.0

 

Repayment of debt

 

(322.0

)

(50.0

)

Redemption of mandatorily redeemable preferred stock

 

(20.0

)

 

Interest rate swap agreements

 

(2.4

)

 

Cash dividends paid to the Company’s common shareholders

 

(65.1

)

(64.7

)

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

 

(17.8

)

 

Cash dividends paid to preferred shareholders

 

(22.2

)

(22.7

)

Cash dividends paid on WMRe Group Preference Shares

 

(1.9

)

 

OneBeacon Ltd. common shares repurchased and retired

 

(5.8

)

 

Common shares repurchased

 

(2.5

)

 

Proceeds from option exercises

 

1.8

 

.1

 

Net cash provided from (used for) financing activities

 

183.1

 

(72.3

)

Effect of exchange rate changes on cash

 

2.1

 

5.8

 

Net increase in cash during the period

 

26.6

 

22.6

 

Cash balances at beginning of period

 

159.0

 

187.7

 

Cash balances at end of period

 

$

185.6

 

$

210.3

 

Supplemental cash flows information:

 

 

 

 

 

Interest paid

 

$

(30.0

)

$

(23.9

)

Net Federal income taxes (paid) received

 

(81.7

)

17.5

 

 

See Notes to Consolidated Financial Statements

 

6



 

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 are located at Bank of Butterfield Building, 42 Reid Street, Hamilton, Bermuda HM 12, 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, White Mountains Re, Esurance and Other Operations.  Significant transactions among White Mountains’ segments have been eliminated in this report.

 

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”), substantially all of which operate in a multi-company pool. OneBeacon offers a wide range of specialty, personal and commercial products and services sold primarily through select independent agents and brokers. OneBeacon was acquired by White Mountains in 2001 (the “OneBeacon Acquisition”).  During the fourth quarter of 2006, White Mountains sold 27.6 million, or 27.6%, of OneBeacon Ltd.’s common shares in an initial public offering (the “OneBeacon Offering”).  In connection with the OneBeacon Offering, White Mountains undertook an internal reorganization (the “Reorganization”) and formed OneBeacon Ltd. for the purpose of holding certain of its property and casualty insurance businesses. As a result of the Reorganization, certain of White Mountains’ businesses that had been historically reported as part of its Other Operations segment are now owned by OneBeacon Ltd., and accordingly have been included in the OneBeacon segment for all periods presented in this report.  In addition, certain other businesses of White Mountains that had been historically reported as part of its OneBeacon segment and which were not held by OneBeacon Ltd. following the OneBeacon Offering are included in the Other Operations segment for all periods presented in this report.

 

The White Mountains Re segment consists of White Mountains Re Ltd., an exempted Bermuda limited liability company, and its subsidiaries (collectively, “White Mountains Re”).  White Mountains Re offers reinsurance capacity for property, liability, accident & health, aviation and certain other exposures on a worldwide basis through its subsidiaries, Folksamerica Reinsurance Company (“Folksamerica Re”, together with its immediate parent, Folksamerica Holding Company (“Folksamerica Holdings”), “Folksamerica”), Sirius International Insurance Corporation (“Sirius International”) and Fund American Reinsurance Company, Ltd. (“FARe”).  White Mountains Re also provides reinsurance advisory services, specializing primarily in property and other short-tailed lines of reinsurance, through White Mountains Re Underwriting Services Ltd. (“WMRUS”).  On August 3, 2006, White Mountains Re sold one of its subsidiaries, Sirius America Insurance Company (“Sirius America”), to an investor group.  As part of the transaction, White Mountains acquired an equity interest of approximately 18% in the acquiring entity, Lightyear Delos Acquisition Corp. (“Delos”), and accounts for Delos on the equity method within its Other Operations segment.

 

The Esurance segment consists of Esurance Holdings, Inc., and its subsidiaries (collectively, “Esurance”). Esurance sells personal auto insurance directly to customers online and through select online agents.

 

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”), its weather risk management business (“Galileo”), its variable annuity reinsurance business, White Mountains Life Reinsurance (Bermuda) Ltd. (“WM Life Re”), as well as the International American Group, Inc. (the “International American Group”) and various other entities not included in other segments. The International American Group, which was acquired by White Mountains in 1999, includes American Centennial Insurance Company (“American Centennial”) and British Insurance Company of Cayman (“British Insurance Company”), both of which are in run-off.  The Other Operations segment also includes White Mountains’ investments in common shares and warrants to purchase common shares of Symetra Financial Corporation (“Symetra”), the consolidated results of the Tuckerman Capital, LP and Tuckerman Capital II, LP funds (“Tuckerman Funds”), common and preferred shares of Delos and warrants to purchase common shares of Montpelier Re Holdings, Ltd. (“Montpelier Re”), which White Mountains sold back to Montpelier Re on May 1, 2007.

 

7



 

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 and 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 2006 Annual Report on Form 10-K. 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. Actual results could differ from those estimates. Refer to the Company’s 2006 Annual Report on Form 10-K for a complete discussion regarding White Mountains’ significant accounting policies.

 

Minority Interest

 

Minority interests consist of the ownership interests of noncontrolling shareholders in consolidated subsidiaries, and are presented separately on the balance sheet. The portion of income attributable to minority interests is presented net of related income taxes in the statement of income and comprehensive income. The change in unrealized investment gains, foreign currency translation and the change in the fair value of the interest rate swap to hedge OneBeacon’s exposure to variability in the interest rate on its mortgage note are presented in accumulated other comprehensive income net of the minority interest portion.  The percentage of the noncontrolling shareholders’ ownership interest in OneBeacon Ltd. at September 30, 2007 and December 31, 2006 was 28.1% and 27.6%.

 

White Mountains began to present minority interest subsequent to the OneBeacon Offering.  The portion of income attributable to minority interest in certain limited partnership investments has been reclassified to conform with the presentation of the minority interest in OneBeacon Ltd.

 

On May 24, 2007, White Mountains Re Group, Ltd. (“WMRe Group”), an intermediate holding company of White Mountains Re, issued $250 million non-cumulative perpetual preference shares (“the Preference Shares”) (See Note 2).  The Preference Shares and dividends thereon are included in minority interest on the balance sheet and as minority interest expense on the statement of income and comprehensive income, respectively.

 

Recently Adopted Changes in Accounting Principles

 

Federal, State and Foreign Income Taxes

 

While White Mountains is subject to taxation in several jurisdictions, the majority of White Mountains’ subsidiaries file consolidated tax returns in the United States.  Income earned or losses generated by companies outside the United States are generally subject to an overall effective tax rate lower than that imposed by the United States.

 

On January 1, 2007 White Mountains adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48 prescribes when the impact of a given tax position should be recognized and how it should be measured.  Under the new guidance, recognition is based upon whether or not a company determines that it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. In evaluating the more-likely-than-not recognition threshold, White Mountains must presume that the tax position will be subject to examination by a taxing authority with full knowledge of all relevant information. If the recognition threshold is met, then the tax position is measured at the largest amount of benefit that is more than 50% likely of being realized upon ultimate settlement.

 

FIN 48 also addresses how interest and penalties should be accrued for uncertain tax positions, requiring that interest expense should be recognized in the first period interest would be accrued under the tax law. White Mountains classifies all interest and penalties on unrecognized tax benefits as part of income tax expense.  At January 1, 2007, White Mountains had accrued interest and penalties of $3.8 million, net of federal benefit. In connection with the adoption of FIN 48, White Mountains recognized a $.2 million decrease in the liability for unrecognized tax benefits, primarily as a result of reductions in its estimates of accrued interest. The effect of adoption has been recorded as an adjustment to opening retained earnings.

 

At January 1, 2007, White Mountains had $70.6 million of unrecognized tax benefits.  If recognized, $60.3 million would increase net income and reduce the effective tax rate.  The remaining $10.3 million of unrecognized tax benefits relate to tax positions for which ultimate deductibility is highly certain but the timing of deductibility is uncertain.  Recognition of these tax benefits, other than any applicable interest and penalties, would not affect the effective tax rate.  There have been no material changes to these balances since adoption.

 

With few exceptions, White Mountains is no longer subject to U.S. federal, state or non-U.S. income tax examinations by tax authorities for years before 2003.  The Internal Revenue Service (“IRS”) commenced an examination of White Mountains’ U.S. income tax returns for 2003 and 2004 in the second quarter of 2006 that is

 

8



 

anticipated to be completed by the end of 2008. As of September 30, 2007, the IRS has not proposed any significant adjustments to taxable income.  White Mountains does not expect the IRS to propose any adjustments that would result in a material change to its financial position.

 

As of September 30, 2007, White Mountains does not anticipate any significant changes to its total unrecognized tax benefits within the next twelve months.

 

Recent Accounting Pronouncements

 

Fair Value Measurements

 

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“FAS 157”). The Statement provides a revised definition of fair value and guidance on the methods used to measure fair value. The Statement also expands financial statement disclosure requirements for fair value information. The Statement establishes a fair value hierarchy that distinguishes between assumptions based on market data from independent sources (“observable inputs”) and a reporting entity’s internal assumptions based upon the best information available when external market data is limited or unavailable (“unobservable inputs”). The fair value hierarchy in FAS 157 prioritizes inputs within three levels. Quoted prices in active markets have the highest priority (Level 1) followed by observable inputs other than quoted prices (Level 2) with unobservable inputs having the lowest priority (Level 3). The guidance in FAS 157 is applicable to derivatives as well as other financial instruments measured at fair value and nullifies the guidance that provided for the deferral of gains at the date of initial measurement. The Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007.  White Mountains has not yet determined the effect of adoption on its financial condition, results of operations or cash flows.

 

Fair Value Option

 

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“FAS 159”). The Statement allows companies to make an election, on an individual instrument basis, to report financial assets and liabilities at fair value. The election must be made at the inception of a transaction and may not be reversed. The election may also be made for existing financial assets and liabilities at the time of adoption. Unrealized gains and losses on assets or liabilities for which the fair value option has been elected are to be reported in earnings. The Statement requires additional disclosures for instruments for which the election has been made, including a description of management’s reasons for making the election. The Statement is effective as of fiscal years beginning after November 15, 2007 and is to be adopted prospectively and concurrently with the adoption of FAS 157. White Mountains has not yet determined the effect of adoption on its financial condition, results of operations or cash flows.

 

Note 2. Significant Transactions

 

Preference Shares

 

On May 24, 2007, WMRe Group issued 250,000 non-cumulative perpetual preference shares with a $1,000 per share liquidation preference. Proceeds of $245.7 million, net of $4.3 million of issuance costs and commissions, were received from the issuance. Holders of the Preference Shares receive dividends on a non-cumulative basis when and if declared by WMRe Group. The holders of the Preference Shares have the right to elect two directors to WMRe Group’s board in the event of non-payment of dividends for six quarterly dividend periods. The right ceases upon the payment of dividends for four quarterly periods or the redemption of the Preference Shares. In addition, WMRe Group may not declare or pay dividends on its common shares unless it is current on its most recent dividend period. The dividend rate is fixed at an annual rate of 7.506% until June 30, 2017. After June 30, 2017, the dividend rate will be paid at a floating annual rate, equal to the greater of 3 month LIBOR plus 3.20% or 7.506%. The Preference Shares are redeemable solely at the discretion of WMRe Group on or after June 30, 2017 at their liquidation preference, plus any declared but unpaid dividends. Prior to June 30, 2017, WMRe Group may elect to redeem the Preference Shares at an amount equal to the greater of 1) the aggregate liquidation preference of the shares to be redeemed and 2) the sum of the present values of the aggregate liquidation preference of the shares to be redeemed and the remaining scheduled dividend payments on the shares to be redeemed (excluding June 30, 2017), discounted to the redemption date on a semi-annual basis at a rate equal to the rate on a comparable treasury issue, plus 45 basis points.  In the event of liquidation of WMRe Group, the holders of the Preference Shares would have preference over the common shareholders and would receive a distribution equal to the liquidation preference per share, subject to availability of funds.

 

9



 

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 subsidiaries for the three and nine months ended September 30, 2007 and 2006:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

Millions

 

2007

 

2006

 

2007

 

2006

 

Gross beginning balance

 

$

8,364.7

 

$

9,775.3

 

$

8,777.2

 

$

10,231.2

 

Less beginning reinsurance recoverable on unpaid losses

 

(3,693.2

)

(4,664.2

)

(4,015.7

)

(5,025.7

)

Net loss and LAE reserves

 

4,671.5

 

5,111.1

 

4,761.5

 

5,205.5

 

Loss and LAE reserves sold - Sirius America

 

 

(124.1

)

 

(124.1

)

Loss and LAE incurred relating to:

 

 

 

 

 

 

 

 

 

Current year losses

 

592.8

 

529.2

 

1,850.7

 

1,652.1

 

Prior year losses

 

(.9

)

28.9

 

(53.4

)

233.8

 

Total incurred losses and LAE

 

591.9

 

558.1

 

1,797.3

 

1,885.9

 

Net change in loss reserves - Sierra Insurance Group (1)

 

(9.0

)

 

(9.0

)

 

Accretion of fair value adjustment to loss and LAE reserves

 

5.4

 

6.6

 

16.0

 

18.2

 

Foreign currency translation adjustment to loss and LAE reserves

 

24.1

 

3.1

 

31.3

 

23.0

 

 

 

 

 

 

 

 

 

 

 

Loss and LAE paid relating to:

 

 

 

 

 

 

 

 

 

Current year losses

 

(304.2

)

(229.2

)

(685.5

)

(600.2

)

Prior year losses

 

(312.3

)

(461.7

)

(1,244.2

)

(1,544.4

)

Total loss and LAE payments

 

(616.5

)

(690.9

)

(1,929.7

)

(2,144.6

)

 

 

 

 

 

 

 

 

 

 

Net ending balance

 

4,667.4

 

4,863.9

 

4,667.4

 

4,863.9

 

Plus ending reinsurance recoverable on unpaid losses

 

3,581.9

 

4,250.3

 

3,581.9

 

4,250.3

 

Gross ending balance

 

$

8,249.3

 

$

9,114.2

 

$

8,249.3

 

$

9,114.2

 

 


(1) During the three months ended September 30, 2007, White Mountains Re recorded a $9.0 million decrease on its workers compensation loss reserves relating to its Sierra Insurance Group acquisition, which was offset dollar-for-dollar by an increase in the principal amount of the Sierra Note that White Mountains Re issued as part of that acquisition (See Note 6).

 

White Mountains experienced $.9 million and $53.4 million of net favorable development on prior accident year loss reserves during the three and nine months ended September 30, 2007. For the three months ended September 30, 2007, OneBeacon had net favorable development of $16.5 million that was offset primarily by $15.0 million of net unfavorable development at Esurance.  For the nine months ended September 30, 2007, OneBeacon, White Mountains Re, and Other Operations had net favorable development of $41.2 million, $25.1 million and $10.5 million, respectively, offset by $23.4 million of net unfavorable development at Esurance.  OneBeacon’s net favorable development in 2007 that primarily related to professional liability and tuition reimbursement in specialty lines, property and general liability in commercial lines and automobile liability in traditional personal lines and at AutoOne. Esurance experienced net unfavorable development in 2007 that primarily related to bodily injury claims from prior accident years. Net favorable development at White Mountains Re in 2007 primarily related to property lines. The Other Operations segment experienced $10.5 million of favorable development during 2007 primarily due to the settlement of a large claim at British Insurance Company.

 

White Mountains experienced $28.9 million of net unfavorable development on prior accident year loss reserves during the three months ended September 30, 2006, primarily due to $9.4 million of adverse development at OneBeacon, which mostly related to prior year catastrophe losses, and $12.0 million of adverse development at Folksamerica Re on business assumed through a prior acquisition.  White Mountains experienced $233.8 million of net unfavorable development on prior accident year loss reserves during the nine months ended September 30, 2006, which in addition to the items listed above, primarily related to hurricanes Katrina, Rita and Wilma.

 

In connection with purchase accounting for the acquisitions of OneBeacon, Sirius International and Stockbridge Insurance Company, 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. Accordingly, White Mountains recognized $5.4 million and $16.0 million of such charges for the three and nine months ended September 30, 2007, respectively, and $6.6 million and $18.2 million of such charges for the three and nine months ended September 30, 2006, respectively.

 

10



 

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 September 30, 2007, OneBeacon had $20.6 million of reinsurance recoverables on paid losses and $2,924.7 million (gross of $225.1 million in purchase accounting adjustments) that will become recoverable if claims are paid in accordance with current reserve estimates. The collectibility 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. As a result, uncollectible amounts have historically 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 reinsurance recoverables and the reinsurer’s A.M. Best rating.

 

 

 

Balance at

 

 

 

A.M. Best

 

Top Reinsurers (Millions)

 

September 30, 2007

 

% of Total

 

Rating (1)

 

Subsidiaries of Berkshire (NICO and GRC) (2)

 

$

2,107.3

 

78

%

A++

 

Nichido (formerly Tokio Fire and Marine Insurance Company)

 

59.0

 

2

%

A++

 

Munich Re America (formerly America Reinsurance Company)

 

49.8

 

2

%

A

 

Liberty Mutual Insurance Group and subsidiaries (3)

 

32.0

 

1

%

A

 

Swiss Re

 

21.2

 

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) and “A” (Excellent, which is the third highest of fifteen ratings).

(2)        Includes $404.0 million of Third Party Recoverables, which NICO would pay under the terms of the NICO Cover (as defined below) if they are unable to collect from third party reinsurers. OneBeacon also has an additional $339.7 million of Third Party Recoverables from various reinsurers, the majority of which are rated “A” or better by A.M. Best.

(3)        At September 30, 2007, OneBeacon had assumed balances payable and expenses payable of approximately $24.0 million under its renewal rights agreement with Liberty Mutual Insurance Group (“Liberty Mutual”), which expired on October 31, 2003.

 

In connection with the OneBeacon Acquisition, the seller caused OneBeacon to purchase two reinsurance contracts: 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 development cover (the “GRC Cover”) from General Reinsurance Corporation (“GRC”) for up to $570.0 million, comprised of $400.0 million of adverse development on losses occurring in years 2000 and prior in addition to $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 as a seller guarantee under GAAP in accordance with Emerging Issues Task Force Technical Matter Document No. D-54 (“EITF Topic D-54”). NICO and GRC are wholly-owned subsidiaries of Berkshire Hathaway Inc. (“Berkshire”).

 

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 September 30, 2007 it has used approximately $2.1 billion of the coverage provided by NICO.  Approximately $952.6 million of these incurred losses have been paid by NICO through September 30, 2007. Since entering into the NICO Cover, $39.8 million of the $2.1 billion of utilized coverage from NICO related to uncollectible Third Party Recoverables. 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.

 

11



 

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 small.

 

Effective, July 1, 2007, OneBeacon renewed its property catastrophe reinsurance program through June 30, 2008.  The program provides coverage for all OneBeacon property business including automobile physical damage, as well as terrorism coverage for non-TRIA events (excluding nuclear, biological, chemical and radiological).  Under the program, the first $150 million of losses resulting from a single catastrophe are retained by OneBeacon and $650 million of the next $700 million of losses resulting from the catastrophe are reinsured.  Any loss above $850 million would be retained by OneBeacon. 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.

 

White Mountains Re

 

White Mountains Re’s principal reinsurance protection at September 30, 2007 is provided through Folksamerica Re’s quota share retrocessional arrangements with Olympus Reinsurance Company Ltd. (“Olympus”) and Helicon Reinsurance Company, Ltd. (“Helicon”) and through excess of loss protection purchased by Sirius International to cover Sirius International’s property catastrophe and aviation exposures. Folksamerica Re has notified Olympus and Helicon that it will not renew the quota share arrangements for 2008.

 

At September 30, 2007, White Mountains Re had $35.8 million of reinsurance recoverables on paid losses and $851.5 million that will become recoverable if claims are paid in accordance with current reserve estimates. Because reinsurance contracts do not relieve White Mountains Re of its obligation to its ceding companies, the collectibility of balances due from its reinsurers is critical to White Mountains Re’s financial strength. White Mountains Re monitors the financial strength of its reinsurers on an ongoing basis. The following table provides a listing of White Mountains Re’s top reinsurers based upon recoverable amounts, the percentage of total recoverables and the reinsurers’ A.M. Best ratings.

 

 

 

Balance at

 

 

 

A.M. Best

 

 

 

Top Reinsurers (Millions)

 

September 30, 2007

 

% of Total

 

Rating (2)

 

% Collateralized

 

Olympus (1)(3)

 

$

267.1

 

30

%

NR

-4

 

100

%

Imagine Re (1)

 

163.6

 

18

%

A

-

 

100

%

London Life (1)

 

93.1

 

10

%

A

 

 

100

%

GRC

 

88.5

 

10

%

A

++

 

2

%

The Travelers Companies

 

62.9

 

7

%

A

+

 

0

%

 


(1)        Non-U.S. insurance entities. Balances are fully collateralized through funds held, letters of credit or trust agreements.

(2)        A.M. Best ratings as detailed above are: “NR-4” (Not rated per company request), “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).

(3)        Gross of $137.0 million due to Olympus under an indemnity agreement with Folksamerica Holdings.

 

12



 

Note 5.  Investment Securities

 

White Mountains’ invested assets comprise securities and other investments held for general investment purposes and those held in a segregated trust account established in connection with the OneBeacon Offering to economically defease the Berkshire Preferred Stock and the Zenith Preferred Stock.

 

White Mountains’ portfolio of fixed maturity investments and common equity securities, excluding convertible bonds, held for general investment purposes is classified as available for sale and is reported at fair value as of the balance sheet date as determined by quoted market prices.  Net unrealized investment gains and losses on available for sale securities are reported net, after-tax, as a separate component of shareholders’ equity.  Changes in net unrealized investment gains and losses, net of the effect of adjustments for minority interest and after-tax, are reported as a component of other comprehensive income.

 

White Mountains has elected the fair value option for its investment in convertible bonds.  Convertible bonds are carried at fair value with changes in value recorded in income as realized investment gains.

 

White Mountains has invested in mortgage backed and asset-backed securities, which are classified as available for sale and carried at fair value within fixed maturity investments.  Fair values are based on quoted market prices from a third party pricing service. 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.

 

The portfolio of fixed maturity investments held in the segregated trust account are classified as held to maturity as White Mountains has the ability and intent to hold the investments until maturity. Securities classified as held to maturity are recorded at amortized cost.

 

Investment securities are regularly reviewed for impairment based on criteria that include the extent to which cost exceeds market value, the duration of the market decline, the financial health of and specific prospects for the issuer and the ability and intent to hold the investment to recovery.  Investment losses that are other than temporary are recognized in earnings.  Realized gains and losses resulting from sales of investment securities are accounted for using the weighted average method.  Premiums and discounts on all fixed maturity investments are 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 mature or become available for use within one year.  Short-term investments are carried at amortized cost, which approximated fair value as of September 30, 2007 and December 31, 2006. Short-term investments held in the segregated trust account are included in the total of investments held in trust.

 

Other investments comprise White Mountains’ investments in limited partnerships, warrants, equity method investments and an interest rate swap accounted for as a cash flow hedge.

 

Net investment income for the three and nine months ended September 30, 2007 and 2006 consisted of the following:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

Millions

 

2007

 

2006

 

2007

 

2006

 

Investment income:

 

 

 

 

 

 

 

 

 

Fixed maturity investments

 

$

101.0

 

$

84.4

 

$

301.2

 

$

255.4

 

Short-term investments

 

15.7

 

17.4

 

51.9

 

36.4

 

Common equity securities

 

5.6

 

6.9

 

17.1

 

23.5

 

Other

 

8.4

 

1.7

 

9.6

 

4.7

 

Convertible fixed maturity investments

 

2.1

 

1.5

 

5.7

 

1.6

 

Total investment income

 

132.8

 

111.9

 

385.5

 

321.6

 

Less investment expenses

 

(3.9

)

(3.2

)

(11.9

)

(10.0

)

Net investment income, pre-tax

 

$

128.9

 

$

108.7

 

$

373.6

 

$

311.6

 

 

13



 

Realized investment gains (losses) consisted of the following:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

Millions

 

2007

 

2006

 

2007

 

2006

 

Fixed maturity investments

 

$

(8.4

)

$

13.4

 

$

(3.2

)

$

13.5

 

Common equity securities

 

2.2

 

46.9

 

96.4

 

86.4

 

Other investments

 

28.7

 

.2

 

88.5

 

72.9

 

Convertible fixed maturity investments

 

7.4

 

7.3

 

11.2

 

30.0

 

Net realized investment gains, pre-tax

 

$

29.9

 

$

67.8

 

$

192.9

 

$

202.8

 

 

For the three and nine months ended September 30, 2007, net realized investment gains included $11.3 million of realized losses from other than temporary impairment charges, principally comprised of $5.6 million in equity securities and $4.9 million in fixed maturity investments.  There were no other than temporary impairment charges recorded during the nine months ended September 30, 2006.  For the three months ended September 30, 2006, White Mountains recorded net realized gains of $15.7 million from its investment in Montpelier Re.

 

White Mountains’ ending net unrealized investment gains and losses on its investment portfolio and its investments in unconsolidated affiliates at September 30, 2007 and December 31, 2006 were as follows:

 

 

 

September 30,

 

December 31,

 

Millions

 

2007

 

2006

 

Investment securities:

 

 

 

 

 

Gross unrealized investment gains

 

$

375.0

 

$

353.6

 

Gross unrealized investment losses

 

(64.0

)

(52.2

)

Net unrealized gains from investment securities

 

311.0

 

301.4

 

Net unrealized gains (losses) from investments in unconsolidated affiliates

 

(18.8

)

.3

 

Total net unrealized investment gains, before tax

 

292.2

 

301.7

 

Income taxes attributable to such gains

 

(104.7

)

(103.2

)

Minority interest

 

(3.2

)

(4.5

)

Total net unrealized investment gains, after-tax

 

$

184.3

 

$

194.0

 

 

The cost or amortized cost, gross unrealized investment gains and losses, and carrying values of White Mountains’ fixed maturity investments as of September 30, 2007 and December 31, 2006, were as follows:

 

 

 

September 30, 2007

 

 

 

Cost or

 

Gross

 

Gross

 

Net foreign

 

 

 

 

 

amortized

 

unrealized

 

unrealized

 

currency

 

Carrying

 

Millions

 

cost

 

gains

 

losses

 

gains

 

value

 

U.S. Government obligations

 

$

1,145.1

 

$

16.2

 

$

(1.8

)

$

4.3

 

$

1,163.8

 

Debt securities issued by industrial corporations

 

2,011.9

 

17.1

 

(22.3

)

30.1

 

2,036.8

 

Municipal obligations

 

11.9

 

.5

 

 

 

12.4

 

Asset-backed securities

 

3,278.9

 

20.0

 

(12.0

)

5.5

 

3,292.4

 

Foreign government obligations

 

742.3

 

1.2

 

(5.6

)

74.9

 

812.8

 

Preferred stocks

 

101.6

 

8.7

 

(.5

)

8.7

 

118.5

 

Total fixed maturity investments

 

$

7,291.7

 

$

63.7

 

$

(42.2

)

$

123.5

 

$

7,436.7

 

 

14



 

 

 

December 31, 2006

 

 

 

Cost or

 

Gross

 

Gross

 

Net foreign

 

 

 

 

 

amortized

 

unrealized

 

unrealized

 

currency

 

Carrying

 

Millions

 

cost

 

gains

 

losses

 

gains

 

value

 

U.S. Government obligations

 

$

1,080.4

 

$

4.2

 

$

(6.2

)

$

 

$

1,078.4

 

Debt securities issued by industrial corporations

 

1,939.2

 

20.2

 

(23.6

)

25.1

 

1,960.9

 

Municipal obligations

 

15.5

 

.5

 

 

 

16.0

 

Asset-backed securities

 

3,579.6

 

13.2

 

(13.2

)

2.6

 

3,582.2

 

Foreign government obligations

 

657.2

 

2.1

 

(6.1

)

55.2

 

708.4

 

Preferred stocks

 

105.1

 

16.8

 

(.4

)

7.9

 

129.4

 

Total fixed maturity investments

 

$

7,377.0

 

$

57.0

 

$

(49.5

)

$

90.8

 

$

7,475.3

 

 

The cost or amortized cost, gross unrealized investment gains and losses, and carrying values of White Mountains’ common equity securities, other investments and convertible fixed maturity investments as of September 30, 2007 and December 31, 2006, were as follows:

 

 

 

September 30, 2007

 

 

 

Cost or

 

Gross

 

Gross

 

Net foreign

 

 

 

 

 

amortized

 

unrealized

 

unrealized

 

currency

 

Carrying

 

Millions

 

cost

 

gains

 

losses

 

gains

 

value

 

Common equity securities

 

$

1,232.8

 

$

243.7

 

$

(20.2

)

$

15.0

 

$

1,471.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other investments

 

$

484.5

 

$

67.8

 

$

(1.6

)

$

(1.4

)

$

549.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible fixed maturity investments

 

$

529.5

 

$

 

$

 

$

 

$

529.5

 

 

 

 

December 31, 2006

 

 

 

Cost or

 

Gross

 

Gross

 

Net foreign

 

 

 

 

 

amortized

 

unrealized

 

unrealized

 

currency

 

Carrying

 

Millions

 

cost

 

gains

 

losses

 

gains

 

value

 

Common equity securities

 

$

972.0

 

$

237.2

 

$

(1.3

)

$

4.7

 

$

1,212.6

 

 

 

 

 

 

 

 

 

 

 

 

 

Other investments

 

$

467.1

 

$

59.1

 

$

(1.4

)

$

 

$

524.8

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible fixed maturity investments

 

$

435.9

 

$

.3

 

$

 

$

 

$

436.2

 

 

Impairment

 

Temporary losses on investment securities are recorded as unrealized losses. Temporary losses do not impact net income and earnings per share but serve to reduce comprehensive net income, shareholders’ equity and tangible book value. Unrealized losses subsequently identified as other-than-temporary impairments are recorded as realized losses. Other-than-temporary impairments previously recorded as unrealized losses do not impact comprehensive net income, shareholders’ equity and tangible book value but serve to reduce net income and earnings per share.

 

White Mountains’ methodology of assessing other-than-temporary impairments is based on security-specific facts and circumstances as of the balance sheet date. As a result, subsequent adverse changes in an issuers’ credit quality or subsequent weakening of market conditions that differ from expectations could result in additional other-than-temporary impairments. In addition, the sale of a fixed maturity security with a previously recorded unrealized loss would result in a realized loss. Either of these situations would adversely impact net income and earnings per share but would not impact comprehensive net income, shareholders’ equity or tangible book value.

 

15



 

The following table presents an analysis of the continuous periods during which White Mountains has held investment positions which were carried at an unrealized loss as of September 30, 2007 (excluding short-term investments):

 

 

 

September 30, 2007

 

 

 

0-6

 

6-12

 

> 12

 

 

 

($ in millions)

 

Months

 

Months

 

Months

 

Total

 

Fixed maturity investments:

 

 

 

 

 

 

 

 

 

Number of positions

 

247

 

36

 

273

 

556

 

Market value

 

$

1,526.9

 

$

299.7

 

$

1,560.6

 

$

3,387.2

 

Amortized cost

 

$

1,544.8

 

$

303.4

 

$

1,581.2

 

$

3,429.4

 

Unrealized loss

 

$

(17.9

)

$

(3.7

)

$

(20.6

)

$

(42.2

)

Common equity securities:

 

 

 

 

 

 

 

 

 

Number of positions

 

270

 

14

 

9

 

293

 

Market value

 

$

223.4

 

$

15.0

 

$

1.5

 

$

239.9

 

Cost

 

$

241.9

 

$

16.5

 

$

1.7

 

$

260.1

 

Unrealized loss

 

$

(18.5

)

$

(1.5

)

$

(.2

)

$

(20.2

)

Other investments:

 

 

 

 

 

 

 

 

 

Number of positions

 

5

 

1

 

2

 

8

 

Market value

 

$

17.9

 

$

2.0

 

$

14.5

 

$

34.4

 

Cost

 

$

19.3

 

$

2.1

 

$

14.6