White Mountains Insurance Group (WTM) is an insurance company that sells property & casualty insurance, reinsurance, and auto insurance. Increased competition in the insurance industry has led to a decrease in net written premiums, which have stagnated in the last 3 years for WTM.  This increase in competition has resulted from other companies, such as Lloyd's, increasing their underwriting capacities to take advantage of increased premiums.  Esurance, which WTM acquired in 2000, has been the largest source of growth for WTM, as its policies have risen from 43,000 in 2002 to 485,000 in 2007.  Esurance, an online auto insurer, has become the third largest issuer of online insurance quotes and the third most recognizable brand in the online auto insurance markets. 
However, WTM has maintained positive growth of revenue through acquisitions -- discounting for a one time after-tax gain of $171 million from an offering of OneBeacon in 2006, revenues have steadily increased over the past three years as gross written premiums have decreased . WTM's dependency on inorganic growth means that it must constantly look for acquisition opportunities. Also, WTM's selectivity in acquisitions and underwriting may also lead to a large cash position and be hampered by regulatory constraints. 
White Mountains' revenue comes from the premiums that they receive from customers and the returns they earn from investing those premiums. Since 2005, net written premiums have decreased due to increased competition.. However, WTM's investment returns have outpaced the S&P 500 in 2007 and earned 0.8% in the first quarter of 2008 .
From 2006 to 2007, WTM's total revenues and pre-tax income decreased by 1.25% and 6.62%, respectively . However, this decrease was due to a one time OneBeacon offering worth $171.3 million. Excluding that loss, total revenues increased 2.4% and pre-tax income increased 22.02% . WTM's combined ratio, the ratio of incurred losses and expenses to earned premium, decreased 3% from 2006 due to a reduction in expenses as well as better underwriting .
|Net Income (Mill)||407.4||673.2||290.1||419||281|
|OneBeacon||White Mountains Re||Esurance|
|Net Written Premiums (Mill)||1,864.4||1,095.7||798.5|
|% of Total Company||49.6||29.2||21.2|
As with all insurance companies, WTM has a large loss exposure to catastrophic events. OneBeacon does most of its business throughout the Northeast US, so any large weather or terrorist events would lead to increased losses. Galileo also has exposure to the weather derivatives which it sells to its clients. White Mountains Re is also exposed to significant catastrophe risk because it is the insurer of insurers. Any large disaster will force it to pay out a lot in claims. All of these businesses try to hedge these risks through reinsurance and derivatives. However, while that minimizes the risks, it does not eliminate them. In 2006, White Mountains Re recorded $86 million of unfavorable development due to Hurricanes Katrina, Rita, and Wilma .
WTM has protected itself from sub-prime mortgage backed securities, holding none as of the end of 2007. However, this does not protect it from the negative effects which the credit crunch will have on other investments it has. As banks become less inclined to lend and interest rates rise, the value of WTM's fixed income portfolio drops. WTM estimates that a 1 percent increase in investment grade debt interest rates will lead to losses of $121.2 million for its Fixed Income Assets. The increase in interest rates also increases WTM's borrowing costs. However, this risk is limited by swaps which WTM enters into to hedge out its future interest rate risk.
As of late, WTM has acquired other insurance companies which are undervalued and has used these transactions to increase its float. The troubles in the financial sector have led to a devaluation in the values in many members of the insurance industry. As other companies become cheaper, the number of opportunities WTM has for acquisitions increases as well. However, a lack of attractive investments leads to WTM maintaining a large position in idle cash, which has no prospect of increasing shareholder value. As of the end of 2007, WTM possessed $171.3 million in cash in addition to over $1.3 billion of short-term investments, which could potentially be used in a takeover .
For several years, the number of automobile registrations has remained flat and the average age of cars on the road has risen . This means that the number of cars on the road is not growing like it once was and that the cars that are on the road are worth less. This leads to less premiums for the auto insurance market. This is only made worse by higher oil prices which have risen drastically. Auto companies have had and are expecting growth to slow. For example, Toyota is anticipating a 7% decline in U.S. sales in 2008 from 2007 .
The insurance industry has been experiencing increased competition due to an excess of underwriting capacity. This competition has driven down premiums and made the insurance business less profitable. In the United States, Bermuda, and Europe, WTM faces competition from large global reinsurers such as Swiss Re, Lloyd's of London, and Berkshire Hathaway, as well as smaller companies XL Capital, Transatlantic Holdings, Everest Re Group (RE), and ACE Limited. 
In the personal property insurance market, WTM faces competition from household names such as Allstate (ALL), AIG (AIG), and State Farm, which are able to sell automobile and other property insurance bundled together.  The U.S. property and casualty insurance market is fragmented-- WTM is 27th with 0.6% of the net written premiums.  However, Allstate, AIG, and State Farm, the market leaders, together represent 24.7% of the market.  Additionally, Esurance has to compete directly with Geico and Progressive in the auto insurance market.  Advertising is important in the personal insurance industry to attract customers from the competition. Esurance has been making a strong advertising push to catch up to direct insurers, Geico and Progressive, which also offer auto insurance without an agent. Competition in the auto insurance market is intense because it is difficult for competitors to differentiate themselves from each other.