White Mountains Re weathered the stormy seasons of 2004 and 2005. But can it survive the softening markets? Nick Thorpe investigates.

The reinsurance industry’s annual soiree in Monte Carlo has become something of a showcase for the creative minds of firms’ marketing teams. From branded Renault Méganes to free Häagen-Dazs, handheld Sudoku games and bungee-jumping artists. But with a nod to the industry’s inner youth, it is the White Mountains midnight party on Tuesday night that has captured the industry’s imagination.

Apart from wowing thirsty insurance executives though, White Mountains has emerged over the last 28 years as something of a reinsurance success story. It has combined an aggressive acquisition strategy with a firm commitment to alternative risk transfer solutions. But in the age of the credit crunch and softening rates, can the group emulate past successes?

Going down

The story on everyone’s lips at the beginning of 2008 was the alarming downward trend in prices across almost all lines. Guy Carpenter reported that property catastrophe reinsurance rates alone were down an average of 9% across all markets in the absence of large cat losses. Fellow broker Willis also noted rate reductions in almost every line of business and that the 2008 renewal season “was one of almost unprecedented lateness, as insurers try to reconcile reinsurer offerings with their own financial objectives”.

For White Mountains Re president and chief executive officer Allan Waters, the 1/1 renewals were a trying time. “Along with everyone else we continued to see a softening trend at this year’s renewals in the overall marketplace,” he says. “For our books of business, I would say that our European operation [Sirius International] is seeing a somewhat more stable environment than we are seeing in the US or Bermuda. Their renewals held up quite well and they are seeing less price and terms deterioration than we are seeing elsewhere.”

Waters explains that the haphazard deterioration of rates has meant that in certain cases the company has turned away business in order to maintain the bottom line. “It was quite an uneven deterioration across the lines; there were pieces of business that seemed to deteriorate in terms of pricing quite significantly and then other components of business seemed to hold up quite well. However we’ve tried to be disciplined in our approach and so we are not very concerned with maintaining our top line in these conditions. Where necessary we are allowing our book to shrink in some cases in order to retain profitability.”

Although well used to the rollercoaster ride that reinsurance rates provide (see page 10), the upheavals caused by yo-yoing rates can take its toll on some companies and, indeed, the market as a whole. Waters is confident that White Mountains Re can weather the soft market however. “Obviously we’d like to see a turn sooner rather than later like everyone else, there’s no doubt about that, and it may take an event to stir things back up and get them heading in the other direction. But we’re pretty much steady as she goes and making good returns – it’s just not as much fun as when things are going in the other direction.”

“We're pretty much steady as she goes and making good returns – it's just not as much fun as when things are going in the other direction

White Mountains Re president and chief executive officer Allan Waters

A legacy of success

White Mountains Re started life as Folksamerica Reinsurance back in 1980, writing US property treaty. Eighteen years later the company became a wholly-owned subsidiary of White Mountains Insurance and subsequently the company grew its surplus from $113m to almost $1bn. During this period the company also embarked upon a prodigious acquisition spree, snapping up nine companies and rapidly expanding the group’s operations – both geographically and by line of business.

The hard reinsurance market after 9/11 prompted Folksamerica’s parent to invest a further $400m into the company and also launch White Mountains Underwriting in Dublin “to provide international reinsurance advisory and risk evaluation services to Folksamerica Re and third parties” according to the official company history. The White Mountains Re group was further bolstered by the key acquisition of Swedish reinsurer Sirius International in 2004 for SEK3.22bn (approximately $425m).

Due to its strong capitalisation and seemingly sound investments, the group has managed to produce results in recent years that would have been the envy of many of its competitors. The storms of 2005 certainly impacted the company but while White Mountains Re made a loss of $22.4m compared to a profit in 2004 of $268.1m, the group as a whole group recorded a net profit of $68.4m. Then CEO Steven Fass was open about the mistakes made, although he did pass some of the blame onto the catastrophe models. “In short, we failed to fully assess the models’ deficiencies, we were not sufficiently skeptical about their output, and we failed to identify important correlations in our underwriting activities,” he said. “This will not happen again.”

Fass’ optimism was put to the test in 2007 – the year Munich Re identified as having the most catastrophes since their records began. White Mountains Re’s pre-tax income for the third quarter of 2007 was $74m, compared to $110m in 2006, while the combined ratio was 94%, compared to 89% the previous year.

However for the first nine months of 2007 the story appeared more positive. White Mountains Re reported a 65% increase in pre-tax income from $131m to $217m along with a healthy combined ratio of 96%, down from 108% in the same period the previous year. These results included $82m in catastrophe losses for 2007, a figure dwarfed by the $223m in claims related to Hurricanes Katrina, Rita and Wilma in 2006. Net written premiums were $222m for the third quarter and $905m for the first nine months, a decrease of 22% and 14% from the comparable periods of 2006.

Commenting on the results, CEO Waters said, “While the number of large events was fairly high [in the third quarter], insured damages were limited. Total catastrophe losses for the quarter were still higher than last year. The increased combined ratio also reflects deteriorating pricing across all lines. We are adjusting our mix and reducing volume in response to the market softening and we continue to look for ways to add value. During the quarter, we transferred significant capital to our Bermuda operations to improve our capital allocation.”

“The sidecars were established in the hard market conditions when it made sense to establish temporary pockets of capital

On the back of satisfactory financial performances and ability to successfully weather a number of difficult, catastrophe-rich years, White Mountains has also been actively involved with sidecars and new reinsurers. In April 2007 the company created $600m Bermuda-based Pentelia Re in partnership with French investment bank NATIXIS. The fund behind the reinsurer invests in “a diversified portfolio of life and non-life insurance-linked assets including adverse mortality bonds, weather derivatives, terrorism insurance, life settlements, cat bonds and property catastrophe reinsurance.”

Through the group’s acquisition of Fund American Re it also successfully created a Bermuda-based property cat excess company. And with an additional $250m of recent capitalisation, Waters is confident that once a rating is obtained, Fund American Re will be a valuable asset in the White Mountains portfolio.

“We have capitalised our Bermuda operation Fund American Re with over $250m and are in the process of obtaining a rating. Right now that business is assuming business from Folksamerica and once it is standalone, sometime in Q2, that operation will start to underwrite business directly off Bermuda. Although primarily a property cat excess operation, CEO Dwight Evans is a multi-line guy so as the market in Bermuda presents opportunities to grow into other lines of business profitably we will certainly execute on those other lines also.”

The end of a sidecar?

Although the company is happy pumping money into its various reinsurance subsidiaries, it is responding to the difficult market conditions by retiring its various sidecar arrangements. Early in 2008, the group announced that White Mountains Re had terminated its retrocessional contracts with Helicon Re and Olympus Re. The company did not renew the quote share agreements for 2008 and actually bought out the Helicon Re sidecar for $150m, effectively placing it into run-off.

“The sidecars were established in the hard market conditions when it made sense to establish temporary pockets of capital,” explains Waters. “As the market moved away, however, it made less and less sense for the investors. With diminished opportunities to write profitable business it made more sense for White Mountains Re to retain 100% of those accounts in its own book.”

Waters, however, remains upbeat about the future of the company and its relationship with tools such as sidecars. “This doesn’t mean we won’t consider using a sidecar again – we think overall it’s a very effective tool. First time around I think structures were varied and I think we’ve all learnt a little about how to structure these for the future. We are looking at new structures for securitisations at the moment – it is definitely another tool in the kit.”

Nick Thorpe is associate editor of Global Reinsurance.