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 March 31, 2014
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, and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months. Yes ý No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý | Accelerated filer o | Non-accelerated filer o | Smaller reporting company 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 ý
As of April 28, 2014, 6,174,386 common shares with a par value of $1.00 per share were outstanding (which includes 81,325 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 |
WHITE MOUNTAINS INSURANCE GROUP, LTD.
CONSOLIDATED BALANCE SHEETS
(Millions, except share amounts) | March 31, 2014 | December 31, 2013 | ||||||
Assets | Unaudited | |||||||
Fixed maturity investments, at fair value | $ | 4,988.7 | $ | 5,030.5 | ||||
Short-term investments, at amortized cost (which approximates fair value) | 674.0 | 635.9 | ||||||
Common equity securities, at fair value | 1,174.6 | 1,156.8 | ||||||
Convertible fixed maturity investments, at fair value | 73.8 | 80.5 | ||||||
Other long-term investments | 302.3 | 288.9 | ||||||
Total investments | 7,213.4 | 7,192.6 | ||||||
Cash (restricted: $22.2 and $56.1) | 338.6 | 382.8 | ||||||
Reinsurance recoverable on unpaid losses | 425.2 | 428.1 | ||||||
Reinsurance recoverable on paid losses | 15.2 | 25.4 | ||||||
Insurance and reinsurance premiums receivable | 734.8 | 518.9 | ||||||
Funds held by ceding companies | 93.8 | 106.3 | ||||||
Investments in unconsolidated affiliates | 373.3 | 321.4 | ||||||
Deferred acquisition costs | 190.0 | 174.7 | ||||||
Deferred tax asset | 484.9 | 512.1 | ||||||
Ceded unearned insurance and reinsurance premiums | 149.5 | 92.4 | ||||||
Accrued investment income | 37.0 | 39.3 | ||||||
Accounts receivable on unsettled investment sales | 19.9 | 12.1 | ||||||
Other assets | 537.7 | 458.1 | ||||||
Assets held for sale | 1,803.1 | 1,880.1 | ||||||
Total assets | $ | 12,416.4 | $ | 12,144.3 | ||||
Liabilities | ||||||||
Loss and loss adjustment expense reserves | $ | 3,048.4 | $ | 3,079.3 | ||||
Unearned insurance and reinsurance premiums | 1,116.6 | 901.4 | ||||||
Variable annuity benefit guarantee | 54.1 | 52.8 | ||||||
Debt | 677.6 | 676.4 | ||||||
Deferred tax liability | 353.9 | 356.2 | ||||||
Accrued incentive compensation | 124.9 | 218.3 | ||||||
Ceded reinsurance payable | 157.9 | 71.9 | ||||||
Funds held under insurance and reinsurance contracts | 127.8 | 127.1 | ||||||
Accounts payable on unsettled investment purchases | 80.9 | 20.5 | ||||||
Other liabilities | 343.3 | 362.9 | ||||||
Liabilities held for sale | 1,803.1 | 1,880.1 | ||||||
Total liabilities | 7,888.5 | 7,746.9 | ||||||
Equity | ||||||||
White Mountains’s common shareholders’ equity | ||||||||
White Mountains’s common shares at $1 par value per share - authorized 50,000,000 shares; | ||||||||
issued and outstanding 6,174,386 and 6,176,739 shares | 6.2 | 6.2 | ||||||
Paid-in surplus | 1,046.7 | 1,044.9 | ||||||
Retained earnings | 2,880.8 | 2,802.3 | ||||||
Accumulated other comprehensive income (loss), after tax: | ||||||||
Equity in net unrealized losses from investments in Symetra common shares | (3.9 | ) | (40.4 | ) | ||||
Net unrealized foreign currency translation gains | 80.5 | 88.4 | ||||||
Pension liability and other | 4.2 | 4.1 | ||||||
Total White Mountains’s common shareholders’ equity | 4,014.5 | 3,905.5 | ||||||
Non-controlling interests | ||||||||
Non-controlling interest - OneBeacon Ltd. | 279.2 | 273.7 | ||||||
Non-controlling interest - SIG Preference Shares | 250.0 | 250.0 | ||||||
Non-controlling interest - HG Global | 18.4 | 16.6 | ||||||
Non-controlling interest - BAM | (102.7 | ) | (97.6 | ) | ||||
Non-controlling interest - other | 68.5 | 49.2 | ||||||
Total non-controlling interests | 513.4 | 491.9 | ||||||
Total equity | 4,527.9 | 4,397.4 | ||||||
Total liabilities and equity | $ | 12,416.4 | $ | 12,144.3 | ||||
See Notes to Consolidated Financial Statements
1
WHITE MOUNTAINS INSURANCE GROUP, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Unaudited
Three Months Ended | ||||||||
March 31, | ||||||||
(Millions, except per share amounts) | 2014 | 2013 | ||||||
Revenues: | ||||||||
Earned insurance and reinsurance premiums | $ | 493.6 | $ | 495.4 | ||||
Net investment income | 24.3 | 28.5 | ||||||
Net realized and unrealized investment gains | 63.8 | 75.2 | ||||||
Other revenue | (3.4 | ) | 28.3 | |||||
Total revenues | 578.3 | 627.4 | ||||||
Expenses: | ||||||||
Loss and loss adjustment expenses | 229.3 | 244.3 | ||||||
Insurance and reinsurance acquisition expenses | 95.1 | 98.2 | ||||||
Other underwriting expenses | 81.4 | 79.1 | ||||||
General and administrative expenses | 50.3 | 43.8 | ||||||
Interest expense | 10.1 | 10.2 | ||||||
Total expenses | 466.2 | 475.6 | ||||||
Pre-tax income from continuing operations | 112.1 | 151.8 | ||||||
Income tax expense | (30.3 | ) | (41.6 | ) | ||||
Net income from continuing operations | 81.8 | 110.2 | ||||||
Net (loss) income from discontinued operations, net of tax | (.5 | ) | .5 | |||||
Income before equity in earnings of unconsolidated affiliates | 81.3 | 110.7 | ||||||
Equity in earnings of unconsolidated affiliates, net of tax | 13.8 | 9.2 | ||||||
Net income | 95.1 | 119.9 | ||||||
Net loss attributable to non-controlling interests | .5 | .5 | ||||||
Net income attributable to White Mountains’s common shareholders | 95.6 | 120.4 | ||||||
Other comprehensive income, net of tax: | ||||||||
Change in equity in net unrealized gains (losses) from investments in Symetra common shares, net of tax | 36.5 | (8.0 | ) | |||||
Change in foreign currency translation, pension liability and other | (7.8 | ) | (3.7 | ) | ||||
Comprehensive income | 124.3 | 108.7 | ||||||
Comprehensive income attributable to non-controlling interests | — | — | ||||||
Comprehensive income attributable to White Mountains’s common shareholders | $ | 124.3 | $ | 108.7 | ||||
Income (loss) per share attributable to White Mountains’s common shareholders | ||||||||
Basic income (loss) per share | ||||||||
Continuing operations | $ | 15.56 | $ | 19.10 | ||||
Discontinued operations | (.08 | ) | .07 | |||||
Total consolidated operations | $ | 15.48 | $ | 19.17 | ||||
Diluted income (loss) per share | ||||||||
Continuing operations | $ | 15.56 | $ | 19.10 | ||||
Discontinued operations | (.08 | ) | .07 | |||||
Total consolidated operations | $ | 15.48 | $ | 19.17 | ||||
Dividends declared per White Mountains’s common share | $ | 1.00 | $ | 1.00 | ||||
See Notes to Consolidated Financial Statements
2
WHITE MOUNTAINS INSURANCE GROUP, LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Unaudited
White Mountains’s Common Shareholders’ Equity | ||||||||||||||||||||||||
(Millions) | Common shares and paid-in surplus | Retained earnings | AOCI, after tax | Total | Non-controlling interest | Total Equity | ||||||||||||||||||
Balance at January 1, 2014 | $ | 1,051.1 | $ | 2,802.3 | $ | 52.1 | $ | 3,905.5 | $ | 491.9 | $ | 4,397.4 | ||||||||||||
Net income (loss) | — | 95.6 | — | 95.6 | (.5 | ) | 95.1 | |||||||||||||||||
Net change in unrealized gains from investments in unconsolidated affiliates | — | — | 36.5 | 36.5 | — | 36.5 | ||||||||||||||||||
Net change in foreign currency translation | — | — | (7.9 | ) | (7.9 | ) | — | (7.9 | ) | |||||||||||||||
Net change in pension liability and other accumulated comprehensive items | — | — | .1 | .1 | — | .1 | ||||||||||||||||||
Total comprehensive income (loss) | — | 95.6 | 28.7 | 124.3 | (.5 | ) | 123.8 | |||||||||||||||||
Dividends declared on common shares | — | (6.2 | ) | — | (6.2 | ) | — | (6.2 | ) | |||||||||||||||
Dividends to non-controlling interests | — | — | — | — | (5.2 | ) | (5.2 | ) | ||||||||||||||||
Repurchases and retirements of common shares | (4.5 | ) | (10.9 | ) | — | (15.4 | ) | — | (15.4 | ) | ||||||||||||||
Issuances of common shares | 2.1 | — | — | 2.1 | — | 2.1 | ||||||||||||||||||
Net contributions from non-controlling interests | — | — | — | — | 27.0 | 27.0 | ||||||||||||||||||
Amortization of restricted share awards | 4.2 | — | — | 4.2 | .2 | 4.4 | ||||||||||||||||||
Balance at March 31, 2014 | $ | 1,052.9 | $ | 2,880.8 | $ | 80.8 | $ | 4,014.5 | $ | 513.4 | $ | 4,527.9 | ||||||||||||
White Mountains’s Common Shareholders’ Equity | ||||||||||||||||||||||||
(Millions) | Common shares and paid-in surplus | Retained earnings | AOCI, after tax | Total | Non-controlling interest | Total Equity | ||||||||||||||||||
Balance at January 1, 2013 | $ | 1,057.2 | $ | 2,542.7 | $ | 131.9 | $ | 3,731.8 | $ | 526.4 | $ | 4,258.2 | ||||||||||||
Net income (loss) | — | 120.4 | — | 120.4 | (.5 | ) | 119.9 | |||||||||||||||||
Net change in unrealized losses from investments in unconsolidated affiliates | — | — | (8.0 | ) | (8.0 | ) | — | (8.0 | ) | |||||||||||||||
Net change in foreign currency translation | — | — | (3.7 | ) | (3.7 | ) | — | (3.7 | ) | |||||||||||||||
Total comprehensive income (loss) | — | 120.4 | (11.7 | ) | 108.7 | (.5 | ) | 108.2 | ||||||||||||||||
Dividends declared on common shares | — | (6.2 | ) | — | (6.2 | ) | — | (6.2 | ) | |||||||||||||||
Dividends to non-controlling interests | — | — | — | — | (5.2 | ) | (5.2 | ) | ||||||||||||||||
Repurchases and retirements of common shares | (23.5 | ) | (55.5 | ) | — | (79.0 | ) | — | (79.0 | ) | ||||||||||||||
Net contributions from non-controlling interests | — | — | — | — | 2.2 | 2.2 | ||||||||||||||||||
Amortization of restricted share awards | 3.6 | — | — | 3.6 | .2 | 3.8 | ||||||||||||||||||
Balance at March 31, 2013 | $ | 1,037.3 | $ | 2,601.4 | $ | 120.2 | $ | 3,758.9 | $ | 523.1 | $ | 4,282.0 | ||||||||||||
See Notes to Consolidated Financial Statements
3
WHITE MOUNTAINS INSURANCE GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Three Months Ended | ||||||||
March 31, | ||||||||
(Millions) | 2014 | 2013 | ||||||
Cash flows from operations: | ||||||||
Net income | $ | 95.1 | $ | 119.9 | ||||
Charges (credits) to reconcile net income to net cash (used for) provided from operations: | ||||||||
Net realized and unrealized investment gains | (63.8 | ) | (75.2 | ) | ||||
Deferred income tax expense | 21.7 | 25.8 | ||||||
Net loss (income) from discontinued operations | .5 | (.5 | ) | |||||
Gain on sale of subsidiary - Citation and Essentia | (.7 | ) | (23.0 | ) | ||||
Excess of fair value of acquired net assets over cost - American Fuji | — | (6.9 | ) | |||||
Undistributed equity in earnings from unconsolidated affiliates, net of tax | (13.8 | ) | (9.2 | ) | ||||
Other operating items: | ||||||||
Net change in loss and loss adjustment expense reserves | (44.6 | ) | (86.2 | ) | ||||
Net change in reinsurance recoverable on paid and unpaid losses | 13.9 | 20.1 | ||||||
Net change in unearned insurance and reinsurance premiums | 217.7 | 146.1 | ||||||
Net change in variable annuity benefit guarantee liabilities | 1.3 | (189.9 | ) | |||||
Net change in variable annuity benefit guarantee derivative instruments | (20.4 | ) | 22.5 | |||||
Net change in deferred acquisition costs | (15.3 | ) | 4.5 | |||||
Net change in funds held by ceding companies | 12.6 | 25.2 | ||||||
Net change in ceded unearned premiums | (60.6 | ) | (52.4 | ) | ||||
Net change in funds held under reinsurance treaties | .7 | 23.7 | ||||||
Net change in insurance and reinsurance premiums receivable | (212.4 | ) | (179.7 | ) | ||||
Net change in ceded reinsurance payable | 78.6 | 75.7 | ||||||
Net change in restricted cash | 33.9 | 61.3 | ||||||
Net change in other assets and liabilities, net | (77.0 | ) | (86.0 | ) | ||||
Net cash used for operations - continuing operations | (32.6 | ) | (184.2 | ) | ||||
Net cash used for operations - discontinued operations | (14.6 | ) | (40.7 | ) | ||||
Net cash used for operations | (47.2 | ) | (224.9 | ) | ||||
Cash flows from investing activities: | ||||||||
Net change in short-term investments | (61.5 | ) | 26.3 | |||||
Sales of fixed maturity and convertible fixed maturity investments | 1,026.3 | 1,962.9 | ||||||
Maturities, calls and paydowns of fixed maturity and convertible fixed maturity investments | 189.7 | 176.3 | ||||||
Sales of common equity securities | 63.4 | 181.9 | ||||||
Distributions and redemptions of other long-term investments | 23.9 | 20.9 | ||||||
Sales of consolidated and unconsolidated affiliates, net of cash sold | 12.8 | 31.3 | ||||||
Funding of operational cash flows for discontinued operations | (14.6 | ) | (40.7 | ) | ||||
Purchases of other long-term investments | (13.0 | ) | (17.4 | ) | ||||
Purchases of common equity securities | (65.0 | ) | (143.3 | ) | ||||
Purchases of fixed maturity and convertible fixed maturity investments | (1,138.3 | ) | (1,742.5 | ) | ||||
Purchases of consolidated and unconsolidated affiliates, net of cash acquired | (32.2 | ) | (9.2 | ) | ||||
Net change in unsettled investment purchases and sales | 52.6 | (80.8 | ) | |||||
Net acquisitions of property and equipment | (.5 | ) | (3.5 | ) | ||||
Net cash provided from investing activities - continuing operations | 43.6 | 362.2 | ||||||
Net cash provided from investing activities - discontinued operations | 14.6 | 40.7 | ||||||
Net cash provided from investing activities | 58.2 | 402.9 | ||||||
Cash flows from financing activities: | ||||||||
Draw down of revolving line of credit | — | 80.0 | ||||||
Repayment of revolving line of credit | — | (155.0 | ) | |||||
Payments on capital lease obligation | (1.3 | ) | (1.8 | ) | ||||
Cash dividends paid to the Company’s common shareholders | (6.2 | ) | (6.2 | ) | ||||
Cash dividends paid to OneBeacon Ltd.’s non-controlling common shareholders | (4.9 | ) | (5.0 | ) | ||||
Common shares repurchased | (10.9 | ) | (79.0 | ) | ||||
Collateral provided by interest rate cap counterparties | (2.6 | ) | — | |||||
Capital contributions from BAM members | 4.8 | — | ||||||
Net cash used for financing activities - continuing operations | (21.1 | ) | (167.0 | ) | ||||
Net cash (used for) provided from financing activities - discontinued operations | — | — | ||||||
Net cash used for financing activities | (21.1 | ) | (167.0 | ) | ||||
Effect of exchange rate changes on cash | (.2 | ) | (.6 | ) | ||||
Net change in cash during the period | (10.3 | ) | 10.4 | |||||
Cash balances at beginning of period (excludes restricted cash balances of $56.1 and $249.8) | 326.7 | 212.6 | ||||||
Cash balances at end of period (excludes restricted cash balances of $22.2 and $188.5) | $ | 316.4 | $ | 223.0 | ||||
Supplemental cash flows information: | ||||||||
Interest paid | $ | (12.8 | ) | $ | (12.9 | ) | ||
Net income tax refund (payment) to national governments | $ | 3.8 | $ | (2.2 | ) | |||
See Notes to Consolidated Financial Statements
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1. Summary of Significant Accounting Policies
Basis of Presentation
These interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and include the accounts of White Mountains Insurance Group, Ltd. (the “Company” or the “Registrant”), its subsidiaries (collectively, with the Company, “White Mountains”) and other entities required to be consolidated under GAAP. The Company is an exempted Bermuda limited liability company whose principal businesses are conducted through its insurance and reinsurance subsidiaries and affiliates. The Company’s headquarters is located at 14 Wesley Street, Hamilton, Bermuda HM 11, 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’s reportable segments are OneBeacon, Sirius Group, HG Global/BAM and Other Operations.
The OneBeacon segment consists of OneBeacon Insurance Group, Ltd. (“OneBeacon Ltd.”), an exempted Bermuda limited liability company that owns a family of property and casualty insurance companies (collectively, “OneBeacon”). OneBeacon is a specialty property and casualty insurance writer that offers a wide range of insurance products in the United States through independent agencies, regional and national brokers, wholesalers and managing general agencies. During the third quarter of 2013, OneBeacon formed Split Rock Insurance, Ltd. (“Split Rock”), a Bermuda-based reinsurance company. As of March 31, 2014 and December 31, 2013, White Mountains owned 75.3% and 75.2% of OneBeacon Ltd.’s outstanding common shares.
As discussed further in Note 2, OneBeacon entered into a definitive agreement to sell its runoff business (the “Runoff Business”) in October 2012 (the “Runoff Transaction”). Accordingly, the Runoff Business is presented as discontinued operations. The OneBeacon Runoff Business includes assets and liabilities that are principally related to non-specialty commercial lines and certain other runoff business that it no longer writes, including nearly all of its asbestos and environmental reserves. Assets and liabilities associated with the Runoff Business as of March 31, 2014 and December 31, 2013 have been presented as held for sale in the financial statements (See Note 15 for discontinued operations).
The Sirius Group segment consists of Sirius International Insurance Group, Ltd., an exempted Bermuda limited liability company, and its subsidiaries (collectively, “Sirius Group”). Sirius Group provides insurance and reinsurance products for property, accident and health, aviation and space, trade credit, marine, agriculture and certain other exposures on a worldwide basis through its primary subsidiaries, Sirius International Insurance Corporation (“Sirius International”), Sirius America Insurance Company (“Sirius America”) and Lloyds Syndicate 1945 (“Syndicate 1945”). Sirius Group also specializes in the acquisition and management of runoff insurance and reinsurance companies both in the United States and internationally through its White Mountains Solutions division (“WM Solutions”).
The HG Global/BAM segment consists of HG Global Ltd. (“HG Global”) and the consolidated results of Build America Mutual Assurance Company (“BAM”). In 2012, White Mountains capitalized HG Global with $594.5 million to fund the start-up of BAM. BAM is a municipal bond insurer domiciled in New York that was established to provide insurance on bonds issued to support essential U.S. public purposes such as schools, utilities, core governmental functions and existing transportation facilities. HG Global, together with its subsidiaries, provided the initial capitalization of BAM through the purchase of $503.0 million of surplus notes issued by BAM (the “BAM Surplus Notes”). HG Global, through its wholly-owned subsidiary, HG Re Ltd. (“HG Re”), also provides 15%-of-par, first loss reinsurance protection for policies underwritten by BAM. As of March 31, 2014 and December 31, 2013, White Mountains owned 96.9% and 97.3% of HG Global's preferred equity and 88.4% and 88.7% of its common equity. White Mountains does not have an ownership interest in BAM, which is a mutual insurance company owned by its members. However, GAAP requires White Mountains to consolidate BAM's results in its financial statements. BAM's results are attributed to non-controlling interests.
White Mountains’s Other Operations segment consists of the Company and its intermediate holding companies, its wholly-owned investment management subsidiary, White Mountains Advisors LLC (“WM Advisors”), White Mountains’s variable annuity reinsurance business, White Mountains Life Reinsurance (Bermuda) Ltd. (“Life Re Bermuda”), which is in runoff, and its U.S.-based service provider, White Mountains Financial Services LLC (collectively, “WM Life Re”), and White Mountains’s investments in Wobi Insurance Agency Ltd. (“Wobi”), QuoteLab Holdings LLC (“QuoteLab”) and Star & Shield Risk Management LLC (“SSRM”). At March 31, 2014, White Mountains holds $12.0 million of Star & Shield Insurance Exchange’s (“SSIE”) surplus notes but does not have an ownership interest in SSIE, which is a reciprocal and is owned by its policyholders. However, as a result of SSRM’s role as the attorney-in-fact to SSIE and the investment in SSIE’s surplus notes, White Mountains is required to consolidate SSIE in its GAAP financial statements. SSIE’s results do not affect White Mountains’s common shareholders’ equity as they are attributable to non-controlling interests.
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. 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 2013 Annual Report on Form 10-K.
5
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 and disclosure of contingent 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. Certain amounts in the prior period financial statements have been reclassified to conform to the current presentation. Refer to the Company’s 2013 Annual Report on Form 10-K for a complete discussion regarding White Mountains’s significant accounting policies.
Non-controlling Interests
Non-controlling interests consist of the ownership interests of non-controlling shareholders in consolidated subsidiaries and are presented separately on the balance sheet.
The percentage of the non-controlling shareholders’ ownership interest in OneBeacon Ltd. at March 31, 2014 and December 31, 2013 was 24.7% and 24.8%.
In 2012, HG Global was capitalized with $594.5 million from White Mountains and $14.5 million from certain management members of BAM, the latter of which is included in non-controlling interest. Upon closing, certain BAM management members also received additional common and preferred shares of HG Global that resulted in a $2.2 million allocation of the carrying value of White Mountains’s investment in HG Global to the non-controlling interest, which was recorded as an adjustment to paid-in surplus in White Mountains’s consolidated statement of changes in equity.
White Mountains is required to consolidate BAM in its GAAP financial statements. However, since BAM is a mutual insurance company that is owned by its members, BAM’s results do not affect White Mountains’s common shareholders’ equity as they are attributable to non-controlling interests. For the three months ended March 31, 2014 and 2013, White Mountains reported $8.6 million and $18.4 million in pre-tax losses from BAM that have been allocated to non-controlling interest.
In May 2007, Sirius International Group, Ltd. (“SIG”), an intermediate holding company of Sirius Group, issued $250.0 million non-cumulative perpetual preference shares, with a $1,000 per share liquidation preference (the “SIG Preference Shares”), and received $245.7 million of proceeds, net of $4.3 million of issuance costs and commissions. SIG Preference Shares and dividends thereon are included in non-controlling interest on the balance sheet and on the statement of income and comprehensive income. The SIG Preference Shares have an initial fixed annual dividend rate of 7.506%. In June 2017, the fixed rate will move to a floating rate equal to the greater of (i) 7.506% and (ii) 3-month LIBOR plus 320 bps. In July 2013, SIG executed a 5-year forward LIBOR cap (the “Interest Rate Cap”) for the period from June 2017 to June 2022 to protect against a significant increase in interest rates during that 5-year period. The Interest Rate Cap economically fixes the annual dividend rate on the SIG Preference Shares from June 2017 to June 2022 at 8.30%. The Interest Rate Cap is recorded in other assets at fair value. Changes in fair value are recorded in other revenue.
At March 31, 2014 and December 31, 2013, the non-controlling equity interest in White Mountains’s consolidated limited partnerships was $46.7 million and $46.1 million. At March 31, 2014, the non-controlling equity interest in Wobi was $5.0 million. At March 31, 2014, the non-controlling equity interest in QuoteLab was $18.8 million. For the three months ended March 31, 2014, SSIE reported $4.7 million in pre-tax losses that have been allocated to non-controlling interest. At March 31, 2014 and December 31, 2013, the non-controlling equity interest in A.W.G. Dewar Inc, a subsidiary of OneBeacon, was $2.7 million and $3.1 million.
Recently Adopted Changes in Accounting Principles
Unrecognized Tax Benefits
Effective January 1, 2014, White Mountains adopted ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (ASC 740). The new ASU requires balance sheet presentation of an unrecognized tax benefit as a reduction of a deferred tax asset for a net operating loss (“NOL”) carryforward or tax credit carryforward rather than as a liability. The exception is in circumstances where a carryforward is not available to settle the additional taxes that might arise upon disallowance of the tax position under the tax law of the applicable jurisdiction. Prior to the issuance of ASU 2013-11, the guidance for unrecognized tax benefits under ASC 740 did not provide explicit guidance on whether an entity should present an unrecognized tax benefit as a liability or as a reduction of NOL carryforwards or other tax credits. In circumstances where an NOL carryforward is not available to offset settlement of any additional taxes arising from a disallowed tax position, the unrecognized tax benefit should be presented as a liability. The new guidance becomes effective for fiscal periods beginning on or after December 15, 2013 and should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective adoption is not allowed. Adoption did not have any impact on White Mountains's financial statements.
6
Recently Issued Accounting Pronouncements
Qualified Affordable Housing Projects
On January 15, 2014, the FASB issued ASU 2014-01, Accounting for Investments in Qualified Affordable Housing Projects (“QAHP”) (ASC 323), which permits companies to make an accounting policy election to account for its investment in a QAHP using the proportional amortization method, if certain conditions are met. Under this method, the initial cost of the investment is amortized in proportion to the tax credits and other tax benefits received, with the net investment performance recognized in the income statement as a component of income tax expense. The new guidance also requires certain new disclosures for all QAHP investments. ASU 2014-01 is effective for annual and interim reporting periods beginning after December 15, 2014 and must be applied retrospectively to all periods presented upon adoption. White Mountains currently holds an investment in a QAHP that is accounted for under the equity method and does not expect the adoption to have a material impact on its financial position, results of operations or cash flows.
Note 2. Significant Transactions
QuoteLab
On March 14, 2014, White Mountains acquired 60% of the outstanding Class A common units of QuoteLab. QuoteLab is an advertising technology company that operates a transparent online advertising exchange that facilitates transactions between buyers and sellers of insurance media, including advertising inventory on QuoteLab’s owned and operated websites. On a fully converted basis, White Mountains owns 54.3% of QuoteLab. White Mountains paid an initial purchase price of $28.1 million and will pay additional consideration to the sellers equal to 62.5% of the 2015 gross profit in excess of the 2013 gross profit. At acquisition, QuoteLab had total assets of $56.9 million, including $43.7 million of intangible assets, and total liabilities of $10.0 million.
Wobi
On February 19, 2014, White Mountains acquired 54% of the outstanding common shares of Wobi for NIS 14.4 million (approximately $4.1 million based upon the foreign exchange spot rate at the date of acquisition). In addition to the common shares, White Mountains also purchased NIS 12.7 million (approximately $3.6 million based upon the foreign exchange spot rate at the date of acquisition) of newly-issued convertible preferred shares of Wobi. Wobi is the only price comparison/aggregation business in Israel, with an insurance carrier panel that represents 85% of the premiums written in the Israeli insurance market. Wobi sells four lines of business, primarily personal auto, and operates as an agency, charging upfront commissions on all policy sales. On a fully converted basis, White Mountains owns 60.7% of Wobi. At acquisition, Wobi had total assets of $15.3 million, including $15.0 million of intangible assets, and total liabilities of $2.6 million.
Star & Shield
On January 31, 2014, White Mountains acquired certain assets and liabilities of Star & Shield Holdings LLC, including SSRM, the attorney-in-fact for SSIE, for a purchase price of $1.8 million.
White Mountains also purchased $12.0 million of surplus notes issued by SSIE. Principal and interest on the surplus notes are payable to White Mountains only with approval from the Florida Office of Insurance Regulation.
SSIE is a Florida-domiciled reciprocal insurance exchange providing private passenger auto insurance to the public safety community and their families. SSIE is a variable interest entity (“VIE”). As a result of SSRM’s role as the attorney-in-fact to SSIE and the investment in SSIE’s surplus notes, White Mountains is required to consolidate SSIE. At March 31, 2014, consolidated amounts included total assets of $27.1 million and total liabilities of $31.7 million of SSIE. For the quarter ended March 31, 2014, SSIE had a pre-tax loss of $4.7 million that was recorded in net loss attributable to non-controlling interests.
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WM Solutions
In the first quarter of 2014, WM Solutions completed the shell sale of Citation Insurance Company, which resulted in a gain of $0.7 million recorded in other revenue.
In the first quarter of 2013, WM Solutions acquired Ashmere Insurance Company (“Ashmere”, formerly known as American Fuji Fire and Marine Insurance Company), an American International Group, Inc. (“AIG”) runoff subsidiary. The transaction resulted in a gain of $6.9 million recorded in other revenue.
Sale of Essentia Insurance Company
Effective January 1, 2013, OneBeacon completed the sale of Essentia Insurance Company (“Essentia”), an indirect wholly-owned subsidiary which wrote the collector car and boat business, to Markel Corporation. Concurrently, OneBeacon and Hagerty Insurance Agency (“Hagerty”) terminated their underwriting arrangement with respect to the collector car and boat business. OneBeacon recognized a pre-tax gain on sale of $23.0 million ($15.0 million after tax) in the first quarter of 2013.
Sale of OneBeacon Runoff Business
On October 17, 2012, one of OneBeacon’s indirect wholly-owned subsidiaries, OneBeacon Insurance Group LLC, entered into a definitive agreement (as amended, the “Runoff SPA”) with Trebuchet US Holdings, Inc. (“Trebuchet”), a wholly-owned subsidiary of Armour Group Holdings Limited (together with Trebuchet, “Armour”), to sell the Runoff Business. Pursuant to the terms of the agreement, at closing OneBeacon will transfer to Trebuchet all of the issued and outstanding shares of common stock of certain legal entities that will contain the assets, liabilities (including gross and ceded loss reserves) and capital supporting the Runoff Business as well as certain elements of the Runoff Business infrastructure, including staff and office space. The transaction is subject to regulatory approval and is expected to close in the second half of 2014. As a result of the agreement, the OneBeacon Runoff Business is reported as discontinued operations (see Note 15).
Common Shares Repurchased and Retired
During the past several years, White Mountains's board of directors has authorized the Company to repurchase its common shares, from time to time, subject to market conditions. The repurchase authorizations do not have a stated expiration date. As of March 31, 2014, White Mountains may repurchase an additional 529,648 shares under these board authorizations. In addition, from time to time White Mountains has also repurchased its common shares through tender offers that were separately approved by its board of directors.
During the three months ended March 31, 2014, the Company repurchased 26,323 common shares for $15.4 million at an average share price of $586, which was comprised of 15,848 common shares repurchased under the board authorization and 10,475 common shares repurchased pursuant to employee benefit plans. Shares repurchased pursuant to employee benefit plans do not fall under the board authorizations referred to above.
During the three months ended March 31, 2013, the Company repurchased 140,224 common shares for $79.0 million at an average share price of $564, which was comprised of 140,000 common shares repurchased under the board authorization and 224 common shares repurchased pursuant to employee benefit plans.
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Note 3. Loss and Loss Adjustment Expense Reserves
The following table summarizes the loss and loss adjustment expense (“LAE”) reserve activities of White Mountains’s insurance and reinsurance subsidiaries for the three months ended March 31, 2014 and 2013:
Three Months Ended | ||||||||
March 31, | ||||||||
Millions | 2014 | 2013 | ||||||
Gross beginning balance | $ | 3,079.3 | $ | 3,168.9 | ||||
Less beginning reinsurance recoverable on unpaid losses | (428.1 | ) | (429.1 | ) | ||||
Net loss and LAE reserves | 2,651.2 | 2,739.8 | ||||||
Loss and LAE reserves acquired (1) | — | 21.3 | ||||||
Loss and LAE reserves consolidated — SSIE | 13.6 | — | ||||||
Loss and LAE incurred relating to: | ||||||||
Current year losses | 240.5 | 242.9 | ||||||
Prior year losses | (11.2 | ) | 1.4 | |||||
Total incurred losses and LAE | 229.3 | 244.3 | ||||||
Accretion of fair value adjustment to loss and LAE reserves | .2 | 1.2 | ||||||
Foreign currency translation adjustment to loss and LAE reserves | 1.8 | (9.6 | ) | |||||
Loss and LAE paid relating to: | ||||||||
Current year losses | (35.0 | ) | (36.6 | ) | ||||
Prior year losses | (237.9 | ) | (270.6 | ) | ||||
Total loss and LAE payments | (272.9 | ) | (307.2 | ) | ||||
Net ending balance | 2,623.2 | 2,689.8 | ||||||
Plus ending reinsurance recoverable on unpaid losses | 425.2 | 410.8 | ||||||
Gross ending balance | $ | 3,048.4 | $ | 3,100.6 | ||||
(1) Loss and LAE reserves acquired relate to WM Solutions purchase of Ashmere in the first quarter of 2013.
Loss and LAE incurred relating to prior year losses for the three months ended March 31, 2014
During the three months ended March 31, 2014, White Mountains experienced $11.2 million of net favorable loss reserve development.
For the three months ended March 31, 2014, OneBeacon had net favorable loss reserve development of $1.4 million primarily related to its ocean marine business and its technology business. For the three months ended March 31, 2014, Sirius Group had net favorable loss reserve development of $9.8 million primarily related to its casualty and accident and health lines of business.
Loss and LAE incurred relating to prior year losses for the three months ended March 31, 2013
During the three months ended March 31, 2013, White Mountains experienced $1.4 million of net unfavorable loss reserve development. OneBeacon had net favorable loss reserve development of $2.9 million primarily driven by medical facilities and managed care errors and omissions lines in its healthcare business, which is included in OneBeacon's Professional Insurance underwriting unit. Sirius Group had net unfavorable loss reserve development of $4.3 million primarily due to a late reported agricultural claim related to the 2012 U.S. drought.
Fair value adjustment to loss and LAE reserves
In connection with purchase accounting for acquisitions, White Mountains is 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.
White Mountains recognized $0.2 million of such charges, recorded as loss and LAE for the three months ended March 31, 2014, and $1.2 million for the three months ended March 31, 2013. As of March 31, 2014, the remaining pre-tax un-accreted adjustment was $4.5 million.
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Note 4. Third Party Reinsurance
In the normal course of business, White Mountains’s 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 March 31, 2014, OneBeacon had $3.0 million and $80.1 million of reinsurance recoverables on paid and unpaid losses. At December 31, 2013, OneBeacon had $9.7 million and $80.2 million of reinsurance recoverables on paid and unpaid losses. The reinsurance balances associated with the Runoff Business are included in discontinued operations (see Note 15). Reinsurance contracts do not relieve OneBeacon of its 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 and ratings of its reinsurers on an ongoing basis. Uncollectible amounts related to the ongoing specialty business historically have not been significant.
Effective January 1, 2014, OneBeacon entered into reinsurance treaties to provide coverage for the 2014 crop year. OneBeacon purchased an aggregate stop loss on its multiple peril crop insurance portfolio, providing 48.5% of coverage in excess of a 101.5% loss ratio on premiums covered by the contract and a separate aggregate stop loss providing 80.0% of coverage in excess of a 100.0% loss ratio on its crop-hail portfolio.
Sirius Group
At March 31, 2014, Sirius Group had $12.2 million and $344.8 million of reinsurance recoverables on paid and unpaid losses that will become recoverable if claims are paid in accordance with current reserve estimates. At December 31, 2013, Sirius Group had $15.7 million and $347.9 million of reinsurance recoverables on paid and unpaid losses. Because retrocessional reinsurance contracts do not relieve Sirius Group of its obligation to its insureds, the collectability of balances due from Sirius Group’s reinsurers is important to its financial strength. Sirius Group monitors the financial strength and ratings of retrocessionaires on an ongoing basis. Uncollectible amounts historically have not been significant.
Note 5. Investment Securities
White Mountains’s invested assets consist of securities and other long-term investments held for general investment purposes. The portfolio of investment securities includes short-term investments, fixed maturity investments, convertible fixed maturity investments and equity securities which are all classified as trading securities. Trading securities are reported at fair value as of the balance sheet date. Realized and unrealized investment gains and losses on trading securities are reported in pre-tax revenues. White Mountains’s investments in debt securities, including mortgage-backed and asset-backed securities, are generally valued using industry standard pricing models. Key inputs include benchmark yields, benchmark securities, reported trades, issuer spreads, bids, offers, credit ratings and prepayment speeds. 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.
Realized investment gains and losses resulting from sales of investment securities are accounted for using the specific identification method. Premiums and discounts on all fixed maturity investments are amortized or 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, at the time of purchase, mature or become available for use within one year. Short-term investments are carried at amortized or accreted cost, which approximated fair value as of March 31, 2014 and December 31, 2013.
Other long-term investments primarily comprise White Mountains’s investments in hedge funds and private equity funds.
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Net Investment Income
Pre-tax net investment income for the three months ended March 31, 2014 and 2013 consisted of the following:
Three Months Ended | ||||||||
March 31, | ||||||||
Millions | 2014 | 2013 | ||||||
Investment income: | ||||||||
Fixed maturity investments | $ | 22.4 | $ | 26.0 | ||||
Short-term investments | .6 | .8 | ||||||
Common equity securities | 5.4 | 4.7 | ||||||
Convertible fixed maturity investments | .4 | .8 | ||||||
Other long-term investments | .3 | .7 | ||||||
Total investment income | 29.1 | 33.0 | ||||||
Less third-party investment expenses | (4.8 | ) | (4.5 | ) | ||||
Net investment income, pre-tax | $ | 24.3 | $ | 28.5 | ||||
Net Realized and Unrealized Investment Gains and Losses
Net realized and unrealized investment gains and losses for the three months ended March 31, 2014 and 2013 consisted of the following:
Three Months Ended | ||||||||
March 31, | ||||||||
Millions | 2014 | 2013 | ||||||
Net realized investment gains, pre-tax | $ | 21.7 | $ | 36.5 | ||||
Net unrealized investment gains, pre-tax | 42.1 | 38.7 | ||||||
Net realized and unrealized investment gains, pre-tax | 63.8 | 75.2 | ||||||
Income tax expense attributable to net realized and unrealized investment gains | (15.7 | ) | (13.7 | ) | ||||
Net realized and unrealized investment gains, after tax | $ | 48.1 | $ | 61.5 | ||||
Net realized investment gains (losses)
Net realized investment gains (losses) for the three months ended March 31, 2014 and 2013 consisted of the following:
Three Months Ended | Three Months Ended | |||||||||||||||||||||||
March 31, 2014 | March 31, 2013 | |||||||||||||||||||||||
Millions | Net realized gains (losses) | Net foreign exchange gains (losses) | Total net realized gains (losses) reflected in earnings | Net realized gains (losses) | Net foreign currency gains (losses) | Total net realized gains (losses) reflected in earnings | ||||||||||||||||||
Fixed maturity investments | $ | 4.4 | $ | (3.5 | ) | $ | .9 | $ | 22.6 | $ | (14.6 | ) | $ | 8.0 | ||||||||||
Short-term investments | — | — | — | — | .1 | .1 | ||||||||||||||||||
Common equity securities | 18.9 | (.1 | ) | 18.8 | 22.6 | (.2 | ) | 22.4 | ||||||||||||||||
Convertible fixed maturity investments | 2.4 | — | 2.4 | 2.7 | — | 2.7 | ||||||||||||||||||
Other long-term investments | (.3 | ) | — | (.3 | ) | 2.9 | — | 2.9 | ||||||||||||||||
Forward contracts | (.1 | ) | — | (.1 | ) | .4 | — | .4 | ||||||||||||||||
Net realized investment gains (losses), pre-tax | 25.3 | (3.6 | ) | 21.7 | 51.2 | (14.7 | ) | 36.5 | ||||||||||||||||
Income tax expense attributable to net realized investment (losses) gains | (4.6 | ) | .9 | (3.7 | ) | (11.8 | ) | 3.3 | (8.5 | ) | ||||||||||||||
Net realized investment gains (losses), after tax | $ | 20.7 | $ | (2.7 | ) | $ | 18.0 | $ | 39.4 | $ | (11.4 | ) | $ | 28.0 | ||||||||||
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Net unrealized investment gains (losses)
The following table summarizes net unrealized investment gains (losses) for the three months ended March 31, 2014 and 2013:
Three Months Ended | Three Months Ended | |||||||||||||||||||||||
March 31, 2014 | March 31, 2013 | |||||||||||||||||||||||
Millions | Net unrealized gains (losses) | Net foreign exchange gains (losses) | Total net unrealized gains (losses) reflected in earnings | Net unrealized gains (losses) | Net foreign currency gains (losses) | Total net unrealized gains (losses) reflected in earnings | ||||||||||||||||||
Fixed maturity investments | $ | 19.4 | $ | 12.2 | $ | 31.6 | $ | (30.6 | ) | $ | 4.6 | $ | (26.0 | ) | ||||||||||
Short-term investments | — | — | — | — | — | — | ||||||||||||||||||
Common equity securities | 4.0 | .5 | 4.5 | 61.9 | — | 61.9 | ||||||||||||||||||
Convertible fixed maturity investments | .7 | — | .7 | (1.1 | ) | (.2 | ) | (1.3 | ) | |||||||||||||||
Other long-term investments | 4.9 | .4 | 5.3 | 3.6 | .5 | 4.1 | ||||||||||||||||||
Forward contracts | — | — | — | — | — | — | ||||||||||||||||||
Net unrealized investment gains (losses), pre-tax | 29.0 | 13.1 | 42.1 | 33.8 | 4.9 | 38.7 | ||||||||||||||||||
Income tax expense attributable to net unrealized investment (losses) gains | (9.1 | ) | (2.9 | ) | (12.0 | ) | (4.1 | ) | (1.1 | ) | (5.2 | ) | ||||||||||||
Net unrealized investment gains (losses), after tax | $ | 19.9 | $ | 10.2 | $ | 30.1 | $ | 29.7 | $ | 3.8 | $ | 33.5 | ||||||||||||
The following table summarizes the amount of total pre-tax gains included in earnings attributable to unrealized investment gains for Level 3 investments for the three months ended March 31, 2014 and 2013:
Three Months Ended | ||||||||
March 31, | ||||||||
Millions | 2014 | 2013 | ||||||
Fixed maturity investments | $ | .2 | $ | .2 | ||||
Common equity securities | .8 | (.1 | ) | |||||
Other long-term investments | 6.1 | 6.4 | ||||||
Total unrealized investment gains, pre-tax - Level 3 investments | $ | 7.1 | $ | 6.5 | ||||
Investment Holdings
The cost or amortized cost, gross unrealized investment gains and losses, net foreign currency gains and losses, and carrying values of White Mountains’s fixed maturity investments as of March 31, 2014 and December 31, 2013 were as follows:
March 31, 2014 | ||||||||||||||||||||
Millions | Cost or amortized cost | Gross unrealized gains | Gross unrealized losses | Net foreign currency gains (losses) | Carrying value | |||||||||||||||
U.S. Government and agency obligations | $ | 539.2 | $ | .6 | $ | (.8 | ) | $ | (.6 | ) | $ | 538.4 | ||||||||
Debt securities issued by corporations | 2,311.6 | 48.3 | (7.1 | ) | (6.3 | ) | 2,346.5 | |||||||||||||
Municipal obligations | 33.5 | .2 | (.2 | ) | — | 33.5 | ||||||||||||||
Mortgage-backed and asset-backed securities | 1,847.9 | 4.1 | (6.3 | ) | (3.5 | ) | 1,842.2 | |||||||||||||
Foreign government, agency and provincial obligations | 366.4 | 3.4 | (1.1 | ) | (4.3 | ) | 364.4 | |||||||||||||
Preferred stocks | 79.9 | 6.1 | — | (.1 | ) | 85.9 | ||||||||||||||
Total fixed maturity investments including assets held for sale | $ | 5,178.5 | $ | 62.7 | $ | (15.5 | ) | $ | (14.8 | ) | $ | 5,210.9 | ||||||||
Fixed maturity investments reclassified to assets held for sale related to the Runoff Transaction | (222.2 | ) | ||||||||||||||||||
Total fixed maturity investments | $ | 4,988.7 | ||||||||||||||||||
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December 31, 2013 | ||||||||||||||||||||
Millions | Cost or amortized cost | Gross unrealized gains | Gross unrealized losses | Net foreign currency gains (losses) | Carrying value | |||||||||||||||
U.S. Government and agency obligations | $ | 365.5 | $ | .5 | $ | (1.0 | ) | $ | (2.5 | ) | $ | 362.5 | ||||||||
Debt securities issued by corporations | 2,330.7 | 44.0 | (13.2 | ) | (14.3 | ) | 2,347.2 | |||||||||||||
Municipal obligations | 18.3 | — | (.4 | ) | — | 17.9 | ||||||||||||||
Mortgage-backed and asset-backed securities | 2,027.3 | 2.4 | (9.9 | ) | (5.3 | ) | 2,014.5 | |||||||||||||
Foreign government, agency and provincial obligations | 444.2 | 3.7 | (3.2 | ) | (4.8 | ) | 439.9 | |||||||||||||
Preferred stocks | 79.9 | 5.1 | — | (.2 | ) | 84.8 | ||||||||||||||
Total fixed maturity investments including assets held for sale | $ | 5,265.9 | $ | 55.7 | $ | (27.7 | ) | $ | (27.1 | ) | $ | 5,266.8 | ||||||||
Fixed maturity investments reclassified to assets held for sale related to the Runoff Transaction | (236.3 | ) | ||||||||||||||||||
Total fixed maturity investments | $ | 5,030.5 | ||||||||||||||||||
The cost or amortized cost, gross unrealized investment gains and losses, net foreign currency gains and losses, and carrying values of White Mountains’s common equity securities, convertible fixed maturities and other long-term investments as of March 31, 2014 and December 31, 2013 were as follows:
March 31, 2014 | ||||||||||||||||||||
Millions | Cost or amortized cost | Gross unrealized gains | Gross unrealized losses | Net foreign currency gains (losses) | Carrying value | |||||||||||||||
Common equity securities | $ | 905.6 | $ | 273.9 | $ | (4.5 | ) | $ | (.4 | ) | $ | 1,174.6 | ||||||||
Convertible fixed maturity investments | $ | 64.3 | $ | 10.6 | $ | (1.0 | ) | $ | (.1 | ) | $ | 73.8 | ||||||||
Other long-term investments | $ | 246.4 | $ | 83.4 | $ | (25.5 | ) | $ | (2.0 | ) | $ | 302.3 | ||||||||
December 31, 2013 | ||||||||||||||||||||
Millions | Cost or amortized cost | Gross unrealized gains | Gross unrealized losses | Net foreign currency gains (losses) | Carrying value | |||||||||||||||
Common equity securities | $ | 890.2 | $ | 271.0 | $ | (3.6 | ) | $ | (.8 | ) | $ | 1,156.8 | ||||||||
Convertible fixed maturity investments | $ | 71.7 | $ | 9.9 | $ | (.9 | ) | $ | (.2 | ) | $ | 80.5 | ||||||||
Other long-term investments | $ | 238.3 | $ | 79.6 | $ | (26.6 | ) | $ | (2.4 | ) | $ | 288.9 | ||||||||
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Hedge Funds and Private Equity Funds
White Mountains holds investments in hedge funds and private equity funds, which are included in other long-term investments. The fair value of these investments has been estimated using the net asset value of the funds. At March 31, 2014, White Mountains held investments in 16 hedge funds and 39 private equity funds. The largest investment in a single fund was $18.8 million at March 31, 2014. The following table summarizes investments in hedge funds and private equity interests by investment objective and sector at March 31, 2014 and December 31, 2013:
March 31, 2014 | December 31, 2013 | |||||||||||||||
Millions | Fair Value | Unfunded Commitments | Fair Value | Unfunded Commitments | ||||||||||||
Hedge funds | ||||||||||||||||
Long/short equity | $ | 67.6 | $ | — | $ | 62.6 | $ | — | ||||||||
Long/short credit & distressed | 23.3 | — | 22.8 | — | ||||||||||||
Long/short equity REIT | 18.8 | — | 18.3 | — | ||||||||||||
Long/short equity activist | 16.3 | — | 16.8 | — | ||||||||||||
Long bank loan | .2 | — | .2 | — | ||||||||||||
Long diversified strategies | — | — | .1 | — | ||||||||||||
Total hedge funds | 126.2 | — | 120.8 | — | ||||||||||||
Private equity funds | ||||||||||||||||
Energy infrastructure & services | 46.8 | 12.7 | 45.9 | 13.1 | ||||||||||||
Multi-sector | 24.1 | 6.4 | 23.8 | 6.5 | ||||||||||||
Manufacturing/Industrial | 11.5 | 15.2 | 11.2 | 15.5 | ||||||||||||
Aerospace/Defense/Government | 10.6 | 15.5 | 5.8 | 19.2 | ||||||||||||
Private equity secondaries | 9.2 | 3.1 | 9.5 | 3.1 | ||||||||||||
Healthcare | 7.8 | 2.8 | 5.6 | 2.8 | ||||||||||||
Real estate | 7.1 | 3.3 | 8.2 | 3.3 | ||||||||||||
Insurance | 2.4 | 41.3 | 2.3 | 41.3 | ||||||||||||
Venture capital | 1.6 | .3 | 1.6 | .3 | ||||||||||||
International multi-sector, Asia | — | 2.7 | — | 2.7 | ||||||||||||
International multi-sector, Europe | 3.8 | 2.8 | 3.9 | 2.8 | ||||||||||||
Total private equity funds | 124.9 | 106.1 | 118.2 | 110.6 | ||||||||||||
Total hedge and private equity funds included in other long-term investments(1) | $ | 251.1 | $ | 106.1 | $ | 239.0 | $ | 110.6 | ||||||||
(1) Excludes carrying value of $25.0 and $26.6 at March 31, 2014 and December 31, 2013 associated with hedge funds and private equity funds accounted for using the equity method.
Redemption of investments in certain hedge funds is subject to restrictions including lock-up periods where no redemptions or withdrawals are allowed, restrictions on redemption frequency and advance notice periods for redemptions. Amounts requested for redemptions remain subject to market fluctuations until the redemption effective date, which generally falls at the end of the defined redemption period.
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The following summarizes the March 31, 2014 fair value of hedge funds subject to restrictions on redemption frequency and advance notice period requirements for investments in active hedge funds:
Notice Period | ||||||||||||||||||||
Millions Redemption frequency | 30-59 days notice | 60-89 days notice | 90-119 days notice | 120+ days notice | Total | |||||||||||||||
Monthly | $ | 4.9 | $ | — | $ | — | $ | 5.5 | $ | 10.4 | ||||||||||
Quarterly | 29.4 | 30.4 | 11.9 | 8.8 | 80.5 | |||||||||||||||
Semi-annual | — | 25.8 | — | — | 25.8 | |||||||||||||||
Annual | — | — | 9.3 | .2 | 9.5 | |||||||||||||||
Total | $ | 34.3 | $ | 56.2 | $ | 21.2 | $ | 14.5 | $ | 126.2 | ||||||||||
Certain of the hedge fund investments in which White Mountains is invested are no longer active and are in the process of disposing of their underlying investments. Distributions from such funds are remitted to investors as the fund’s underlying investments are liquidated. At March 31, 2014, distributions of $2.1 million were outstanding from these investments. The actual amount of the final distribution remittances remain subject to market fluctuations. The date at which such remittances will be received is not determinable at March 31, 2014.
White Mountains has also submitted redemption requests for certain of its investments in active hedge funds. At March 31, 2014, redemptions of $2.2 million are outstanding and are subject to market fluctuations. The date at which such redemptions will be received is not determinable at March 31, 2014. Redemptions are recorded as receivables when the investment is no longer subject to market fluctuations.
Investments in private equity funds are generally subject to a “lock-up” period during which investors may not request a redemption. Distributions prior to the expected termination date of the fund may be limited to dividends or proceeds arising from the liquidation of the fund’s underlying investments. In addition, certain private equity funds provide an option to extend the lock-up period at either the sole discretion of the fund manager or upon agreement between the fund and the investors.
At March 31, 2014, investments in private equity funds were subject to lock-up periods as follows:
Millions | 1-3 years | 3 – 5 years | 5 – 10 years | >10 years | Total | |||||
Private Equity Funds — expected lock-up period remaining | $6.5 | $29.5 | $75.7 | $13.2 | $124.9 | |||||
Fair value measurements at March 31, 2014
White Mountains’s invested assets that are measured at fair value include fixed maturity investments, common and preferred equity securities, convertible fixed maturity securities and other long-term investments, such as interests in hedge funds and private equity funds. Fair value measurements reflect management’s best estimate of the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements fall into a hierarchy with three levels based on the nature of the inputs. Fair value measurements based on quoted prices in active markets for identical assets are at the top of the hierarchy (“Level 1”), followed by fair value measurements based on observable inputs that do not meet the criteria for Level 1, including quoted prices in inactive markets and quoted prices in active markets for similar, but not identical instruments (“Level 2”). Measurements based on unobservable inputs, including a reporting entity’s estimates of the assumptions that market participants would use are at the bottom of the hierarchy (“Level 3”).
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White Mountains uses quoted market prices or other observable inputs to determine fair value for the vast majority of its investment portfolio. Investments valued using Level 1 inputs include fixed maturity investments, primarily investments in U.S. Treasuries, common equities and short-term investments, which include U.S. Treasury Bills. Investments valued using Level 2 inputs consist of fixed maturity investments including corporate debt, state and other governmental debt, convertible fixed maturity securities and mortgage and asset-backed securities. Fair value estimates for investments that trade infrequently and have few or no observable market prices are classified as Level 3 measurements. Level 3 fair value estimates based upon unobservable inputs include White Mountains’s investments in hedge funds and private equity funds, as well as investments in certain debt and equity securities where quoted market prices are unavailable. White Mountains uses brokers and outside pricing services to assist in determining fair values. For investments in active markets, White Mountains uses the quoted market prices provided by outside pricing services to determine fair value. The outside pricing services used by White Mountains have indicated that if no observable inputs are available for a security, they will not provide a price. In those circumstances, White Mountains estimates the fair value using industry standard pricing models and observable inputs such as benchmark interest rates, matrix pricing, market comparables, broker quotes, issuer spreads, bids, offers, credit rating, prepayment speeds and other relevant inputs. White Mountains performs procedures to validate the market prices obtained from the outside pricing sources. Such procedures, which cover substantially all of its fixed maturity investments include, but are not limited to, evaluation of model pricing methodologies and review of the pricing services’ quality control processes and procedures on at least an annual basis, comparison of market prices to prices obtained from different independent pricing vendors on at least a semi-annual basis, monthly analytical reviews of certain prices, and review of assumptions utilized by the pricing service for selected measurements on an ad hoc basis throughout the year. White Mountains also performs back-testing of selected sales activity to determine whether there are any significant differences between the market price used to value the security prior to sale and the actual sale price on an ad-hoc basis throughout the year. Prices provided by the pricing services that vary by more than 5% and $1.0 million from the expected price based on these procedures are considered outliers. In circumstances where the results of White Mountains’s review process do not appear to support the market price provided by the pricing services, White Mountains challenges the price. If White Mountains cannot gain satisfactory evidence to support the challenged price, it relies upon its own pricing methodologies to estimate the fair value of the security in question. The fair values of such securities are considered to be Level 3 measurements.
White Mountains’s investments in debt securities are generally valued using matrix and other pricing models. Key inputs include benchmark yields, benchmark securities, reported trades, issuer spreads, bids, offers, credit ratings and prepayment speeds. 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 or accreted prospectively over the remaining economic life.
White Mountains employs a number of procedures to assess the reasonableness of the fair value measurements for its other long-term investments, including obtaining and reviewing the audited annual financial statements of each hedge fund and private equity fund and periodically discussing each fund’s pricing with the fund manager. However, since the fund managers do not provide sufficient information to evaluate the pricing inputs and methods for each underlying investment, the inputs are considered to be unobservable. Accordingly, the fair values of White Mountains’s investments in hedge funds and private equity funds have been classified as Level 3 measurements. The fair value of White Mountains’s investments in hedge funds and private equity funds has been determined using net asset value.
In addition to the investments described above, White Mountains has $84.6 million and $86.3 million of investment-related liabilities recorded at fair value and included in other liabilities as of March 31, 2014 and December 31, 2013. These liabilities relate to securities that have been sold short by limited partnerships in which White Mountains has investments and is required to consolidate under GAAP. All of the liabilities included have a Level 1 designation.
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Fair Value Measurements by Level
The following tables summarize White Mountains’s fair value measurements for investments at March 31, 2014 and December 31, 2013, by level:
March 31, 2014 | ||||||||||||||||
Millions | Fair value | Level 1 | Level 2 | Level 3 | ||||||||||||
Fixed maturity investments: | ||||||||||||||||
U.S. Government and agency obligations | $ | 538.4 | $ | 471.7 | $ | 66.7 | $ | — | ||||||||
Debt securities issued by corporations: | ||||||||||||||||
Consumer | 741.0 | — | 741.0 | — | ||||||||||||
Financials | 446.0 | — | 446.0 | — | ||||||||||||
Communications | 267.5 | — | 267.5 | — | ||||||||||||
Industrial | 251.5 | — | 251.5 | — | ||||||||||||
Energy | 194.2 | — | 194.2 | — | ||||||||||||
Utilities | 132.7 | — | 132.7 | — | ||||||||||||
Basic Materials | 140.1 | — | 140.1 | — | ||||||||||||
Technology | 91.5 | — | 91.5 | — | ||||||||||||
Other | 82.0 | — | 82.0 | — | ||||||||||||
Total debt securities issued by corporations: | 2,346.5 | — | 2,346.5 | — | ||||||||||||
Mortgage-backed and asset-backed securities | 1,842.2 | — | 1,800.6 | 41.6 | ||||||||||||
Foreign government, agency and provincial obligations | 364.4 | 42.8 | 321.6 | — | ||||||||||||
Preferred stocks | 85.9 | — | 14.6 | 71.3 | ||||||||||||
Municipal obligations | 33.5 | — | 33.5 | — | ||||||||||||
Total fixed maturity investments (1) | 5,210.9 | 514.5 | 4,583.5 | 112.9 | ||||||||||||
Short-term investments | 674.0 | 666.6 | 7.4 | — | ||||||||||||
Common equity securities: | ||||||||||||||||
Financials | 359.8 | 312.9 | — | 46.9 | ||||||||||||
Consumer | 313.8 | 313.8 | — | — | ||||||||||||
Industrial | 106.5 | 106.5 | — | — | ||||||||||||
Energy | 81.1 | 81.1 | — | — | ||||||||||||
Communications | 56.5 | 56.5 | — | — | ||||||||||||
Basic materials | 56.0 | 56.0 | — | — | ||||||||||||
Technology | 44.9 | 44.9 | — | — | ||||||||||||
Utilities | 36.7 | 36.7 | — | — | ||||||||||||
Other | 119.3 | 42.7 | 76.3 | .3 | ||||||||||||
Total common equity securities | 1,174.6 | 1,051.1 | 76.3 | 47.2 | ||||||||||||
Convertible fixed maturity investments | 73.8 | — | 67.7 | 6.1 | ||||||||||||
Other long-term investments (2) | 277.4 | — | — | 277.4 | ||||||||||||
Total investments | $ | 7,410.7 | $ | 2,232.2 | $ | 4,734.9 | $ | 443.6 | ||||||||
(1) Carrying value includes $222.2 that is classified as assets held for sale relating to discontinued operations.
(2) Excludes carrying value of $25.0 associated with other long-term investment limited partnerships accounted for using the equity method and $(0.1) related to forward contracts.
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December 31, 2013 | ||||||||||||||||
Millions | Fair value | Level 1 | Level 2 | Level 3 | ||||||||||||
Fixed maturity investments: | ||||||||||||||||