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’s actual results could be materially different from and worse than its expectations. See “FORWARD-LOOKING STATEMENTS” on page 109 for specific important factors that could cause actual results to differ materially from those contained in forward-looking statements.
White Mountains ended 2014 with an adjusted book value per share of $665, an increase of 3.6% during the year, including dividends, compared to an increase of 9.5% during 2013, including dividends. White Mountains reported adjusted comprehensive income of $136 million in 2014 compared to adjusted comprehensive income of $340 million in 2013. The decrease was driven by $87 million of after-tax foreign currency exchange losses, $58 million of after-tax adverse prior year loss reserve development at OneBeacon and lower investment returns, partially offset by strong underwriting performance at Sirius Group.
White Mountains’s GAAP pre-tax total return on invested assets was 1.9% for 2014, compared to 4.1% for 2013. 2014 included 1.9% of foreign currency losses, while foreign currency translation did not meaningfully impact investment returns in 2013. In local currencies, the fixed income portfolio was up 2.7% for 2014, a decent absolute result for the year but behind the longer duration Barclays Intermediate Aggregate Index as interest rates fell. In local currencies, the fixed income portfolio was up 0.5% for 2013. In local currencies, the equity portfolio (common equity securities, convertibles and other long-term investments) was up 8.0% for 2014, a strong absolute result for the year but mixed against benchmarks, underperforming the S&P 500 and outperforming the small-cap Russell 2000. In local currencies, the equity portfolio was up 18.9% for 2013.
During 2014, White Mountains completed the acquisitions of four insurance marketing/technology service businesses: (i) Tranzact, a leading provider of end-to-end customer acquisition solutions to the insurance sector, (ii) QuoteLab, an advertising technology company focused on the insurance industry, (iii) Wobi, an Israeli online insurance price comparison business, and (iv) Star & Shield, which includes the attorney-in-fact for SSIE, a Florida-domiciled reciprocal insurance exchange providing private passenger auto insurance to members of the public safety community and their families. In addition, White Mountains purchased a 45% interest in durchblicker.at, Austria’s first independent price comparison portal for insurance, gas/electricity and financial services. In 2014, White Mountains deployed almost $400 million of capital, including approximately $235 million through the purchase of insurance service businesses and $134 million through share repurchases.
Adjusted comprehensive income is a non-GAAP measure. For a description of the most comparable GAAP measure (see NON-GAAP FINANCIAL MEASURES on page 86).
White Mountains’s total revenues increased 8% to $2,510 million in 2014, which was driven by an increase in net unrealized gains from the investment portfolio and other revenues from the newly-acquired insurance service businesses. Earned insurance and reinsurance premiums increased 4%, with OneBeacon up 5% and Sirius Group up 1% over 2013. Net investment income was down 5% to $105 million, due to a lower fixed maturity asset base and lower investment yields. White Mountains reported net realized and unrealized investment gains of $284 million in 2014, which included $141 million of net realized and unrealized foreign currency gains, compared to $162 million of gains in 2013, which included $1 million of net realized and unrealized foreign currency gains. Net realized and unrealized foreign currency gains on investments are primarily related to GAAP foreign currency translation and are more than offset in comprehensive net income and adjusted book value per share by foreign currency losses recognized in other comprehensive income in 2014 (see “Foreign Currency Translation” on page 73). Other revenue increased to $62 million in 2014 from $58 million in 2013. Other revenue in 2014 included $57 million in foreign currency translation losses compared to $1 million in foreign currency translation losses in 2013. Other revenue in 2014 included $65 million from QuoteLab and $43 million from Tranzact. Other revenue in 2013 included transaction gains of $42 million, composed of a $23 million gain on OneBeacon’s sale of Essentia, a $7 million gain on Sirius Group’s acquisition of Empire, a $7 million gain on Sirius Group’s acquisition of Ashmere and a $4 million gain from the extension of the transition service agreement for services provided by OneBeacon on business sold to Tower in the personal lines transaction in 2010. In addition, 2013 included $11 million of mark-to-market gains on the Symetra warrants, which were exercised in June 2013. Other revenue included $4 million of WM Life Re’s losses in 2014 compared to $13 million of WM Life Re’s losses in 2013. See Note 9 - “Derivatives” for details regarding WM Life Re’s total impact on White Mountains’s statement of operations. Other revenues in 2014 also included third-party investment management fee income at WM Advisors of $12 million, compared to $11 million in 2013.
OneBeacon Results-Year Ended December 31, 2014 versus Year Ended December 31, 2013
Financial results and GAAP combined ratios for Sirius Group for the years ended December 31, 2014, 2013 and 2012 follows:
A summary of White Mountains’s financial results from its Other Operations segment for the years ended December 31, 2014, 2013 and 2012 follows:
For purposes of discussing rates of return, all percentages are presented gross of management fees and trading expenses in order to produce a better comparison to benchmark returns, while all dollar amounts are presented net of any management fees and trading expenses. A summary of White Mountains’s consolidated pre-tax investment results for the years ended December 31, 2014, 2013 and 2012 follows:
Investment Returns-Year Ended December 31, 2013 versus Year Ended December 31, 2012
Symetra’s book value per common share excluding unrealized gains and losses from its fixed maturity portfolio
The following table presents the composition of White Mountains’s investment portfolio as of December 31, 2014 and 2013:
A summary of the impact of foreign currency translation on White Mountains’s consolidated financial results for the years ended December 31, 2014, 2013 and 2012 follows:
As of December 31, 2014, White Mountains’s investment portfolio included approximately $0.9 billion in non-U.S. dollar-denominated investments, most of which are held at Sirius International and are denominated in Swedish krona, British pound sterling or euro. The value of the investments in this portfolio is impacted by changes in the exchange rate between the U.S. dollar and those currencies. During 2014, the U.S. dollar strengthened 21% against the Swedish krona, 6% against the British pound sterling and 14% against the euro. These foreign currency movements resulted in approximately $133 million of foreign currency investment losses for the year ended December 31, 2014, which are recorded as components of net realized and unrealized investment gains (recognized in pre-tax income) and change in foreign currency translation on investments (recognized in other comprehensive income). During 2013, the U.S. dollar weakened 1% against the Swedish krona, 2% against the British pound sterling and 4% against the euro, which resulted in $12 million of foreign currency investment gains for the year. During 2012, the U.S. dollar weakened 6% against the Swedish krona, 5% against the British pound sterling and 2% against the euro, which resulted in $38 million of foreign currency investment gains for the year.
The unsecured portions of the Nordea and Lloyds Bank facilities are subject to various affirmative, negative and financial covenants that White Mountains considers to be customary for such borrowings, including certain minimum net worth and maximum debt to capitalization standards. An uncured breach of these covenants could result in an event of default under the Nordea and the Lloyds Bank facilities, which would allow providers to demand cash collateralization of the unsecured LOCs and/or cancel and return the issued LOCs. In addition, a failure by Sirius International or its subsidiaries to pay principal and interest on a credit facility, mortgage or similar debt agreement (collectively “covered debt”), where such failure results in the acceleration of at least $75 million principal amount of covered debt, could trigger cash collateralization of the unsecured portions of the Nordea and the Lloyds Bank facilities and/or cancellation and return of the issued LOCs. As of December 31, 2014, Sirius International and SIG were in compliance with all of the covenants under the Nordea and the Lloyds Bank facilities and anticipate they will continue to remain in compliance with these covenants for the foreseeable future.
In November 2012, OBH issued $275 million face value of senior unsecured debt through a public offering, at an issue price of 99.9%. The net proceeds from the issuance of the OBH Senior Notes were used to repurchase OBH’s previously issued Senior Notes. The OBH Senior Notes, which are fully and unconditionally guaranteed as to the payment of principal and interest by OneBeacon Ltd., bear an annual interest rate of 4.60%, payable semi-annually in arrears on May 9 and November 9, until maturity on November 9, 2022.
WM Life Re reinsures death and living benefit guarantees associated with certain variable annuities issued in Japan. WM Life Re has assumed the risk related to a shortfall between the account value and the guaranteed value that must be paid by the ceding company to an annuitant or to an annuitant’s beneficiary in accordance with the underlying annuity contracts. WM Life Re uses derivative instruments, including put options, interest rate swaps, total return swaps and futures contracts on major equity indices, currency pairs and government bonds, to mitigate the risks associated with changes in the fair value of the reinsured variable annuity guarantees. As of December 31, 2014, the total guarantee value was approximately ¥134.2 billion (approximately $1.1 billion) and the related account values were approximately 113% of this amount.
During 2014, BAM received $16 million in surplus contributions from its members.
OneBeacon’s loss and LAE reserves, net of reinsurance recoverables, as of December 31, 2014 and 2013 were as follows:
Sirius Group’s net loss and LAE reserves by class of business as of December 31, 2014 and 2013 were as follows:
In 2012, Sirius Group had net favorable loss reserve development of $34 million. The major reductions in loss reserve estimates were recognized in casualty runoff ($32 million), property ($28 million), marine/energy ($12 million), trade credit ($7 million) and aviation and space ($5 million) lines, partially offset by a $46 million increase in asbestos loss reserves and a $4 million increase in accident and health.
As mentioned previously, a $24 million decrease in the property reserves in 2014 represented a reduction of loss reserves previously held above the actuarial central estimate. When examined in 2014, the loss estimates for the major catastrophe events that occurred in 2010 to 2012 had stabilized and had proven to be redundant in aggregate; as a result, the additional amount above the actuarial central estimate was reversed. This is the primary reason why the recorded reserves are lower in the range of actuarial estimates in 2014 as compared to 2013.
As of December 31, 2011, WM Life Re increased the variable annuity guaranty liability by $6 million to partially reflect a “basis swap” implied by foreign exchange rates which results in lower projected returns (in Japanese yen) for the portion of funds invested in countries outside of Japan. Since the financial crisis in 2008, there has been a break in expected arbitrage free relationships between swap interest rates and foreign exchange rates (in particular, between the U.S. and Japan). This adjustment recognizes that this anomaly of trading values may be more than temporary. The balance of this reserve was $0.1 million as of December 31, 2014.
As a result of this time lag in reporting, Sirius Group estimates a portion of its written premium and related commissions and expenses. Given the nature of Sirius Group’s business, estimated premium balances, net of related commissions and expenses, comprise a large portion of total premium balances receivable. The estimation process begins by identifying which major accounts have not reported activity at the most recent period end. In general, premium estimates for excess of loss business are based on expected premium income included in the contractual terms. For proportional business, Sirius Group’s estimates are derived from expected premium volume based on contractual terms or ceding company reports and other correspondence and communication with underwriters, intermediaries and ceding companies. Once premium estimates are determined, related commission and expense estimates are derived using contractual terms.