Byrne explains White Mountains stumble

Not many people could characterize a $200 million mistake as having “stubbed our toe a bit.”

But not many people are the legendary Jack Byrne, back less than a month in his former role as chairman of the White Mountains Insurance Group board of directors, holding forth on how the company could have so severely underestimated hurricane losses in a Tuesday conference call to skeptical analysts.

Byrne was trying to wipe the egg off the face of a company that had to bail out Olympus Reinsurance Company — an offshore third-party catastrophic investment vehicle — to the tune of some $143 million, which would effectively wipe it out without a quick cash infusion.

To brace for any other potential losses, White Mountain had to increase its reserves, resulting in a $197 million adjustment (some $12 per common share).

“Does this do it? I believe this does it,” asked and answered Byrne.

Rating agencies and investors aren’t so sure. AM Best and Standard & Poor’s downgraded the company after the June 16 announcement of the additional losses and the stock dived from a high of $520 to $468, a one-year low in over four days.

Only a few weeks ago the company at its annual meeting was patting itself on how it had weathered the hurricane storm.

Byrne had taken a three-year hiatus to help his son’s company Overstock.com, but he returned as chairman, he joked, “just in time for this call.”

Oh, Steven E. Fass, the new CEO – and the reason the company relocated its US headquarters from New Hampshire to New Jersey – also spoke, as did a few other key executives, but it Byrne, who still operates out of the company’s Hanover facility, ran the show, opening the conference and answering most of the questions. It mostly came back to Byrne, even after he politely tossed questions to company executives.

The company underestimated the losses for several reasons. There were simply not enough auditors to compile such staggering losses, the total now approaching some $1.5 billion, so they were slow in coming in. The company particularly underestimated offshore energy losses by some $140 million. Some of these companies took their time filing claims, concentrating on getting up and running. Finally the company should have relied less on computer modeling used to estimate potential losses.

“Everybody in the property casualty business got blindsided by having more exposure than they thought they had,” Byrne said. The modelers have since come out with a new product, “and every insurance company is scrambling to understand what that means with respect to their own exposure.”

It was to protect against such exposure, while taking advantage of the surge in catastrophic premiums following the terrorist attacks on September 11th, that White Mountains set up Olympus Reinsurance. Not wanting to risk the company’s balance sheet, it used this third-party company, based in Bermuda, to attract outside investors, who included Byrne and Fass.

At the time it was considered a brilliant idea, and other insurers copied it.

“It worked very well for three years,” Byrne said. But after the multiple storm surge of 2005, culminating in Hurricane Katrina, “it has been a very sorry chapter in our life here.”

Still, Byrne said, “It is still a very valuable option” though the company does plan to go back to pre-9/11 days, when it kept its catastrophic exposure at 25 percent. And it is getting out of the offshore oil reinsurance market altogether, Foss said.

“It is not our ballgame anymore,” said Byrne.

But Byrne said it was in the best interests of the company to keep Olympus alive. And he stressed that the Olympus bailout would only be for those who invested in Olympus after January, based on misinformation about f the company’s solvency. It would not set a precedent, and it would not help out any of the original investors – including himself.

Early investors such as Byrne “haven’t got a pot to piss in here,” he said. “All of us have been wiped out. It gives me no pleasure to say that these are all my friends. I haven’t even told my wife yet that her investment is wiped out. I hope Dorothy is not listening. This is very, very sad chapter in a long career.”

Then Byrne stopped himself. “I probably said more than I should have. Next question.” – BOB SANDERS