White Mountains Insurance Group, Ltd. — FY 2015 Form 10-K
Reporting period: Year ended December 31, 2015. This is an annual filing, not a standalone fourth-quarter report. White Mountains reported continuing operations primarily through OneBeacon, HG Global/BAM and Other Operations. Sirius Group was classified as discontinued operations and held for sale following the agreement to sell it.
Financial performance and position
| Metric | FY 2015 / year-end | Prior comparable period |
|---|---|---|
| Continuing-operations revenue | $1.809 billion | $1.454 billion in 2014 |
| Pre-tax income (continuing operations) | $154.9 million | $(29.0) million in 2014 |
| Net income from continuing operations | $155.6 million | $(14.2) million in 2014 |
| Net income attributable to common shareholders | $297.6 million; $50.60 per share | $312.2 million; $51.13 per share in 2014 |
| Adjusted comprehensive income (non-GAAP) | $232.1 million | $135.3 million in 2014 |
| Adjusted book value per share (non-GAAP) | $698.95; up 5.3% including dividends | $664.50; up 3.6% including dividends in 2014 |
| Continuing-operations cash from operations | $161.0 million | $58.8 million in 2014 |
| Total assets / common shareholders’ equity | $10.285 billion / $3.913 billion | $10.456 billion / $3.996 billion at year-end 2014 |
| Debt | $442.4 million in continuing operations; $845.9 million including discontinued operations | $343.1 million continuing; $746.6 million total in 2014 |
Results benefited substantially from a $258.8 million pre-tax unrealized gain on Symetra common shares after White Mountains changed its accounting for the investment from the equity method to fair value. Continuing-operations net realized and unrealized investment gains were $225.4 million, versus $78.5 million in 2014. Net investment income was $60.8 million, compared with $59.5 million.
White Mountains’ total pre-tax investment return was 3.6%. Excluding Symetra, management reported a GAAP return of -0.2% in U.S. dollars; returns excluding Symetra were 0.7% in local currencies. Operating cash flow improved, though reported net income included significant non-cash investment gains and discontinued-operation results.
Business results and material changes
- OneBeacon: Net written premiums declined 7% to $1.137 billion. Its combined ratio improved to 96% from 102% in 2014, primarily because the prior year included a $109 million reserve charge. Pre-tax income fell to $25.3 million from $42.3 million, including a $35.1 million net realized and unrealized investment loss in 2015. There was approximately $2 million of favorable net reserve development in 2015, compared with $90 million unfavorable in 2014.
- OneBeacon’s premium decline reflected exits from crop and lawyers’ liability, lower Healthcare premiums and termination of an affiliated reinsurance treaty, partly offset by growth in Programs and Surety. It exited crop insurance in July 2015 and reported no material remaining net crop exposure.
- HG Global/BAM: BAM insured $10.6 billion of municipal bonds in 2015, up 36% from 2014. Its insured par outstanding rose to $22.556 billion from $12.363 billion. Claims-paying resources were $601.3 million, up 3%; BAM recorded a $32 million statutory net loss. BAM is a member-owned mutual, and its results are attributed to non-controlling interests.
- Other Operations: Pre-tax income was $159.0 million versus a $49.1 million loss in 2014, driven chiefly by the Symetra gain and higher revenue from acquired insurance-service businesses. The segment also recorded higher expenses, including incentive compensation associated with the Symetra and Sirius transactions.
- Disposals and reporting: The Sirius Group sale agreement led to discontinued-operations presentation and reclassification of prior periods. The expected cash purchase price is 127.3% of closing tangible common shareholders’ equity plus $10 million. White Mountains estimated a $470.4 million net gain, or $84.02 per share, at year-end; that gain was expected to be recorded at closing, not as 2015 operating income. The sale was expected to close in the first quarter of 2016, subject to approvals. Symetra’s sale to Sumitomo Life closed on February 1, 2016, and White Mountains received $658 million, or $32 per share.
Liquidity, debt and capital
Cash flow from continuing operations was $161 million. At year-end, the Company and intermediate holding companies held $74 million of net unrestricted cash, short-term investments and fixed maturities, alongside $292 million of common equity securities and $18 million of other long-term investments; $375 million was available under the Company’s revolving facility. OneBeacon holding companies had $65 million of net unrestricted cash, short-term investments and fixed maturities and $65 million available under its facility. Management said liquidity was adequate for expected needs.
Total debt to adjusted capital was 16% (20% including Sirius preference shares). The Company’s $425 million revolving facility had $50 million drawn; OneBeacon’s $65 million facility was undrawn. Tranzact and MediaAlpha had $102.9 million and $14.7 million of debt, respectively. The $275 million OneBeacon senior notes bear 4.6% interest and mature in 2022. White Mountains reported covenant compliance. Insurance-subsidiary dividends remain subject to regulatory limits; top-tier regulated subsidiaries had $48 million of dividend capacity without prior approval during 2016.
Outlook, risks and unusual items
- No formal earnings or premium guidance is provided in the filing. Management’s stated outlook includes the anticipated Sirius sale closing in early 2016 and the runoff of WM Life Re, whose contracts mature by June 30, 2016.
- Insurance results depend on uncertain loss-reserve estimates, catastrophe experience, pricing and reinsurance recoveries. OneBeacon’s disclosed reserve range was $1.009 billion to $1.356 billion, compared with recorded net reserves of $1.204 billion. Management cited sensitivities to inflation, large losses and professional-liability severity.
- Investment risks include interest rates, credit spreads, equities, foreign exchange and illiquid or Level 3 valuations. The OneBeacon surplus notes issued in the runoff-business sale had par value of $101 million but fair value of $51.5 million, down from $65.1 million, with payment timing subject to regulatory approval.
- White Mountains held $503 million of BAM surplus notes and had accrued $90 million of interest. BAM made no interest payments in 2015; payments require regulatory approval and depend on future premium and member-contribution growth.
- Other disclosed risks include competitive and soft insurance markets, rating changes, regulatory constraints, foreign-currency exposure, cybersecurity, tax-asset utilization and the possibility that reinsurance recoverables are not collected. OneBeacon’s ratings included a Fitch “A” rating with a negative outlook; other cited agency outlooks were stable.
- The Tribune Company shareholder litigation remained unresolved; no loss was accrued because any loss could not be reasonably estimated. The Pennsylvania court upheld approval of OneBeacon’s runoff-business sale in January 2016, and the objectors’ appeal period expired. White Mountains recognized $18.2 million of 2015 discontinued-operations income from the final Allstate reserve settlement.
Important facts for investors to verify
- Separate recurring operating performance from Symetra’s non-cash fair-value gain and from discontinued operations; review the non-GAAP reconciliations for adjusted comprehensive income and adjusted book value.
- Confirm completion and final economics of the Sirius Group sale, including closing tangible equity, retained assets, transaction costs and the realized gain.
- Track OneBeacon’s current accident-year loss trends, reserve development, premium renewal rates and the adequacy and collectability of reinsurance.
- Assess liquidity at the holding-company level, regulatory limits on subsidiary distributions, debt maturities and covenants, and the cash proceeds from the Symetra sale.
- Monitor BAM’s claims-paying resources, municipal portfolio concentrations and ability to generate premiums and member contributions sufficient to support its obligations.