White Mountains Insurance Group, Ltd. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; comparisons are to the same 2015 periods unless noted. Amounts are in U.S. dollars. White Mountains operates through OneBeacon, HG Global/BAM and Other Operations; Sirius Group and Tranzact are reported as discontinued operations.
Financial results and position
- Revenue: Continuing-operations revenue was $358.2 million in Q2, down 3% from $368.7 million, and $727.5 million for the first half, up 1% from $723.0 million. Earned premiums fell 15% in Q2 and 9% year to date; investment income and gains partly offset the decline.
- Profit: Continuing-operations net income was $3.9 million in Q2 and $22.1 million for the first half, compared with losses of $2.9 million and $4.5 million, respectively. Net income attributable to common shareholders was $341.1 million for Q2 and $354.1 million year to date, including the $366.6 million after-tax Sirius sale gain. Total consolidated EPS was $66.93 for Q2 and $66.57 for the first half.
- Cash flow: Net cash used in operations was $187.2 million for the first half, including $144.1 million from continuing operations. Investing activities provided $948.9 million, substantially reflecting investment and subsidiary sales; financing activities used $599.0 million, including $541.5 million of common-share repurchases. Continuing-operations cash was $135.0 million at period-end.
- Insurance performance: OneBeacon’s Q2 combined ratio was 103% (95% in 2015), and its first-half ratio was 99% (95%). Q2 included six points of net unfavorable reserve development; first-half results included three points. OneBeacon pre-tax income was $23.0 million in Q2 and $61.2 million for the first half.
- Investments: Net investment income was $19.2 million in Q2 and $37.1 million for the first half. Net realized and unrealized investment gains were $28.1 million and $57.6 million, respectively. First-half GAAP total portfolio return was 2.4%, below the S&P 500’s 3.8% and the Barclays U.S. Intermediate Aggregate Index’s 3.8%.
- Equity and liquidity: Total assets were $7.07 billion and total equity $4.10 billion at June 30, versus $10.28 billion and $4.37 billion at year-end; the change chiefly reflects divestitures and held-for-sale reclassification. Book value per share was $780.67 and adjusted book value per share was $784.90; management reported 12% growth in both for the first half, including dividends.
- Debt: Continuing-operations debt was $289.8 million; total debt including discontinued operations was $386.7 million. The $425 million parent revolving facility was undrawn, and the company reported compliance with debt covenants.
Material changes and unusual items
- White Mountains completed the Sirius Group sale on April 18 for approximately $2.6 billion. The sale generated a $366.6 million after-tax gain in discontinued operations and $113.3 million in other comprehensive income, increasing book value by approximately $479.9 million.
- White Mountains sold its Symetra shares in February for $658.0 million. The Tranzact sale closed on July 21, after quarter-end, for net proceeds of $221.3 million; management estimated it would add about $16 per share to book value.
- White Mountains repurchased 691,964 shares for $547.4 million in the first half. Its share count fell to 4.96 million at June 30 from 5.62 million at December 31, 2015.
- First-half earnings benefited from $16.3 million of favorable IRS settlement benefits. A $20 million write-down of Star & Shield surplus notes reduced income attributable to White Mountains shareholders, with a corresponding increase in non-controlling interests. Star & Shield stopped writing new policies effective July 1 and planned to cease renewals later, subject to regulatory approval.
Outlook, commentary and risks
- Management said it had approximately $2 billion of undeployed capital as of July 31 and expected to return capital to shareholders gradually while considering new investments. The filing provides no specific earnings or operating guidance.
- Management described persistent soft-market conditions. Premium declines also reflected exits from crop and lawyers liability businesses, non-renewal of an affiliated reinsurance treaty, and corrective underwriting actions in Healthcare and Programs.
- OneBeacon’s adverse reserve development was concentrated in Healthcare and Programs, including increased claims activity involving extended-care facilities and two large managed-care errors-and-omissions claims. Reserve adequacy remains a key uncertainty.
- Management stated that cash, operating cash flows, investment sales and maturities, and available credit were adequate for expected requirements. Insurance-subsidiary dividends remain subject to regulatory limits and approvals.
- Other risks include catastrophe losses, reinsurance collectability and cost, investment-market and valuation risk, ratings or financing constraints, regulatory changes, and litigation. Sirius sale consideration remained subject to a closing-price true-up; indemnification obligations also apply. The Tribune-related litigation had no accrual because any loss could not be reasonably estimated; the Noteholder Actions dismissal was affirmed, while a separate action remained pending.
Important facts for investors to verify
- Reconcile reported common-shareholder earnings and EPS to continuing operations, discontinued operations, the Sirius sale gain and non-controlling interests.
- Track OneBeacon reserve development, Healthcare and Programs underwriting actions, premium trends and combined ratios.
- Confirm final Sirius closing-price adjustments and assess the realized outcome of the Tranzact sale versus management’s estimated book-value contribution.
- Review the scale and price of share repurchases relative to adjusted book value, and the company’s intended use of undeployed capital.
- Monitor parent and subsidiary liquidity, regulatory dividend capacity, debt maturities and covenants, and material claims, litigation or reinsurance developments.