White Mountains ended 2009 with an adjusted book value per common share of $417, an increase of 18%, including dividends, from December 31, 2008. White Mountains reported adjusted comprehensive income of $560 million in 2009 compared to adjusted comprehensive loss of $749 million in 2008. The 2009 results were driven primarily by strong investment results, foreign currency gains, improved underwriting results and favorable weather, as compared to the 2008 results, which experienced significant investment and foreign currency losses.
The following table presents White Mountains’ adjusted book value per share, a non-GAAP financial measure, for the years ended December 31, 2009, 2008 and 2007 and reconciles this non-GAAP measure to the most comparable GAAP measure (See NON-GAAP FINANCIAL MEASURES on page 73):
Specialty now lines includes Technology, Financial Services, OBSP and PIM, which were formerly reported in commercial lines. Prior periods have been reclassified to conform to the current presentation.
Net written premium increased 3% to $823 million in 2008 from $799 million in 2007. In 2008, White Mountains purchased Answer Financial, a national property and casualty insurance agency that sells policies online and through call centers utilizing a comparison quoting platform. As of December 31, 2008, the Esurance segment had 745,000 policies-in-force, including 284,000 policyholders at Answer Financial (which excludes 17,000 policies-in-force that were placed with Esurance). The turmoil in the U.S. economy decreased new car sales and insurance shopping behavior overall, contributing to minimal premium growth across the industry. Fewer overall shoppers and intense competition in the auto insurance industry made acquiring customers at acceptable costs more difficult in 2008. In response to these trends, Esurance reduced its marketing spend to $80 million in 2008 from $125 million in 2007. In addition, the economic turmoil has impacted and will likely continue to impact retention rates, as more customers are cancelling for non-payment of premium or choosing to go without insurance. As a result, Esurance experienced a reduction in new policy sales during the year and had a net 5% drop in policies-in-force in 2008 to 461,000.
White Mountains’ Other Operations segment’s pre-tax loss was $111 million in 2009 compared to $218 million in 2008. The decrease in pre-tax loss was primarily attributable to improved performance at WM Life Re and an increase in the value of the Company’s investment in Symetra warrants, partially offset by increased incentive compensation expenses. WM Life Re reported $57 million in pre-tax net losses in 2009 compared to $187 million of pre-tax net losses in 2008. The pre-tax net losses from WM Life Re for 2008 resulted from the effect of volatile market conditions on WM Life Re’s derivative assets and liabilities (see below). In addition, the WM Life Re results for 2009 included $22 million of losses from surrender assumption revisions, compared to $93 million of such losses in 2008. The value of White Mountains’ investment in Symetra warrants increased by $11 million during 2009 compared to a decrease of $50 million in 2008, which was due to a significant decline in the valuation of stocks in the life insurance sector. These decreases in pre-tax losses were partially offset by a $48 million increase in incentive compensation expenses in 2009, mainly due to the reversal of outstanding performance share accruals at the end of 2008 as described below.
Other Operations Results-Year Ended December 31, 2008 versus Year Ended December 31, 2007
In addition, the value of White Mountains’ investment in Symetra warrants decreased due to a decline in the valuation of stocks in the life insurance sector in 2008. During 2008, the value of the Symetra warrants decreased by $50 million, compared to an increase of $23 million in 2007. The pre-tax income in 2007 also included $17 million of net investment income on a dividend received on the Symetra warrants and $11 million of favorable loss reserve development, primarily due to the settlement of a large claim at British Insurance Company. These decreases in pre-tax income were partially offset by a $29 million decrease in incentive compensation expenses in 2008. Based on the Company’s performance in 2008, it was determined that there would likely be no payouts for all the outstanding performance share grants under the Company’s long term incentive compensation plans. Accordingly, during 2008 White Mountains reversed all amounts that had previously been accrued for these performance share grants.
White Mountains’ GAAP total return on invested assets for 2008 was -9.5% compared to 7.9% for 2007. White Mountains’ equity, convertible fixed maturities, and other long-term investment portfolio return of -38.2% in 2008 underperformed the S&P 500 Index, which declined by 37.0% in 2008, mainly as a result of the portfolio being more heavily weighted than the S&P 500 Index in utilities and metals, industries which were hit particularly hard by the volatile financial markets. The GAAP total return on fixed maturity investments, including mortgage-backed and asset-backed securities, was -1.9% for 2008, due to widening spreads in certain corporate and structured securities. White Mountains largely avoided the many negative corporate credit events and the extensive damage from structured securities and leverage that was experienced by many financial institutions. The strengthening of the U.S. dollar also adversely impacted investment returns in 2008.
WMRe America has the ability to pay dividends during any 12-month period without the prior approval of regulatory authorities in an amount equal to the lesser of net investment income, as defined by statute, or 10% of statutory surplus, in both cases as most recently reported to regulatory authorities, subject to the availability of earned surplus. Based upon December 31, 2009 statutory surplus of $832 million, WMRe America would have the ability to pay approximately $83 million of dividends during 2010 without prior approval of regulatory authorities, subject to the availability of earned surplus. As of December 31, 2009, WMRe America had negative earned surplus. During 2009, WMRe America did not pay any dividends to its immediate parent.
During 2009, in addition to the $350 million distribution in connection with the WMRe Bermuda reorganization, White Mountains Re paid $183 million of additional distributions to its immediate parent. The total of $533 million of distributions made by White Mountains Re in 2009 was comprised of $480 million of cash and $53 million of other assets.
In 2007, OneBeacon Ltd.’s board of directors authorized OneBeacon Ltd. to repurchase up to $200 million of its Class A common shares from time to time, subject to market conditions. Shares may be repurchased on the open market or through privately negotiated transactions. This program does not have a stated expiration date. Since the inception of this program, OneBeacon has repurchased and retired 5.0 million of its Class A common shares for $102 million. During 2008, OneBeacon repurchased and retired 3.4 million of its Class A common shares for $69 million. OneBeacon did not repurchase any shares in 2009.
During 2008, White Mountains contributed $105 million in cash and investments to WM Life Re, $48 million in cash to Esurance and $3 million in cash to Answer Financial.
In 2007, White Mountains Re completed a detailed, ground-up asbestos exposure study. This study was an update to an analysis first performed in 2005. The study analyzed potential exposure to loss of all insureds that had reported at least $250,000 in losses to WMRe America through reinsurance contracts as of June 30, 2007. This analysis entailed examining total expected asbestos losses and LAE from a variety of information sources, including asbestos studies, data reported to WMRe America and a review of historical public filings. The results of this analysis were compared to WMRe America’s reinsurance contract layers to derive an estimated expected loss. White Mountains Re also analyzed a significant sample of all other insureds that had reported losses of less than $250,000 and extrapolated the sample findings to the entire population.
(1) Excludes carrying value of $15.7 associated with other long-term investments accounted for using the equity method.
Hedge fund and private equity fund returns are commonly measured against the benchmark returns of hedge fund indices and/or the S&P 500 Index. The Hedge Fund Research, Inc. (“HFRX”) Equal Weighted Strategies Index is representative of the overall composition of the hedge fund market and is comprised of typical hedge fund strategies, including convertible arbitrage, distressed securities, equity hedge, equity market neutral, event driven, macro, merger arbitrage and relative value arbitrage. The HFRX Equal Weighted Strategies Index applies an equal weight to all constituent strategy indices. The historical returns for each index in the past 5 full years are listed below:
Comprises exchange traded equity index, foreign currency and interest rate futures. Fair value measurements based upon quoted prices for identical instruments that are actively traded.