WHITE MOUNTAINS INSURANCE GROUP LTD quarterly report, Q3 FY2017

Vollständiges Dokument

White Mountains Insurance Group, Ltd. — Q3 2017 Form 10-Q

Reporting period: Three and nine months ended September 30, 2017. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data.

Business context and reporting period

White Mountains reported continuing operations through HG Global/BAM, MediaAlpha and Other Operations. OneBeacon was sold to Intact Financial Corporation on September 28, 2017, and is presented as discontinued operations. The sale and other divestitures substantially changed the company’s size and comparability with prior periods.

Financial performance and condition

  • Revenue: Q3 revenue was $87.5 million, up from $56.8 million; nine-month revenue was $259.8 million, up from $163.2 million. Growth reflected higher investment returns and MediaAlpha advertising and commission revenue.
  • Profit: Q3 continuing-operations net income was $12.4 million, versus $3.3 million; nine-month continuing-operations net income was $7.9 million, versus a $50.1 million loss. Net income attributable to common shareholders was $562.1 million for Q3 and $604.7 million year to date, including the OneBeacon sale gain. The sale generated a reported net gain of approximately $554.6 million.
  • Per share and book value: Q3 diluted EPS was $130.81, including $125.45 from discontinued operations; nine-month diluted EPS was $135.06. September 30 book value per share was $925.04 and adjusted book value per share was $905.72. Including dividends, book value per share rose 17% in Q3 and 18% year to date; adjusted book value per share rose 17% and 15%, respectively. Excluding the estimated OneBeacon gain from the June comparison, Q3 growth was 1.9% in book value per share and 1.8% in adjusted book value per share.
  • Investment results: Net investment income was $12.2 million in Q3 and $39.7 million year to date; net realized and unrealized gains were $32.5 million and $102.5 million. Total portfolio returns were 1.4% and 4.3%, respectively. The nine-month gain comparison benefited from a prior-year unrealized investment loss.
  • Cash flow: Net cash provided by operations was $92.6 million for nine months, compared with $136.6 million used in the prior-year period. Continuing operations used $64.4 million; discontinued operations provided $157.0 million. Investing activities provided $697.7 million, while financing activities used $724.7 million, including $714.6 million for share repurchases.
  • Liquidity and debt: At September 30, cash was $48.6 million, total investments were $3.28 billion, and debt was $9.4 million. The $425 million parent revolving facility was undrawn; MediaAlpha had $9.4 million outstanding under its $20 million secured facility. The company reported covenant compliance and said available liquidity was adequate for foreseeable requirements. Parent and intermediate holding companies reported $1.741 billion of net unrestricted cash, short-term investments and fixed maturities.
  • Equity and capital returns: Common shareholders’ equity was $3.469 billion and total equity was $3.337 billion. White Mountains repurchased 832,725 shares for $723.9 million in the first nine months, including a substantial Q3 tender offer; it paid a $1.00-per-share dividend year to date.
  • Margins and insurance activity: MediaAlpha’s nine-month gross profit was $15.2 million on $101.2 million of advertising and commission revenue, about a 15% gross margin; it recorded a $3.3 million pretax loss. OneBeacon, now discontinued, reported a 113% Q3 combined ratio and 105% for the first nine months.

Material changes versus the prior comparable period

  • Q3 and nine-month revenue increased, primarily from investment gains and income and MediaAlpha growth. Nine-month general and administrative expense rose to $162.2 million from $144.9 million, partly due to former executive compensation and higher incentive compensation related to the OneBeacon transaction.
  • OneBeacon’s sale eliminated substantial assets and liabilities from the continuing balance sheet: total assets declined to $3.637 billion from $6.520 billion at December 31, 2016, largely reflecting the disposition and removal of held-for-sale balances.
  • The investment mix shifted toward equity securities and short-term investments: common equity securities rose to $774.4 million from $285.6 million, while fixed maturities declined to $1.490 billion from $2.081 billion. Total investments increased to $3.281 billion from $2.714 billion.
  • Management disclosed revisions to previously issued financial statements following discovery that Wobi’s former CEO had overstated commission revenue and receivables. Revisions reduced revenue and receivables and wrote Wobi goodwill and intangible assets down to zero. Management said no previously reported period was individually materially misstated, but the aggregate prior-period amounts could be material to full-year 2017 results.

Outlook, commentary, risks and unusual items

  • No specific earnings or revenue guidance was provided. Management said liquidity should meet expected cash needs for the foreseeable future, while cautioning that future external financing may not be available on satisfactory terms.
  • Management’s BAM surplus-note model projects payments could begin in 2019, subject to regulatory approval, and full repayment approximately eight years before final maturity—seven years later than its prior forecast. BAM’s ability to pay is constrained by regulatory approval and its capital requirements.
  • BAM’s claims-paying resources were $686.7 million at September 30, up from $643.7 million at year-end 2016. Its S&P AA/Stable rating was affirmed after a review; lower insured volume reflected reduced municipal issuance and rating uncertainty during that review.
  • Investment risks include equity-market and interest-rate movements, foreign-currency exposure and illiquid private investments. Management reported that 93% of the investment portfolio was valued using quoted prices or other observable inputs. A $54.7 million hedge-fund holding remained subject to a lock-up through September 2018; private-equity fund holdings had extended lock-up periods.
  • OneBeacon’s Q3 discontinued-operations loss reflected underwriting losses, including catastrophe losses from Hurricane Harvey and unfavorable reserve development. The filing also identifies catastrophe events, reserve adequacy, competition, regulation, ratings actions and financing availability as risks.
  • White Mountains said its disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter. It reported no litigation expected to have a material adverse effect and no material change to previously disclosed risk factors.

Important facts for investors to verify

  • Reconcile the $554.6 million OneBeacon transaction gain, sale proceeds and discontinued-operations earnings, and distinguish these from recurring results.
  • Review the Wobi investigation and revised periods, including whether cumulative misstatements affect full-year 2017 results or indicate control weaknesses.
  • Assess continuing-operations cash generation and liquidity after the OneBeacon sale, share repurchases and changes in the investment portfolio.
  • Track BAM’s regulatory conditions, claims-paying resources, underwriting volume and revised surplus-note repayment expectations.
  • Compare recurring investment returns and MediaAlpha profitability with the reported earnings and book-value growth, including the effects of investment marks, foreign-currency contracts and share repurchases.