Monday, August 4, 2008

White Mountains Insurance (WTM) Analyst Day - The Reserve Issue

White Mountains Insurance (WTM) held its annual analyst meeting on June 17, and I finally got around to listening to the webcast. The URL is here if you want to listen yourself.

I have twenty-eight pages of notes so I will have to present this in more than one post. I’ll start with the surprise reserve addition that was announced at the meeting.

White Mountains Re Reserve Issue

After brief introductory remarks by Ray Barrette, WTM spent the first 15 minutes coming clean on the reserve problems in its Folksamerica unit, now called White Mountains Re America.

WTM is increasing reserves at this unit by $140 million in the second quarter of 2008. This will be partially offset by an $80 million reserve release at its Sirius unit, giving the company a net increase of $60 million in reserves. The after tax number is $ 33 million. The timeline of events that led to this is as follows:

1) WTM added $63 million to reserves in the fourth quarter of 2007.

2) In Feb 2008, WTM begins an intensive review of the reserves and underwriting books at the company.

3) In May 2008, WTM increased reserves by $41 million for late reported construction defect claims at Folksamerica for underwriting years 2002 and prior.

4) At the July analyst meeting, WTM announced the additional reserve issues in the first paragraph above.

Barrette went out of his way to emphasize that he felt they had cleaned house at this unit and that the reserve issue was now behind them, and even seemed to imply that there was a chance of a reserve release in the future.

He said, “But I have to say before we have never done the work that we did this time to get to the bottom of this…we did a deep dive, we think we have it. It’s still the Property casualty reinsurance business so there is no guarantee that there aren’t going to be some reserve development somewhere but we think we have reserves so that it is as likely that something good can happen to the reserves as bad…”

Allan L. Waters, the President and CEO of White Mountains Re, drilled down a little deeper on the issue:

1) In the first quarter of 2008, WTM received two claims activity reports for business written in 2000 and 2001 relating to California Construction defects. They did a quick review and found two other accounts with exposure, and took the $41 million reserve increase ($29 million) after tax.

2) WTM was a little concerned by this so they did a complete review of the books, which resulted in the $160 million gross reserve addition, all from business written during the last soft market from 1996-2002.

3) They confirmed that they felt that business since 2002 has been properly underwritten due to changes that WTM made at the time in underwriting and controls.

4) The net after tax reserve addition of $33 million announced at the analyst meeting represents 2% of group reserve base, 1% of regulatory capital and 1% of shareholders equity.

Waters said, ““We really worked hard to get to the bottom of this we dug as deep as we could and felt that we hit bedrock here. There is no guarantees in this business here. This is the property casualty business, the property casualty reinsurance business which is even worse in terms of trying to predict your future reserves but we think we have gotten to the bottom of this and booked everything we found and we put this behind us once and for all.”

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