White Mountains Insurance Group, Ltd.
White Mountains Insurance Group, Ltd.
Incorporated: 1980 as a Delaware corporation; 1999 as a Bermuda limited liability company
Total Assets: $3.4 billion (2001)
Stock Exchanges: New York
Ticker Symbol: WTM
NAIC: 524130 Reinsurance Carriers, Fire, Marine, and Casualty
With U.S. offices in White River Junction, Vermont, White Mountains Insurance Group, Ltd. is an international financial services company based in Bermuda. Through its consolidated and unconsolidated subsidiaries and affiliates, the company conducts its principal businesses in property and casualty insurance and reinsurance. The company was formed in 1980 as a Delaware corporation and—after many name changes, acquisitions, mergers, and divestitures—resituated as a Bermuda corporation in 1999. White Mountains’ major subsidiaries and affiliates include: Massachusetts-based OneBeacon Insurance Group LLC, which owns several property and casualty insurance and reinsurance companies throughout the United States; Folksamerica Holding Company, Inc., a New-York based, multi-line broker-market reinsurer; Fund American Reinsurance Company, Ltd, organized under the laws of Bermuda; Maryland-based Peninsula Insurance Company, a property and casualty insurer; White Mountains Underwriting Limited, an Ireland-based provider of reinsurance advisory and risk evaluation; Bermuda-based Montpelier Re Holdings Ltd, a reinsurance company; and New Hampshire-based Main Street America Holdings, Inc.
1980–97: The Early Career of John J. Byrne
John J. Byrne, the driving force among the founders of White Mountains Insurance Group, entered the insurance business at an early age. According “See Jack Run,” an article by John Gorham in the July 24, 2000 issue of Forbes magazine, young Byrne’s after-school chores included working for his father, who owned a small insurance business in Wildwood, New Jersey. Later, while matriculating for a master’s degree in mathematics at Rutgers University, Byrne spent his summers as an actuarial assistant for Travelers Group Inc. After serving in the Air Force, Byrne landed a job as a reinsurance salesman for Lincoln National Life Insurance. Then he returned to Travelers and drew an annual salary of $30,000 as “a consultant to the company’s variable sales team. Within ten years he had worked himself up to executive vice-president in charge of Travelers’ entire life insurance operation,” wrote Gorham. By 1975, Byrne had developed two major phases of the company’s more profitable operations. Yet, despite his other accomplishments, he was not chosen to replace Travelers’ president. “He quit in a huff to become chief executive of a troubled Washington, D.C.-based auto insurer called GEICO,” Gorham commented.
The new position tapped Byrne’s special ability to direct his energy to rescuing companies on the brink of insolvency. Since its founding in 1936, GEICO (Government Employees Insurance Company) specialized in direct-mail sales of insurance to low-risk drivers. When GEICO began to insure riskier drivers and to underprice its policies, the company’s shares dropped from $42 in 1974 to $5 in early 1976, and regulators threatened to close the company. Then Byrne came on board, reduced the work force, closed offices, raised prices, and cut out unprofitable business. It was at GEICO that Byrne identified Tom Kemp as an outstanding general manager; the two worked together for the next twenty years. Warren Buffett, who later played an important role in the development of White Mountains Insurance, paid over $4 million for a stake in GEICO. Byrne worked his magic: by 1981, GEICO shares were worth $15. Buffett referred to Byrne as the “Babe Ruth of Insurance,” according to Gorham.
1980–96: Transformation of Passive Investments Into Dynamic Companies
Byrne dealt successfully with the vicissitudes of the insurance industry, including government regulations, damaging floods and storms, and brutal competition for insurance premiums. Then he accepted American Express chairman James Robinson’s challenge to revive the profitability of Fireman’s Fund Insurance Co. (an Amexco division). During 1983–84, Fireman’s had chalked up pretax losses of about $356 million. Byrne greatly improved Fireman’s underwriting ratios, and in 1985 he took the company public with an IPO that, at $25.75 a share, was the best offering in the history of IPO’s.
The Babe Ruth of Insurance got results, he once said, by not paying much attention to advice from Wall Street or to its slavish attachment to accounting standards. As Gorham pointed out, Byrne knew that “standard accounting, especially in insurance, allowed companies to hide losses and inflate earnings.” Instead of considering only a company’s share price, Byrne focused on what he called its “intrinsic business value,” that is, the fact that assets could appreciate even while they were still listed at cost on the books. Byrne followed his hunches; as Gorham noted, “When the industry was hurting, he was ready to buy.”
In 1991, Byrne sold Fireman’s insurance operations to Germany-based Allianz AG for $2.91 billion in cash. He retained the holding company, renamed it Fund American Enterprises, Inc. (based in Norwich, Vermont), and exchanged the cash for its equity investment portfolio. Soon after, he liquidated much of the portfolio and returned almost $3 billion to shareholders through stock buybacks. Byrne also held on to a substantial portion of investment securities and Michigan-based Source One Mortgage Services Corporation, one of the nation’s largest mortgage banking companies.
Byrne was soon on the prowl for greater challenges. In 1994, Fund American began to invest in other insurance companies and conceptualized White Mountains Holdings to serve as the direct holding company for these investments. Byrne headed an investment group that wanted to inject $630 million into then-struggling Home Holdings Inc. but lost the battle to Zurich Financial Group. By the end of fiscal 1996, White Mountains’ principal holdings included Financial Security Assurance Holdings Ltd. (FSA), a leading writer of financial guarantee insurance; Folksamerica Holding Company, Inc., a multi-line broker-market reinsurer; and Main Street America Holdings, an affiliate of National Grange Mutual Insurance Company, a New Hampshire-based property and casualty insurer.
Wholly-owned subsidiaries included White Mountains Insurance Co., which opened its New Hampshire-based commercial property and casualty operation in September 1995. White Mountains Holdings acquired Valley Group, Inc., which wrote personal and commercial lines in the Pacific Northwest, and Charter Group, Inc. Subsidiary Charter Indemnity Company wrote non-standard automobile insurance in Texas.
In his 1996 Annual Report, Byrne reported what he considered “modest results indeed.” However, book value per share had grown 10 percent and 60 cents in earnings. Stock price had climbed 30 percent to over $100. Claiming that leaping over regulatory hurdles was “all too complicated” for him, Byrne emphasized that Fund American had emerged as “a collection of operating companies led by an energetic team of younger managers” and relinquished his active role as chairman, president, and CEO. The board of directors respected Byrne’s decision to forsake his active role in the company and showed its appreciation for his pioneering efforts by electing him as nonexecutive chairman.
1997–99: Evolution Toward a Single Corporate Entity
K. Thomas Kemp, Fund American’s new president and chief executive officer, reported that 1997 was a solid year for the financial services holding company which operated through its principal subsidiary—White Mountains Holdings, Inc. The company ended fiscal 1997 with a book value per share of $102.19, a growth of 13.5 percent, and market value that peaked at 27.3 percent growth.
Fund American still owned a considerable passive investment portfolio primarily made up of common equity securities and other investments. Initially, the company’s primary goal was either to place remaining investments and other assets into operating businesses compatible with management’s knowledge and experience or to return excess capital to debt holders and shareholders. When no opportunities came for big transaction hits in the early 1990s, Byrne and Kemp were struck by the idea that “smaller regional or specialty insurance investments might be a more workable strategy than archeological work on dinosaurs caught in tar pits.” They opted to have White Mountains Holdings keep and build a new insurance portfolio and gain substantial positions in their first operating investments: Main Street America (MSA) and Financial Security Assurance (FSA).
White Mountains’ mission is to be an intelligent owner of a premier group of regional or niche property/casualty and specialty underwriters which, with prudent operating and financial leverage, produces for its owners a long-term return of at least 700 basis points over ten-year treasuries after all applicable corporate tax. Each member of the group will be well managed in its own right and each underwriting-driven, using its own strategy. White Mountains will function as owner, capital provider, and allocator.
Therefore, in 1997 Fund American increased its ownership of MSA from 33 percent to 50 percent. Phil Koerner, MSA’s chairman and president, kept the company and its independent agency partners at the forefront of a highly competitive marketplace. Committed to independent agents as MSA’s sole distribution source, Koerner introduced use of the Internet as an agency processing platform. In 1998, when the warming temperatures and moisture brought by El Nino covered the northern portion of MSA’s market with ice, the company spent more than $13 million to help clients put their lives back in place after the power lines and trees came down and pipes froze. However, despite this misfortune, MSA posted 11.2 percent returns on equity for 1998—and continued to grow. In 1998, 125 agents transferred entire books of business worth $18 million to MSA and another 123 new agents began to represent the company. With 100,000 new policies, MSA set a record for the second consecutive year. In 1999, Koerner continued to develop an Internet-based system for MSA, which was one of nine insurance companies to receive the IIAA Award of Excellence for participation in the national Communications Program.
FSA, one of the four major bond insurers, in 1997 enjoyed a breakthrough year in the municipal bond and asset-backed markets. With a full-service San Francisco office and a marketing office in Dallas, FSA provided the industry’s strongest regional coverage. The company continued to be active in Europe and made a substantial investment in marketing its knowledge and expertise in the Pacific Rim markets, as well as in Australia, New Zealand, and Japan and other Asian markets. FSA insured securities in three sectors: consumer finance, residential mortgage finance, and structured finance. FSA produced $200 million U.S. asset-based premiums during 1999—an increase of 36 percent—and reached a record $133 million in international premiums.
In May 1999, Fund American Enterprises Holdings, Inc. divested itself of substantially all the mortgage banking assets of White Mountains Services Corporation (formerly Source One) for $181 million and exited the mortgage business. The sale was completed in July 2000. In June 1999, Fund American changed its name to White Mountains Insurance Group, Ltd. and sold Valley Group, Inc. to Unitrim for roughly twice its book value, that is, $139 million in cash, after receiving a special dividend of $77 million consisting of cash, investment securities, and the common stock of Valley National Insurance Company.
During October 1999, White Mountains completed a corporate reorganization that brought about the relocation of its domicile from Delaware to Bermuda. The redomestication was undertaken primarily to create a corporate structure more favorable to foreign-based insurance and reinsurance operations and to increase the company’s ability to pursue business combinations with companies not based in the United States. White Mountains also acquired Consolidated International Group, Inc., parent of Peninsula Insurance Company. Maryland-based PIC was a property and casualty insurer that wrote both personal and commercial lines, primarily homeowners, private passenger auto, commercial auto, and commercial multiple peril.
2000 and Beyond
In January 2000, after a three-year retirement, John J. Byrne claimed that he no longer was “getting any respect” and returned to White Mountains as chairman and chief executive officer. On May 5, 2000, Folksamerica acquired Risk Capital Reinsurance Company in a transaction that broadened its product offerings in marine, accident, and health insurance. New York-based Folksamerica Reinsurance Company provided reinsurance to insurers of property, casualty, accident, and health risks in the United States, Canada, Latin America, and the Caribbean. In July, management completed the sale of White Mountains Holdings Inc.—and a substantial amount of FSA stock—to Dexia Credit Local de France S.A. for proceeds of $620.4 million, thereby effecting a pretax gain of $391.4 million.
Much of 2000 was given to negotiating the purchase and financing of Boston-based CGU USA Insurance Company—for sale at $2.1 billion plus $470 million in assumed debt—and ranked as the 16th largest property and casualty insurer in the United States. Byrne contacted billionaire Warren Buffett, his longtime friend from GEICO days, and used that personal connection to out-duel competitors. White Mountains secured $1 billion in debt financing from Lehman Brothers, $300 million from private investors and management, and $300 million from billionaire Buffett, chairman of Berkshire Hathaway. Buffett accepted close to 30 percent of White Mountains stock for his investment. CGU was renamed OneBeacon Insurance Group; the acquisition was completed June 1, 2001.
During the fourth quarter of 2001, Folksamerica completed the acquisition of Esurance, a new distribution channel for property/casualty insurance and one of the leading Internet-based marketers of personal auto insurance. Esurance leveraged Internet technology to remove excess costs from the marketing, sales, and servicing of personal lines insurance products; its customer service center operated on a 24/7 basis. Through a partnership with Liberty Mutual Insurance Group, in November 2001 OneBeacon transferred its regional agency business, agents, and operations in 42 states and the District of Columbia to Liberty Mutual Insurance Group. It was also OneBeacon’s goal to use new technology to replace the traditional way of marketing insurance in order to become the premier independent agency of property/casualty insurance in the Northeast.
- John J. Byrne and other investors organize Fund American Enterprises Inc.
- White Mountains Holdings, Inc. is organized.
- K. Thomas Kemp replaces Byrne as president and chief operating officer.
- Fund American changes its name to White Mountains Insurance Group, Ltd. and relocates to Bermuda.
- Byrne returns to White Mountains as chairman and chief operating officer.
- White Mountains establishes itself as an internationally based reinsurance company.
The year 2001 was a one of unprecedented upheaval in the U.S. property and casualty insurance marketplace. The September 11, 2001, terrorist attacks caused more turmoil in insurance markets than did 1980’s Hurricane Andrew. Prior to the attacks, most insurance companies had not explicitly faced the risk of substantive damages as a result of terrorist actions when underwriting their policies and had not paid much attention to the intricacies of reinsurance. White Mountains moved quickly to fix its balance sheet, restructure its investment portfolio, and improve underwriting. Despite some losses, the company emerged from September 11 in good health and invested large amounts of capital in the reinsurance business through a capital contribution to its Folksamerica Reinsurance Company. White Mountains also played a lead role with the Benfield Group to establish Montpelier Re Holdings, Ltd. in Bermuda to take advantage of the favorable underwriting and pricing environment in the reinsurance industry.
Furthermore, Folksamerica negotiated a quota-share re-trocessional arrangement with Olympus Reinsurance Ltd. to capitalize on enhanced reinsurance fundamentals during 2002 and beyond. The company formed White Mountains Underwriting Limited (WMU) as an underwriting management company headquartered in Ireland. WMU expanded Folksamerica’s access to international property excess of loss reinsurance business and provided professional insurance services to both Folksamerica and Olympus Re. White Mountains subsidiary Fund American Reinsurance Company Ltd. acquired substantially all the international reinsurance operations of the Folksam Group of Stockholm, Sweden. This acquisition began the formation and growth of White Mountains’ internationally based reinsurance operations. Fund American was commercially domiciled in Bermuda but had an executive office and an operating branch in Stockholm as well as an additional branch in Singapore.
For the fiscal year ended December 31, 2001, White Mountains revenues totaled $3.23 billion, up from $848.2 million in 2000. By the end of first quarter 2002, the company stock was valued between a low of about $330 and a high of approximately $370 a share. The course for continuing success was set. As stated in its four operating principles, White Mountains gave priority to underwriting, invested for total return, maintained a disciplined balance sheet, and functioned as a low-cost operator. John J. Byrne was named 2001 insurance Leader of the Year by the School of Risk Management, Insurance and Actuarial Science at New York’s St. John’s University.
Folksamerica Holding Company, Inc.; Fund American Enterprises Holdings, Inc.; Fund American Reinsurance Company, Ltd. (Bermuda); OneBeacon Insurance Group LLC; Pennsylvania General Insurance Company; White Mountains Holdings SRL (Barbados); White Mountains Underwriting Ltd. (Ireland).
The Allstate Corporation; GEICO Corporation; Gen-eralCologne Re; Munich Re; Reinsurance Group of America, Inc.
Board, Laura, “Britain’s CGNU Is Paying Off,” Daily Deal (London), August 12, 2001.
Gorham, John, “See Jack Run,” Forbes, July 24, 2000, p. 98.
Holman, Kelly, and Josh Kosman, “PE Reinsurance Deals Net $1.1B,” Daily Deal, December 10, 2001.
Howard, Lisa S., “Capital Pouring Into Insurance Ventures,” National Underwriter: Property & Casualty/Risk & Benefits Management Edition, November 12, 2001, p. 6.
Johnston, David Cay, “A Big Tax Loophole for Insurers Prompts a Review on Capitol Hill,” New York Times, October 5, 2000, p. C1.
McLeod, Douglas, “White Mountains Heads to Pink Sands: Plans to Form New $1 Billion Reinsurer in Bermuda,” Business Insurance, November 5, 2001, p. 2.
“White Mountains Set to Form New $1B Reinsurer,” Insurance Day, November 6, 2001.
Wilkinson, Claire, “Beacon to Transfer Operations to Liberty,” Insurance Day, September 11, 2001, p. 1.
—Gloria A. Lemieux