The following discussion contains "forward-looking statements". White Mountains
intends statements that are not historical in nature, which are hereby
identified as forward-looking statements, to be covered by the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. White
Mountains cannot promise that its expectations in such forward-looking
statements will turn out to be correct. White Mountains' actual results could be
materially different from and worse than its expectations. See "FORWARD-LOOKING
STATEMENTS" for specific important factors that could cause actual results to
differ materially from those contained in forward-looking statements.
The following discussion also includes three non-GAAP financial measures -
adjusted comprehensive income (loss), adjusted book value per share and total
adjusted capital - that have been reconciled to their most comparable GAAP
financial measures (see page 62). White Mountains believes these measures to be
more relevant than comparable GAAP measures in evaluating White Mountains'
financial performance and condition.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012 AND 2011
Overview
White Mountains ended the second quarter of 2012 with an adjusted book value
per share of $565, which was break-even for the quarter and up 4.4% for the
first six months of 2012, including dividends. White Mountains reported an
adjusted comprehensive loss of $4 million and adjusted comprehensive income of
$114 million for the second quarter and first six months of 2012 compared to
adjusted comprehensive income of $6 million and $40 million for the second
quarter and first six months of 2011. In the second quarter of 2012, good
underwriting results at both OneBeacon and Sirius Group were offset by losses in
the equity portfolio and foreign currency losses resulting from a strengthening
U.S. dollar.
In July 2012, White Mountains invested approximately $600 million in HG Global
Ltd. ("HG Global"), which will reinsure municipal bond insurance risks written
by Build America Mutual Assurance Company ("BAM") through a wholly-owned
subsidiary, HG Re Ltd.White Mountains owns 98% of HG Global's preferred equity
and 89% of its common equity. White Mountains expects to syndicate approximately
$110 million of its investment to interested investors in the near future to
broaden the support for BAM.
White Mountains' GAAP pre-tax total return on invested assets was -0.5% and 1.6
% for the second quarter and first six months of 2012, which included 0.5% and
0.1% of foreign currency losses, compared to 1.1% and 3.1% for the second
quarter and first six months of 2011, which included 0.2% and 1.0% of foreign
currency gains.
OneBeacon's book value per share increased 1.2% for the second quarter and 6.3%
for the first six months of 2012, including dividends. OneBeacon's GAAP
combined ratio was 94% for the second quarter of 2012 compared to 95% for the
second quarter of 2011, while the GAAP combined ratio was 94% for both the first
six months of 2012 and the first six months of 2011. The GAAP combined ratio for
both the second quarter and the first six months of 2012 reflected improvement
in the current accident year loss ratio that was driven by lower catastrophe
losses, partially offset by lower favorable loss reserve development.
Catastrophe losses were 2 points in both the second quarter and the first six
months of 2012 compared to 6 points in the second quarter and 4 points in the
first six months of 2011. Favorable loss reserve development was 1 point in the
second quarter of 2012 compared to 4 points in the second quarter of last year.
The first six months of 2012 included 1 point of unfavorable loss reserve
development compared to 3 points of favorable loss reserve development in the
first six months of last year.
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Sirius Group's GAAP combined ratio was 82% for the second quarter of 2012
compared to 92% for the second quarter of 2011, while the GAAP combined ratio
for the first six months of 2012 was 83% compared to 112% for the first six
months of 2011. The improvement in both periods was primarily due to lower
catastrophe losses. The combined ratio for the second quarter of 2012 included 3
points ($7 million) of catastrophe losses, mainly due to earthquakes in Italy,
compared to 17 points ($39 million) in the second quarter of 2011, which
included $25 million of losses from severe weather and tornadoes in the
Midwestern United States and $10 million of additional losses from the Japan
earthquake and tsunami that occurred in the first quarter of 2011. The combined
ratio for the first six months of 2012 included 2 points ($8 million) of
catastrophe losses compared to 36 points ($163 million) during the first half of
2011, which were primarily from $90 million of losses from the Japan earthquake
and tsunami, and $40 million of losses from the February 2011 New Zealand
earthquake.
White Mountains' total net written premiums increased 8% and 9% to $518 million
in the second quarter and $1,173 million in the first six months of 2012,
compared to $482 million in the second quarter and $1,079 million in the first
six months of 2011. OneBeacon's net written premiums increased 10% and 14% to
$293 million and $597 million in the second quarter and first six months of
2012. Sirius Group's net written premiums increased 4% in both the second
quarter and first six months of 2012 to $225 million and $576 million (increases
of 6% and 7%, respectively, in local currencies).
Adjusted Book Value Per Share
The following table presents White Mountains' adjusted book value per share and
reconciles this non-GAAP measure to the most comparable GAAP measure. (See
NON-GAAP FINANCIAL MEASURES on page 62).
June 30, March 31, June 30,
2012 2012 December 31, 2011 2011
Book value per share numerators (in
millions):
White Mountains' common shareholders'
equity $ 3,742.5 $ 3,718.8 $ 4,087.7 $ 3,620.5
Equity in net unrealized losses
(gains) from Symetra's fixed
maturity portfolio (27.0 ) 1.2 - (80.6 )
Adjusted book value per share
numerator (1) $ 3,715.5 $ 3,720.0 $ 4,087.7 $ 3,539.9
Book value per share denominators (in
thousands of shares):
Common shares outstanding 6,630.3 6,638.9 7,577.9 7,958.6
Unearned restricted shares (51.6 ) (59.4 ) (37.6 ) (51.5 )
Adjusted book value per share
denominator (1) 6,578.7 6,579.5 7,540.3 7,907.1
Book value per share (2) $ 564.45 $ 560.16 $ 539.43 $ 454.92
Adjusted book value per share (2) $ 564.77 $ 565.38 $
542.11 $ 447.69
(1) Excludes out of-the-money stock options.
(2) During the first quarter and first six months of both 2012 and 2011, White
Mountains declared and paid a dividend of $1.00 per common share.
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Review of Consolidated Results
White Mountains' consolidated financial results for the three and six months
ended June 30, 2012 and 2011 follow:
Three Months Ended Six Months Ended
June 30, June 30,
Millions 2012 2011 2012 2011
Gross written premiums $ 587.8 $ 536.5 $ 1,371.4 $ 1,254.0
Net written premiums $ 518.2 $ 481.6 $ 1,172.6 $ 1,078.9
Revenues
Earned insurance and reinsurance premiums $ 512.2 $ 478.3 $ 1,011.2 $ 946.1
Net investment income 40.4 45.8 82.2 95.3
Net realized and unrealized investment (losses)
gains (8.1 ) 42.8 50.5 33.6
Other revenue - foreign currency translation
(losses) gains (18.4 ) (10.3 ) - 14.3
Other revenue - Hamer and Bri-Mar 7.3 6.8 15.5 10.9
Other revenue - Symetra warrants 6.1 (3.4 ) 17.2 (4.6 )
Other revenue - other 4.5 (6.4 ) (2.0 ) (12.4 )
Total revenues 544.0 553.6 1,174.6 1,083.2
Expenses
Losses and LAE 265.0 278.5 527.7 636.9
Insurance and reinsurance acquisition expenses 108.7 98.5 217.1 189.2
Other underwriting expenses 79.0 71.4 153.8 144.5
General and administrative expenses 34.5 48.4 65.7 70.4
General and administrative expenses - Hamer and
Bri-Mar 6.4 5.8 13.6 9.7
Accretion of fair value adjustment to loss and
LAE reserves 1.2 2.0 8.3 4.1
Interest expense on debt 10.9 12.9 21.8 26.0
Total expenses 505.7 517.5 1,008.0 1,080.8
Pre-tax income 38.3 36.1 166.6 2.4
Income tax expense (6.6 ) (10.0 ) (34.6 ) (2.3 )
Net income from continuing operations 31.7 26.1 132.0 .1
Net (loss) income from discontinued operations,
net of tax - (1.5 ) .1 1.0
Equity in earnings of unconsolidated
affiliates, net of tax 6.5 7.9 16.7 14.6
Net income 38.2 32.5 148.8 15.7
Net income attributable to noncontrolling
interests (12.1 ) (20.8 ) (28.9 ) (32.2 )
Net income (loss) attributable to White
Mountains' common shareholders 26.1 11.7 119.9 (16.5 )
Other comprehensive (loss) income, net of tax (1.6 ) 16.6 20.7 78.6
Comprehensive income attributable to White
Mountains' common
shareholders 24.5 28.3 140.6 62.1
Change in equity in net unrealized losses from
Symetra's fixed maturity
portfolio (28.2 ) (22.1 ) (27.0 ) (22.1 )
Adjusted comprehensive (loss) income $ (3.7 ) $ 6.2 $ 113.6 $ 40.0
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Consolidated Results - Three Months Ended June 30, 2012 versus Three Months
Ended June 30, 2011
White Mountains' total revenues decreased 2% to $544 million in the second
quarter of 2012 compared to $554 million in the second quarter of 2011,
primarily due to lower investment gains, lower net investment income and higher
foreign currency translation losses, mostly offset by higher earned insurance
and reinsurance premiums and higher mark-to-market gains on White Mountains'
investment in Symetra warrants. Earned insurance and reinsurance premiums
increased 7% (9% in local currencies) to $512 million in the second quarter of
2012. Net investment income was down 12% to $40 million in the second quarter
of 2012, primarily from lower fixed maturity yields and the gradual shift in
White Mountains' investment portfolio toward more common equity securities.
White Mountains reported net realized and unrealized investment losses of $8
million in the second quarter of 2012 compared to $43 million of gains in the
second quarter of 2011 (see Investment Returns on page 50). Other revenues
improved to a loss of $1 million in the second quarter of 2012 from a loss of
$13 million in the second quarter of 2011, as the second quarter of 2011
included a $12 million loss from the repurchase of $150 million of OBH Senior
Notes, while in 2012 higher mark-to-market gains on the Symetra warrants were
mostly offset by higher foreign currency translation losses.
White Mountains' total expenses decreased 2% to $506 million in the second
quarter of 2012 compared to $518 million in the second quarter of 2011. White
Mountains' losses and LAE expenses decreased 5%, as the second quarter of 2012
included $13 million of catastrophe losses compared to $53 million in
catastrophe losses in the second quarter of 2011. General and administrative
expenses decreased 25% to $42 million, primarily due to lower incentive
compensation expenses as the second quarter of 2011 included increased incentive
compensation accruals following the agreement to sell Esurance and Answer
Financial to Allstate.
White Mountains' income tax expense for the second quarter of 2012 and 2011
represented effective tax rates of 17.2% and 27.7%, which differed from the U.S.
statutory rate of 35% primarily due to income generated in jurisdictions other
than the United States.
Consolidated Results - Six Months Ended June 30, 2012 versus Six Months Ended
June 30, 2011
White Mountains' total revenues increased 8% to $1,175 million in the first six
months of 2012 compared to $1,083 million in the first six months of 2011,
primarily due to higher earned insurance and reinsurance premiums, higher
mark-to-market gains on White Mountains' investment in Symetra warrants and
higher investment gains, partially offset by lower net investment income and
lower foreign currency translation gains. Earned premiums increased 7% (8% in
local currencies) to $1,011 million in the first six months of 2012. Net
investment income was down 14% to $82 million in the first six months of 2012,
due primarily to lower fixed maturity yields and the gradual shift in White
Mountains' investment portfolio to common equity securities. White Mountains
reported net realized and unrealized investment gains of $51 million in the
first six months of 2012, compared to $34 million in the first six months of
2011 (see Investment Returns on page 50). Other revenues increased to $31
million in the first six months of 2012 from $8 million in the first six months
of 2011, primarily due to increased mark-to-market gains on the Symetra
warrants, partially offset by lower foreign currency translation gains. Other
revenues in the first six months of 2011 also included a $12 million loss from
the repurchase of $150 million of OBH Senior Notes.
White Mountains' total expenses decreased 7% to $1,008 million in the first six
months of 2012, compared to $1,081 million in the first six months of 2011.
Losses and LAE expenses decreased $109 million, or 17%, as the first six months
of 2012 included $16 million of catastrophe losses compared to $182 million in
catastrophe losses in the first six months of 2011, primarily from the Japan
earthquake and tsunami and New Zealand earthquakes. Interest expense on debt
decreased 16% to $22 million in the first six months of 2012 compared to $26
million in the first six months of 2011, primarily due to reductions of
outstanding debt resulting from repurchases of OBH Senior Notes.
White Mountains' income tax expense for the first six months of 2012 represented
an effective tax rate of 20.8%, which differed from the U.S. statutory rate of
35% primarily due to income generated in jurisdictions other than the United
States.White Mountains' effective tax rate for the first six months of 2011 was
not meaningful as pre-tax income was near break-even ($2 million).
I. Summary of Operations By Segment
White Mountains conducts its operations through three segments: (1) OneBeacon,
(2) Sirius Group, and (3) Other Operations. While investment results are
included in these segments, because White Mountains manages the majority of its
investments through its wholly-owned subsidiary, WM Advisors, a discussion of
White Mountains' consolidated investment operations is included after the
discussion of operations by segment. White Mountains' segment information is
presented in Note 10 -"Segment Information" to the Consolidated Financial
Statements.
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OneBeacon
Financial results for OneBeacon for the three and six months ended June 30, 2012
and 2011 follow:
Three Months Ended Six Months Ended
June 30, June 30,
Millions 2012 2011 2012 2011
Gross written premiums $ 312.9 $ 286.2 $ 632.4 $ 560.3
Net written premiums $ 293.4 $ 265.6 $ 597.0 $ 525.5
Earned insurance and reinsurance
premiums $ 282.0 $ 247.5 $ 554.8 $ 492.6
Net investment income 14.0 18.7 28.7 39.7
Net realized and unrealized investment
(losses) gains (11.9 ) 11.0 17.9 34.1
Other revenue .2 (11.5 ) .3 (10.7 )
Total revenues 284.3 265.7 601.7 555.7
Losses and LAE 152.5 137.9 301.8 268.3
Insurance and reinsurance acquisition
expenses 60.1 53.5 117.5 102.5
Other underwriting expenses 52.0 44.1 100.8 93.4
General and administrative expenses 2.6 2.6 5.3 4.9
Interest expense on debt 4.0 6.0 8.1 12.3
Total expenses 271.2 244.1 533.5 481.4
Pre-tax income $ 13.1 $ 21.6 $ 68.2 $ 74.3
The following table presents OneBeacon's book value per share.
