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 September 30, 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 October 29, 2014, 6,004,776 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) | September 30, 2014 | December 31, 2013 | ||||||
Assets | Unaudited | |||||||
Fixed maturity investments, at fair value | $ | 4,785.5 | $ | 5,030.5 | ||||
Short-term investments, at amortized cost (which approximates fair value) | 834.9 | 635.9 | ||||||
Common equity securities, at fair value | 986.1 | 1,156.8 | ||||||
Convertible fixed maturity investments, at fair value | 48.9 | 80.5 | ||||||
Other long-term investments | 320.9 | 288.9 | ||||||
Total investments | 6,976.3 | 7,192.6 | ||||||
Cash (restricted: $23.8 and $56.1) | 543.5 | 382.8 | ||||||
Reinsurance recoverable on unpaid losses | 430.7 | 428.1 | ||||||
Reinsurance recoverable on paid losses | 27.2 | 25.4 | ||||||
Insurance and reinsurance premiums receivable | 677.8 | 518.9 | ||||||
Funds held by ceding entities | 123.9 | 106.3 | ||||||
Investments in unconsolidated affiliates | 413.5 | 321.4 | ||||||
Deferred acquisition costs | 204.4 | 174.7 | ||||||
Deferred tax asset | 439.1 | 512.1 | ||||||
Ceded unearned insurance and reinsurance premiums | 114.3 | 92.4 | ||||||
Accrued investment income | 32.7 | 39.3 | ||||||
Accounts receivable on unsettled investment sales | 39.0 | 12.1 | ||||||
Other assets | 466.7 | 458.1 | ||||||
Assets held for sale | 1,699.2 | 1,880.1 | ||||||
Total assets | $ | 12,188.3 | $ | 12,144.3 | ||||
Liabilities | ||||||||
Loss and loss adjustment expense reserves | $ | 3,022.9 | $ | 3,079.3 | ||||
Unearned insurance and reinsurance premiums | 1,089.5 | 901.4 | ||||||
Variable annuity benefit guarantee | 11.7 | 52.8 | ||||||
Debt | 678.1 | 676.4 | ||||||
Deferred tax liability | 303.0 | 356.2 | ||||||
Accrued incentive compensation | 187.5 | 218.3 | ||||||
Ceded reinsurance payable | 134.0 | 71.9 | ||||||
Funds held under insurance and reinsurance contracts | 132.2 | 127.1 | ||||||
Accounts payable on unsettled investment purchases | 76.0 | 20.5 | ||||||
Other liabilities | 355.4 | 362.9 | ||||||
Liabilities held for sale | 1,699.2 | 1,880.1 | ||||||
Total liabilities | 7,689.5 | 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 6,028,251 and 6,176,739 shares | 6.0 | 6.2 | ||||||
Paid-in surplus | 1,030.9 | 1,044.9 | ||||||
Retained earnings | 2,961.5 | 2,802.3 | ||||||
Accumulated other comprehensive income (loss), after tax: | ||||||||
Equity in net unrealized gains (losses) from investments in Symetra common shares | 19.1 | (40.4 | ) | |||||
Net unrealized foreign currency translation (losses) gains | (11.9 | ) | 88.4 | |||||
Pension liability and other | 4.5 | 4.1 | ||||||
Total White Mountains’s common shareholders’ equity | 4,010.1 | 3,905.5 | ||||||
Non-controlling interests | ||||||||
Non-controlling interest - OneBeacon Ltd. | 275.6 | 273.7 | ||||||
Non-controlling interest - SIG Preference Shares | 250.0 | 250.0 | ||||||
Non-controlling interest - HG Global | 18.0 | 16.6 | ||||||
Non-controlling interest - BAM | (114.3 | ) | (97.6 | ) | ||||
Non-controlling interest - other | 59.4 | 49.2 | ||||||
Total non-controlling interests | 488.7 | 491.9 | ||||||
Total equity | 4,498.8 | 4,397.4 | ||||||
Total liabilities and equity | $ | 12,188.3 | $ | 12,144.3 | ||||
See Notes to Consolidated Financial Statements
1
WHITE MOUNTAINS INSURANCE GROUP, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
Unaudited
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(Millions, except per share amounts) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Revenues: | ||||||||||||||||
Earned insurance and reinsurance premiums | $ | 538.6 | $ | 500.4 | $ | 1,535.6 | $ | 1,493.3 | ||||||||
Net investment income | 24.7 | 27.3 | 78.1 | 84.5 | ||||||||||||
Net realized and unrealized investment gains | 20.8 | 28.2 | 198.5 | 66.1 | ||||||||||||
Other revenue | 5.3 | 18.2 | 8.3 | 46.9 | ||||||||||||
Total revenues | 589.4 | 574.1 | 1,820.5 | 1,690.8 | ||||||||||||
Expenses: | ||||||||||||||||
Loss and loss adjustment expenses | 289.1 | 278.3 | 801.1 | 797.2 | ||||||||||||
Insurance and reinsurance acquisition expenses | 105.3 | 106.7 | 299.3 | 281.0 | ||||||||||||
Other underwriting expenses | 81.0 | 80.4 | 244.3 | 244.0 | ||||||||||||
General and administrative expenses | 69.3 | 41.5 | 189.9 | 125.5 | ||||||||||||
Interest expense | 10.3 | 11.9 | 30.4 | 32.4 | ||||||||||||
Total expenses | 555.0 | 518.8 | 1,565.0 | 1,480.1 | ||||||||||||
Pre-tax income from continuing operations | 34.4 | 55.3 | 255.5 | 210.7 | ||||||||||||
Income tax expense | (7.8 | ) | (8.2 | ) | (62.0 | ) | (49.2 | ) | ||||||||
Net income from continuing operations | 26.6 | 47.1 | 193.5 | 161.5 | ||||||||||||
Net income from discontinued operations, net of tax | 6.7 | .4 | 8.8 | 4.8 | ||||||||||||
Income before equity in earnings of unconsolidated affiliates | 33.3 | 47.5 | 202.3 | 166.3 | ||||||||||||
Equity in earnings of unconsolidated affiliates, net of tax | 7.0 | 8.6 | 33.3 | 24.9 | ||||||||||||
Net income | 40.3 | 56.1 | 235.6 | 191.2 | ||||||||||||
Net loss attributable to non-controlling interests | 11.2 | 1.1 | 7.1 | 12.7 | ||||||||||||
Net income attributable to White Mountains’s common shareholders | 51.5 | 57.2 | 242.7 | 203.9 | ||||||||||||
Other comprehensive (loss) income, net of tax: | ||||||||||||||||
Change in equity in net unrealized (losses) gains from investments in Symetra common shares, net of tax | (9.9 | ) | (7.2 | ) | 59.5 | (81.2 | ) | |||||||||
Change in foreign currency translation, pension liability and other | (64.3 | ) | 46.6 | (100.0 | ) | 8.4 | ||||||||||
Comprehensive (loss) income | (22.7 | ) | 96.6 | 202.2 | 131.1 | |||||||||||
Comprehensive loss (income) attributable to non-controlling interests | .1 | (.1 | ) | .1 | (.1 | ) | ||||||||||
Comprehensive (loss) income attributable to White Mountains’s common shareholders | $ | (22.6 | ) | $ | 96.5 | $ | 202.3 | $ | 131.0 | |||||||
Income per share attributable to White Mountains’s common shareholders | ||||||||||||||||
Basic income per share | ||||||||||||||||
Continuing operations | $ | 7.35 | $ | 9.20 | $ | 38.07 | $ | 32.05 | ||||||||
Discontinued operations | 1.10 | .06 | 1.43 | .78 | ||||||||||||
Total consolidated operations | $ | 8.45 | $ | 9.26 | $ | 39.50 | $ | 32.83 | ||||||||
Diluted income per share | ||||||||||||||||
Continuing operations | $ | 7.35 | $ | 9.20 | $ | 38.07 | $ | 32.05 | ||||||||
Discontinued operations | 1.10 | .06 | 1.43 | .78 | ||||||||||||
Total consolidated operations | $ | 8.45 | $ | 9.26 | $ | 39.50 | $ | 32.83 | ||||||||
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) | — | 242.7 | — | 242.7 | (7.1 | ) | 235.6 | |||||||||||||||||
Net change in unrealized gains from investments in unconsolidated affiliates | — | — | 59.5 | 59.5 | — | 59.5 | ||||||||||||||||||
Net change in foreign currency translation | — | — | (100.3 | ) | (100.3 | ) | (.1 | ) | (100.4 | ) | ||||||||||||||
Net change in pension liability and other accumulated comprehensive items | — | — | .4 | .4 | — | .4 | ||||||||||||||||||
Total comprehensive income (loss) | — | 242.7 | (40.4 | ) | 202.3 | (7.2 | ) | 195.1 | ||||||||||||||||
Dividends declared on common shares | — | (6.2 | ) | — | (6.2 | ) | — | (6.2 | ) | |||||||||||||||
Dividends to non-controlling interests | — | — | — | — | (26.0 | ) | (26.0 | ) | ||||||||||||||||
Repurchases and retirements of common shares | (29.6 | ) | (77.3 | ) | — | (106.9 | ) | — | (106.9 | ) | ||||||||||||||
Issuances of common shares | 2.9 | — | — | 2.9 | — | 2.9 | ||||||||||||||||||
Net contributions from non-controlling interests | — | — | — | — | 29.4 | 29.4 | ||||||||||||||||||
Amortization of restricted share awards | 12.5 | — | — | 12.5 | .6 | 13.1 | ||||||||||||||||||
Balance at September 30, 2014 | $ | 1,036.9 | $ | 2,961.5 | $ | 11.7 | $ | 4,010.1 | $ | 488.7 | $ | 4,498.8 | ||||||||||||
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) | — | 203.9 | — | 203.9 | (12.7 | ) | 191.2 | |||||||||||||||||
Net change in unrealized losses from investments in unconsolidated affiliates | — | — | (81.2 | ) | (81.2 | ) | — | (81.2 | ) | |||||||||||||||
Net change in foreign currency translation | — | — | 7.8 | 7.8 | — | 7.8 | ||||||||||||||||||
Net change in pension liability and other accumulated comprehensive items | — | — | .5 | .5 | .1 | .6 | ||||||||||||||||||
Total comprehensive income (loss) | — | 203.9 | (72.9 | ) | 131.0 | (12.6 | ) | 118.4 | ||||||||||||||||
Dividends declared on common shares | — | (6.2 | ) | — | (6.2 | ) | — | (6.2 | ) | |||||||||||||||
Dividends to non-controlling interests | — | — | — | — | (25.1 | ) | (25.1 | ) | ||||||||||||||||
Repurchases and retirements of common shares | (23.8 | ) | (56.0 | ) | — | (79.8 | ) | — | (79.8 | ) | ||||||||||||||
Issuances of common shares | 1.0 | — | — | 1.0 | — | 1.0 | ||||||||||||||||||
Net contributions from non-controlling interests | — | — | — | — | 7.7 | 7.7 | ||||||||||||||||||
Amortization of restricted share awards | 12.2 | — | — | 12.2 | .8 | 13.0 | ||||||||||||||||||
Balance at September 30, 2013 | $ | 1,046.6 | $ | 2,684.4 | $ | 59.0 | $ | 3,790.0 | $ | 497.2 | $ | 4,287.2 | ||||||||||||
See Notes to Consolidated Financial Statements
3
WHITE MOUNTAINS INSURANCE GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Nine Months Ended | ||||||||
September 30, | ||||||||
(Millions) | 2014 | 2013 | ||||||
Cash flows from operations: | ||||||||
Net income | $ | 235.6 | $ | 191.2 | ||||
Charges (credits) to reconcile net income to net cash (used for) provided from operations: | ||||||||
Net realized and unrealized investment gains | (198.5 | ) | (66.1 | ) | ||||
Deferred income tax expense | 19.7 | 5.4 | ||||||
Net income from discontinued operations | (8.8 | ) | (4.8 | ) | ||||
Gain on sale of subsidiary - Citation and Essentia | (.7 | ) | (23.0 | ) | ||||
Excess of fair value of acquired net assets over cost - Ashmere | — | (6.9 | ) | |||||
Undistributed equity in earnings from unconsolidated affiliates, net of tax | (33.3 | ) | (24.9 | ) | ||||
Other operating items: | ||||||||
Net change in loss and loss adjustment expense reserves | 2.3 | (95.1 | ) | |||||
Net change in reinsurance recoverable on paid and unpaid losses | (28.3 | ) | 15.5 | |||||
Net change in unearned insurance and reinsurance premiums | 232.8 | 91.2 | ||||||
Net change in variable annuity benefit guarantee liabilities | (41.1 | ) | (297.8 | ) | ||||
Net change in variable annuity benefit guarantee derivative instruments | 3.9 | 6.8 | ||||||
Net change in deferred acquisition costs | (36.3 | ) | 7.6 | |||||
Net change in funds held by ceding entities | (24.7 | ) | 36.0 | |||||
Net change in ceded unearned premiums | (35.3 | ) | (30.6 | ) | ||||
Net change in funds held under reinsurance treaties | 11.8 | 44.8 | ||||||
Net change in insurance and reinsurance premiums receivable | (197.5 | ) | (143.8 | ) | ||||
Net change in ceded reinsurance payable | 63.9 | 53.2 | ||||||
Net change in restricted cash | 32.3 | 175.4 | ||||||
Net change in other assets and liabilities, net | 153.1 | 88.6 | ||||||
Net cash provided from operations - continuing operations | 150.9 | 22.7 | ||||||
Net cash used for operations - discontinued operations | (27.6 | ) | (93.5 | ) | ||||
Net cash provided from (used for) operations | 123.3 | (70.8 | ) | |||||
Cash flows from investing activities: | ||||||||
Net change in short-term investments | (240.8 | ) | (9.9 | ) | ||||
Sales of fixed maturity and convertible fixed maturity investments | 3,654.4 | 3,350.9 | ||||||
Maturities, calls and paydowns of fixed maturity and convertible fixed maturity investments | 368.3 | 380.0 | ||||||
Sales of common equity securities | 344.7 | 412.5 | ||||||
Distributions and redemptions of other long-term investments | 45.1 | 36.6 | ||||||
Sales of consolidated and unconsolidated affiliates, net of cash sold | 12.8 | 31.3 | ||||||
Funding of operational cash flows for discontinued operations | (27.6 | ) | (93.5 | ) | ||||
Purchases of other long-term investments | (31.6 | ) | (31.7 | ) | ||||
Purchases of common equity securities | (163.4 | ) | (357.6 | ) | ||||
Purchases of fixed maturity and convertible fixed maturity investments | (3,764.2 | ) | (3,403.8 | ) | ||||
Purchases of consolidated and unconsolidated affiliates, net of cash acquired | (32.2 | ) | (9.2 | ) | ||||
Net change in unsettled investment purchases and sales | 28.9 | (17.8 | ) | |||||
Net acquisitions of property and equipment | (8.5 | ) | (10.4 | ) | ||||
Net cash provided from investing activities - continuing operations | 185.9 | 277.4 | ||||||
Net cash provided from investing activities - discontinued operations | 27.6 | 93.5 | ||||||
Net cash provided from investing activities | 213.5 | 370.9 | ||||||
Cash flows from financing activities: | ||||||||
Draw down of revolving line of credit | 40.0 | 150.0 | ||||||
Repayment of revolving line of credit | (40.2 | ) | (225.0 | ) | ||||
Payments on capital lease obligation | (4.0 | ) | (4.0 | ) | ||||
Cash dividends paid to the Company’s common shareholders | (6.2 | ) | (6.2 | ) | ||||
Cash dividends paid to OneBeacon Ltd.’s non-controlling common shareholders | (14.8 | ) | (14.9 | ) | ||||
Cash dividends paid on SIG Preference Shares | (9.4 | ) | (9.4 | ) | ||||
Common shares repurchased | (100.6 | ) | (79.8 | ) | ||||
OneBeacon Ltd. common shares repurchased and retired | (1.8 | ) | — | |||||
Capital contributions from non-controlling interest of consolidated LPs | 2.5 | 1.6 | ||||||
Redemptions paid to non-controlling interest of consolidated LPs | (4.9 | ) | (.7 | ) | ||||
Purchase of interest rate cap | — | (9.9 | ) | |||||
Collateral provided by interest rate cap counterparties | (5.4 | ) | 9.7 | |||||
Capital contributions from BAM members | 11.6 | 11.5 | ||||||
Net cash used for financing activities - continuing operations | (133.2 | ) | (177.1 | ) | ||||
Net cash (used for) provided from financing activities - discontinued operations | — | — | ||||||
Net cash used for financing activities | (133.2 | ) | (177.1 | ) | ||||
Effect of exchange rate changes on cash | (10.6 | ) | 1.0 | |||||
Net change in cash during the period | 193.0 | 124.0 | ||||||
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 $23.8 and $74.4) | $ | 519.7 | $ | 336.6 | ||||
Supplemental cash flows information: | ||||||||
Interest paid | $ | (41.3 | ) | $ | (32.0 | ) | ||
Net income tax refund (payment) to national governments | $ | 7.8 | $ | (1.5 | ) | |||
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 September 30, 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 September 30, 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 September 30, 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”), QL Holdings LLC (“QuoteLab”) and Star & Shield Risk Management LLC (“SSRM”). At September 30, 2014, White Mountains holds $17.0 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. 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 September 30, 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 and nine months ended September 30, 2014, White Mountains reported $13.1 million and $29.7 million in pre-tax losses from BAM that have been allocated to non-controlling interest. For the three and nine months ended September 30, 2013, White Mountains reported $15.1 million and $60.2 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 basis points. 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 September 30, 2014 and December 31, 2013, the non-controlling equity interest in White Mountains’s consolidated limited partnerships was $45.5 million and $46.1 million. At September 30, 2014, the non-controlling equity interests in Wobi, QuoteLab and SSIE were $3.8 million, $18.0 million and $(11.1) million, respecively. At September 30, 2014 and December 31, 2013, the non-controlling equity interest in A.W.G. Dewar Inc, a subsidiary of OneBeacon, was $3.2 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 became effective for White Mountains on January 1, 2014. Adoption did not have any impact on White Mountains's financial condition, results of operations or cash flows.
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Recently Issued Accounting Pronouncements
Revenue Recognition
On May 28, 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (ASC 606) which modifies the guidance for revenue recognition. The scope of the new ASU excludes insurance contracts but is applicable to certain fee arrangements, such as investment management fees. White Mountains is in the process of evaluating the new guidance and has not yet determined the potential effect of adoption on its financial position, results of operations, or cash flows. ASU 2014-09 is effective for annual and interim reporting periods beginning after December 15, 2016.
Share-Based Compensation Awards
On June 19, 2014, the FASB issued ASU 2014-12, Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The new guidance is intended to eliminate diversity in practice for employee share-based awards containing performance targets that could be achieved after the requisite service period. Some reporting entities account for performance targets that can be achieved after the requisite service period as performance conditions that affect the vesting of the award while other reporting entities treat those performance targets as nonvesting conditions that affect the grant-date fair value of the award. The updated guidance requires that a performance target that affects vesting and that can be achieved after the requisite service period be treated as a performance condition. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which service has been rendered. White Mountains is in the process of evaluating the new guidance and has not yet determined the potential effect of adoption on its financial position, results of operations, or cash flows. The new guidance is effective for annual and interim reporting periods beginning after December 15, 2015.
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 may 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.
Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity
On April 10, 2014, the FASB issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity to reduce diversity in practice for reporting discontinued operations. Under the previous guidance, any component of an entity that was a reportable segment, an operating segment, a reporting unit, a subsidiary, or an asset group was eligible for discontinued operations presentation. The revised guidance only allows disposals of components of an entity that represent a strategic shift (e.g., disposal of a major geographical area, a major line of business, a major equity method investment, or other major parts of an entity) and that have a major effect on a reporting entity’s operations and financial results to be reported as discontinued operations. The revised guidance also requires expanded disclosure in the financial statements for discontinued operations as well as for disposals of significant components of an entity that do not qualify for discontinued operations presentation. The updated guidance is effective for transactions entered into after December 15, 2014.
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Note 2. Significant Transactions
durchblicker.at
In July 2014, White Mountains acquired 45% of the outstanding common shares of durchblicker.at, Austria's first independent price comparison portal for insurance, gas/electricity and financial services, for EUR 8.5 million (approximately $11.7 million based upon the foreign exchange spot rate at the date of acquisition).
PassportCard
In June 2014, White Mountains committed $21.0 million to fund a 50/50 joint venture with DavidShield Group (“DavidShield”) for the development, marketing and distribution of PassportCard travel insurance. The transaction is expected to close in the fourth quarter of 2014, subject to regulatory approvals.
QuoteLab
On March 14, 2014, White Mountains acquired 60% of the outstanding Class A common units of QuoteLab. As of September 30, 2014, White Mountains owned 58.4% of the equity 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. 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. As of September 30, 2014, on a fully converted basis, White Mountains owned 60.7% of Wobi. At acquisition, Wobi had total assets of $13.4 million, including $8.4 million of intangible assets, and total liabilities of $0.7 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 $17.0 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 September 30, 2014, consolidated amounts included total assets of $11.8 million and total liabilities of $22.8 million of SSIE. For the three and nine months ended September 30, 2014, SSIE had pre-tax losses of $1.4 million and $11.1 million that were recorded in net loss attributable to non-controlling interests.
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.
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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. 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 September 30, 2014, White Mountains may repurchase an additional 382,118 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 September 30, 2014, the Company repurchased 122,264 common shares for $76.5 million at an average share price of $626.13, all of which were repurchased under the board authorization. During the nine months ended September 30, 2014, the Company repurchased 173,853 common shares for $106.9 million at an average share price of $614.78, which was comprised of 163,378 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 reduce the board authorizations referred to above.
During the three months ended September 30, 2013, no shares were purchased. During the nine months ended September 30, 2013, the Company repurchased 141,535 common shares for $79.8 million at an average share price of $564, which was comprised of 140,000 common shares repurchased under the board authorization and 1,535 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 and nine months ended September 30, 2014 and 2013:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
Millions | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Gross beginning balance | $ | 3,053.3 | $ | 3,057.9 | $ | 3,079.3 | $ | 3,168.9 | ||||||||
Less beginning reinsurance recoverable on unpaid losses | (433.2 | ) | (388.6 | ) | (428.1 | ) | (429.1 | ) | ||||||||
Net loss and LAE reserves | 2,620.1 | 2,669.3 | 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 | 301.2 | 289.9 | 820.1 | 822.8 | ||||||||||||
Prior year losses | (12.1 | ) | (11.6 | ) | (19.0 | ) | (25.6 | ) | ||||||||
Total incurred losses and LAE | 289.1 | 278.3 | 801.1 | 797.2 | ||||||||||||
Accretion of fair value adjustment to loss and LAE reserves | .1 | .2 | .5 | 1.5 | ||||||||||||
Foreign currency translation adjustment to loss and LAE reserves | (23.5 | ) | 12.3 | (22.2 | ) | (1.9 | ) | |||||||||
Loss and LAE paid relating to: | ||||||||||||||||
Current year losses | (86.2 | ) | (90.0 | ) | (187.0 | ) | (209.9 | ) | ||||||||
Prior year losses | (207.4 | ) | (178.0 | ) | (665.0 | ) | (655.9 | ) | ||||||||
Total loss and LAE payments | (293.6 | ) | (268.0 | ) | (852.0 | ) | (865.8 | ) | ||||||||
Net ending balance | 2,592.2 | 2,692.1 | 2,592.2 | 2,692.1 | ||||||||||||
Plus ending reinsurance recoverable on unpaid losses | 430.7 | 416.0 | 430.7 | 416.0 | ||||||||||||
Gross ending balance | $ | 3,022.9 | $ | 3,108.1 | $ | 3,022.9 | $ | 3,108.1 | ||||||||
(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 and nine months ended September 30, 2014
For the three and nine months ended September 30, 2014, White Mountains experienced net favorable loss reserve development of $12.1 million and $19.0 million.
For the three months ended September 30, 2014, OneBeacon had net unfavorable loss reserve development of $7.3 million primarily related to unfavorable development in professional liability, management liability and financial services businesses included within OneBeacon Professional Insurance (“OBPI”), in OneBeacon Accident and in the inland marine business within International Marine Underwriters (“IMU”), partially offset by favorable development in the healthcare business within OBPI and in OneBeacon Technology. For the nine months ended September 30, 2014, OneBeacon had net unfavorable loss reserve development of $14.3 million primarily related to unfavorable development in professional liability and management liability businesses included within OBPI, in OneBeacon Accident and in the inland marine business within IMU, partially offset by favorable development in the healthcare business within OBPI, in OneBeacon Specialty Property and in the ocean marine business within IMU.
For the three months ended September 30, 2014, Sirius Group had net favorable loss reserve development of $19.2 million primarily due to decreases in property loss reserves, including reductions for prior period catastrophe losses, in addition to decreases in aviation and accident and health loss reserves. For the nine months ended September 30, 2014, Sirius Group had net favorable loss reserve development of $35.3 million primarily due to decreases in property loss reserves, including reductions for prior period catastrophe losses, in addition to decreases in aviation, accident and health, and trade credit loss reserves.
For the three and nine months ended September 30, 2014, SSIE had net favorable loss reserve development of $0.2 million and net unfavorable loss reserve development of $2.0 million.
Loss and LAE incurred relating to prior year losses for the three and nine months ended September 30, 2013
For the three and nine months ended September 30, 2013, White Mountains experienced $11.6 million and $25.6 million of net favorable loss reserve development.
For the three months ended September 30, 2013, OneBeacon had net unfavorable loss reserve development of $3.8 million primarily driven by its property and entertainment business. For the nine months ended September 30, 2013, OneBeacon had net favorable loss reserve development of $0.1 million. For the three and nine months ended September 30, 2013, Sirius Group had net favorable loss reserve development of $15.4 million and $25.5 million primarily due to decreases in property loss reserves, mostly from recent underwriting years, in addition to reductions in loss reserves for the Japan earthquake.
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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 $0.1 million and $0.5 million of such charges, recorded as loss and LAE for the three and nine months ended September 30, 2014, and $0.2 million and $1.5 million for the three and nine months ended September 30, 2013. As of September 30, 2014, the remaining pre-tax un-accreted adjustment was $4.2 million.
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 September 30, 2014, OneBeacon had $12.7 million and $101.4 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.
Except as discussed below, there have been no material changes to OneBeacon's reinsurance coverage as discussed in Note 4 —“Reinsurance” in White Mountains’s 2013 Annual Report on Form 10-K.
Effective May 1, 2014, OneBeacon renewed its property catastrophe reinsurance program through April 30, 2015. The program provides coverage for OneBeacon's property business as well as certain acts of terrorism. Under the program, the first $20.0 million of losses resulting from any single catastrophe are retained and 100% of the next $110.0 million of losses resulting from the catastrophe are reinsured. Any loss above $130.0 million would be retained in full. In the event of a catastrophe, OneBeacon's property catastrophe reinsurance program is reinstated for the remainder of the original contract term by paying a reinstatement premium that is based on the percentage of coverage reinstated and the original property catastrophe coverage premium.
Also effective May 1, 2014, OneBeacon lowered its retention on its property-per-risk reinsurance program from $10.0 million to $5.0 million.
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 September 30, 2014, Sirius Group had $14.5 million and $329.3 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.
Except as discussed below, there have been no material changes to Sirius Group's reinsurance coverage as discussed in Note 4 -“Reinsurance” in White Mountains’s 2013 Annual Report on Form 10-K.
Effective January 1, 2014, Sirius Group entered into a reinsurance agreement to provide excess of loss coverage for losses under medical stop loss policies produced, underwritten and administered on behalf of Sirius Group by various managing general underwriters in the United States. The coverage is in excess of a $1 million retention and consists of multiple layers with limits dependent on the individual policies produced by the managing general underwriters. The coverage is for all losses occurring on or after January 1, 2014 on policies written or renewed with effective dates in 2014.
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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 common 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 fixed maturity investments, 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 September 30, 2014 and December 31, 2013.
Other long-term investments are primarily comprised of White Mountains’s investments in hedge funds and private equity funds.
Net Investment Income
Pre-tax net investment income for the three and nine months ended September 30, 2014 and 2013 consisted of the following:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
Millions | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Investment income: | ||||||||||||||||
Fixed maturity investments | $ | 24.4 | $ | 25.1 | $ | 72.4 | $ | 76.3 | ||||||||
Short-term investments | .8 | 1.1 | 2.0 | 2.9 | ||||||||||||
Common equity securities | 4.3 | 4.4 | 15.2 | 14.0 | ||||||||||||
Convertible fixed maturity investments | 1.1 | .7 | 2.3 | 2.1 | ||||||||||||
Other long-term investments | .1 | 1.2 | 1.8 | 2.7 | ||||||||||||
Interest on funds held under reinsurance treaties | (.1 | ) | — | (.1 | ) | .2 | ||||||||||
Total investment income | 30.6 | 32.5 | 93.6 | 98.2 | ||||||||||||
Less third-party investment expenses | (5.9 | ) | (5.2 | ) | (15.5 | ) | (13.7 | ) | ||||||||
Net investment income, pre-tax | $ | 24.7 | $ | 27.3 | $ | 78.1 | $ | 84.5 | ||||||||
Net Realized and Unrealized Investment Gains and Losses
Net realized and unrealized investment gains and losses for the three and nine months ended September 30, 2014 and 2013 consisted of the following:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
Millions | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Net realized investment gains, pre-tax | $ | 76.0 | $ | 11.7 | $ | 128.3 | $ | 60.2 | ||||||||
Net unrealized investment (losses) gains, pre-tax | (55.2 | ) | 16.5 | 70.2 | 5.9 | |||||||||||
Net realized and unrealized investment gains, pre-tax | 20.8 | 28.2 | 198.5 | 66.1 | ||||||||||||
Income tax expense attributable to net realized and unrealized investment gains | (6.6 | ) | (1.2 | ) | (45.4 | ) | (2.5 | ) | ||||||||
Net realized and unrealized investment gains, after tax | $ | 14.2 | $ | 27.0 | $ | 153.1 | $ | 63.6 | ||||||||
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Net realized investment gains (losses)
Net realized investment gains (losses) for the three and nine months ended September 30, 2014 and 2013 consisted of the following:
Three Months Ended | Three Months Ended | |||||||||||||||||||||||
September 30, 2014 | September 30, 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 | $ | 6.9 | $ | 7.6 | $ | 14.5 | $ | (9.1 | ) | $ | (.3 | ) | $ | (9.4 | ) | |||||||||
Short-term investments | — | 1.1 | 1.1 | — | (.6 | ) | (.6 | ) | ||||||||||||||||
Common equity securities | 54.6 | .1 | 54.7 | 23.5 | (3.0 | ) | 20.5 | |||||||||||||||||
Convertible fixed maturity investments | 2.1 | — | 2.1 | (.2 | ) | — | (.2 | ) | ||||||||||||||||
Other long-term investments | 3.9 | (.6 | ) | 3.3 | (1.1 | ) | 3.0 | 1.9 | ||||||||||||||||
Forward contracts | .3 | — | .3 | (.5 | ) | — | (.5 | ) | ||||||||||||||||
Net realized investment gains (losses), pre-tax | 67.8 | 8.2 | 76.0 | 12.6 | (.9 | ) | 11.7 | |||||||||||||||||
Income tax (expense) benefit attributable to net realized investment gains (losses) | (9.6 | ) | (2.0 | ) | (11.6 | ) | (.4 | ) | .4 | — | ||||||||||||||
Net realized investment gains (losses), after tax | $ | 58.2 | $ | 6.2 | $ | 64.4 | $ | 12.2 | $ | (.5 | ) | $ | 11.7 | |||||||||||
Nine Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, 2014 | September 30, 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 | $ | 17.1 | $ | 7.1 | $ | 24.2 | $ | 12.9 | $ | (14.4 | ) | $ | (1.5 | ) | ||||||||||
Short-term investments | — | 1.1 | 1.1 | .2 | — | .2 | ||||||||||||||||||
Common equity securities | 92.9 | — | 92.9 | 60.7 | (3.0 | ) | 57.7 | |||||||||||||||||
Convertible fixed maturity investments | 5.9 | — | 5.9 | (.7 | ) | — | (.7 | ) | ||||||||||||||||
Other long-term investments | 4.2 | (.2 | ) | 4.0 | 4.8 | — | 4.8 | |||||||||||||||||
Forward contracts | .2 | — | .2 | (.3 | ) | — | (.3 | ) | ||||||||||||||||
Net realized investment gains (losses), pre-tax | 120.3 | 8.0 | 128.3 | 77.6 | (17.4 | ) | 60.2 | |||||||||||||||||
Income tax (expense) benefit attributable to net realized investment gains (losses) | (19.6 | ) | (2.1 | ) | (21.7 | ) | (17.8 | ) | 5.1 | (12.7 | ) | |||||||||||||
Net realized investment gains (losses), after tax | $ | 100.7 | $ | 5.9 | $ | 106.6 | $ | 59.8 | $ | (12.3 | ) | $ | 47.5 | |||||||||||
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Net unrealized investment gains (losses)
The following table summarizes net unrealized investment gains (losses) for the three and nine months ended September 30, 2014 and 2013:
Three Months Ended | Three Months Ended | |||||||||||||||||||||||
September 30, 2014 | September 30, 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 exchange gains (losses) | Total net unrealized gains (losses) reflected in earnings | ||||||||||||||||||
Fixed maturity investments | $ | (14.3 | ) | $ | 37.6 | $ | 23.3 | $ | 9.3 | $ | (30.5 | ) | $ | (21.2 | ) | |||||||||
Short-term investments | — | — | — | — | .1 | .1 | ||||||||||||||||||
Common equity securities | (67.8 | ) | (2.1 | ) | (69.9 | ) | 35.6 | (2.0 | ) | 33.6 | ||||||||||||||
Convertible fixed maturity investments | (4.0 | ) | .1 | (3.9 | ) | 2.4 | (.1 | ) | 2.3 | |||||||||||||||
Other long-term investments | (6.4 | ) | 1.7 | (4.7 | ) | 3.1 | (1.4 | ) | 1.7 | |||||||||||||||
Net unrealized investment (losses) gains, pre-tax | (92.5 | ) | 37.3 | (55.2 | ) | 50.4 | (33.9 | ) | 16.5 | |||||||||||||||
Income tax benefit (expense) attributable to net unrealized investment (losses) gains | 15.8 | (10.8 | ) | 5.0 | (8.6 | ) | 7.4 | (1.2 | ) | |||||||||||||||
Net unrealized investment (losses) gains, after tax | $ | (76.7 | ) | $ | 26.5 | $ | (50.2 | ) | $ | 41.8 | $ | (26.5 | ) | $ | 15.3 | |||||||||
Nine Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, 2014 | September 30, 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 | $ | 30.0 | $ | 78.0 | $ | 108.0 | $ | (94.8 | ) | $ | 6.2 | $ | (88.6 | ) | ||||||||||
Common equity securities | (42.8 | ) | (.2 | ) | (43.0 | ) | 85.2 | (1.0 | ) | 84.2 | ||||||||||||||
Convertible fixed maturity investments | (5.8 | ) | .4 | (5.4 | ) | (.5 | ) | — | (.5 | ) | ||||||||||||||
Other long-term investments | 7.2 | 3.4 | 10.6 | 7.6 | 3.2 | 10.8 | ||||||||||||||||||
Net unrealized investment (losses) gains, pre-tax | (11.4 | ) | 81.6 | 70.2 | (2.5 | ) | 8.4 | 5.9 | ||||||||||||||||
Income tax (expense) benefit attributable to net unrealized investment (losses) gains | (3.1 | ) | (20.6 | ) | (23.7 | ) | 13.1 | (2.9 | ) | 10.2 | ||||||||||||||
Net unrealized investment (losses) gains, after tax | $ | (14.5 | ) | $ | 61.0 | $ | 46.5 | $ | 10.6 | $ | 5.5 | $ | 16.1 | |||||||||||
14
The following table summarizes the amount of total pre-tax (losses) gains included in earnings attributable to unrealized investment (losses) gains for Level 3 investments for the three and nine months ended September 30, 2014 and 2013:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
Millions | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Fixed maturity investments | $ | 1.8 | $ | (2.2 | ) | $ | 2.2 | $ | (2.4 | ) | ||||||
Common equity securities | .9 | (.7 | ) | 3.7 | — | |||||||||||
Convertible fixed maturity investments | .1 | — | 3.3 | — | ||||||||||||
Other long-term investments | (6.7 | ) | .9 | 8.3 | 8.7 | |||||||||||
Total unrealized investment (losses) gains, pre-tax - Level 3 investments | $ | (3.9 | ) | $ | (2.0 | ) | $ | 17.5 | $ | 6.3 | ||||||
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 September 30, 2014 and December 31, 2013 were as follows:
September 30, 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 | $ | 254.4 | $ | .2 | $ | (.5 | ) | $ | 5.6 | $ | 259.7 | |||||||||
Debt securities issued by corporations | 2,314.6 | 48.9 | (6.3 | ) | 30.1 | 2,387.3 | ||||||||||||||
Municipal obligations | 78.9 | 1.3 | (.3 | ) | — | 79.9 | ||||||||||||||
Mortgage-backed and asset-backed securities | 1,846.7 | 6.8 | (4.6 | ) | 16.0 | 1,864.9 | ||||||||||||||
Foreign government, agency and provincial obligations | 311.6 | 3.7 | (.8 | ) | (3.3 | ) | 311.2 | |||||||||||||
Preferred stocks | 79.7 | 6.7 | — | — | 86.4 | |||||||||||||||
Total fixed maturity investments including assets held for sale | $ | 4,885.9 | $ | 67.6 | $ | (12.5 | ) | $ | 48.4 | $ | 4,989.4 | |||||||||
Fixed maturity investments reclassified to assets held for sale related to the Runoff Transaction | (203.9 | ) | ||||||||||||||||||
Total fixed maturity investments | $ | 4,785.5 | ||||||||||||||||||
December 31, 2013 | ||||||||||||||||||||
Millions | Cost or amortized cost | Gross unrealized gains | Gross unrealized losses | Net foreign currency 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 | ||||||||||||||||||
15
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 maturity investments and other long-term investments as of September 30, 2014 and December 31, 2013 were as follows:
September 30, 2014 | ||||||||||||||||||||
Millions | Cost or amortized cost | Gross unrealized gains | Gross unrealized losses | Net foreign currency gains (losses) | Carrying value | |||||||||||||||
Common equity securities | $ | 766.7 | $ | 229.9 | $ | (9.1 | ) | $ | (1.4 | ) | $ | 986.1 | ||||||||
Convertible fixed maturity investments | $ | 45.0 | $ | 4.4 | $ | (1.1 | ) | $ | .6 | $ | 48.9 | |||||||||
Other long-term investments | $ | 256.1 | $ | 85.5 | $ | (21.6 | ) | $ | ||||||||||||