White Mountains Insurance Group, Ltd. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Amounts are in millions of dollars unless stated otherwise. OneBeacon is classified as discontinued operations and held for sale; continuing-operations results therefore exclude it.
Business context and financial performance
White Mountains reported through HG Global/BAM, MediaAlpha and Other Operations. Its results reflect both operating businesses and investment performance. The quarter’s increase in continuing revenue was driven largely by investment income and gains.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Continuing revenue | $85.4 | $49.2 | $178.9 | $108.0 |
| Pre-tax continuing income (loss) | $(0.4) | $(25.1) | $1.0 | $(54.8) |
| Net income (loss) from continuing operations | $0.6 | $(21.1) | $2.3 | $(49.2) |
| Net income attributable to common shareholders | $15.5 | $341.1 | $49.8 | $354.1 |
| Basic EPS, continuing operations | $2.78 | $(8.34) | $3.42 | $(14.47) |
| Basic EPS, consolidated operations | $3.39 | $66.93 | $10.89 | $66.57 |
Prior-year common-shareholder earnings include a $366.6 million after-tax gain on the Sirius Group sale in Q2 2016. In 2017, net realized and unrealized investment gains were $33.7 million for Q2 and $70.0 million year to date, compared with $3.4 million and $16.3 million. Net investment income was $14.7 million and $27.5 million, compared with $6.1 million and $8.6 million.
Six-month total revenues rose 66%, while expenses rose 9% to $177.9 million. General and administrative expenses were $57.5 million in Q2 and $117.9 million year to date, up from $45.2 million and $99.9 million. Management attributed increases largely to incentive compensation tied to the OneBeacon transaction and compensation costs related to former executives. The filing does not provide a single consolidated operating-margin measure.
Balance sheet, cash flow and capital
- At June 30, total assets were $6.786 billion, including $3.696 billion classified as held for sale; total liabilities were $3.022 billion, including $2.679 billion held for sale. Total equity was $3.764 billion and common shareholders’ equity was $3.647 billion.
- Book value per share was $797.80; adjusted book value per share was $780.00, versus $789.53 and $793.58 at year-end 2016. Management reported both measures increased 1% over the first six months including dividends, but adjusted book value per share decreased 2% after the new calculation adjustments.
- Investments were $2.693 billion, including $1.567 billion fixed maturities and $827.9 million common equity securities. Cash was $53.3 million, excluding cash in discontinued operations.
- Operating cash flow was $21.1 million consolidated for the first six months: $66.2 million used by continuing operations and $87.3 million provided by discontinued operations. Cash ended at $53.3 million, excluding discontinued-operations cash of $71.3 million.
- Continuing-operations debt was $10.6 million, all at MediaAlpha; total debt including held-for-sale OneBeacon debt was $283.9 million. White Mountains’ $425 million revolving facility was undrawn, and management said liquidity was adequate for foreseeable needs. Total debt to adjusted capital was 7%; the company reported covenant compliance.
Material changes and operating developments
- OneBeacon sale: OneBeacon agreed to be acquired by Intact for $18.10 per share in cash, approximately 1.65 times tangible book value. White Mountains expected gross proceeds of approximately $1.3 billion; closing was anticipated in Q3 or Q4 2017, subject to regulatory and customary conditions. Shareholders approved the transaction July 18. The estimated gain was $116 per White Mountains share at quarter-end; including that estimate, management cited book value per share of approximately $914 and adjusted book value per share of approximately $896.
- Adjusted book value methodology: New adjustments for the time-value discount on BAM surplus notes and HG Global’s unearned premium reserve, net of deferred acquisition costs, reduced adjusted book value per share by approximately $23. The filing estimates the surplus notes’ present value at $172 million below their nominal GAAP carrying value.
- Investments: Total portfolio return was 1.4% in Q2 and 2.9% for six months, versus 0.8% and 2.4% in 2016. Equity, other long-term and high-yield investments returned 2.6% and 6.0%, below the S&P 500’s 3.1% and 9.3%. Approximately 91% of the investment portfolio was priced using quoted market prices or other observable inputs.
- BAM: Gross written premiums and member surplus contributions were $20 million in Q2 and $48 million year to date. Total pricing increased to 79 and 98 basis points, respectively. Insured bond par was $2.7 billion in Q2 and $5.1 billion year to date, below prior-year levels; management cited uncertainty during S&P’s rating review. S&P affirmed BAM’s AA rating with stable outlook on June 26. Claims-paying resources rose to $676 million from $644 million at year-end.
- MediaAlpha: Q2 advertising and commission revenue increased to $30.8 million from $28.1 million, but pre-tax loss widened to $1.8 million from $0.7 million and EBITDA declined to $1.1 million from $2.2 million. Management cited investment in new verticals and reduced auto-carrier marketing budgets; non-property-and-casualty growth partly offset weakness in P&C.
- Share repurchases: In July, after quarter-end, White Mountains repurchased 235,000 shares for $199.8 million. The company declared and paid a $1.00-per-share dividend during the first half.
Outlook, risks and contingencies
Management provided no specific earnings or revenue guidance. It expects the OneBeacon transaction to close in Q3 or Q4 2017, but completion depends on regulatory approvals and other conditions. BAM’s surplus-note payments require regulatory approval; BAM intends to seek payment approval only when qualified statutory capital exceeds $500 million and capital supports obligations and its rating. A proposed change to Series B note payment terms remained subject to New York regulatory approval, expected in Q3.
Key risks include failure or delay of the OneBeacon transaction, transaction-related shareholder litigation, catastrophe losses, reserve adequacy, investment and foreign-currency market movements, availability and cost of financing, and ratings actions. OneBeacon shareholder suits alleging proxy disclosure deficiencies remained pending; OneBeacon said it believed they lacked merit. The Tribune litigation remained unresolved; no loss was accrued because any potential loss could not be reasonably estimated. Management stated normal-course litigation was not expected to materially adversely affect the company.
Most important facts for investors to verify
- Whether the OneBeacon acquisition closed on the expected timetable and at the stated consideration, and the final proceeds, transaction costs and gain.
- How investment gains, market movements and foreign-currency hedges affect earnings and portfolio returns; Q2 continuing results included substantial investment gains.
- Whether BAM’s rating, claims-paying resources and surplus-note payment prospects support the company’s valuation assumptions and adjusted book value methodology.
- MediaAlpha’s ability to grow non-P&C verticals and improve earnings despite reduced auto-carrier marketing budgets and higher investment spending.
- The effects of the July share repurchase on liquidity and capital allocation, alongside the company’s stated liquidity adequacy and debt covenant compliance.