White Mountains Insurance Group, Ltd. — Q2 2014 Form 10-Q
Business context and reporting period. Bermuda-based specialty property and casualty insurer and reinsurer, with reportable segments OneBeacon, Sirius Group, HG Global/BAM and Other Operations. This unaudited filing covers the three and six months ended June 30, 2014; comparisons are with the corresponding 2013 periods unless noted. Dollar amounts are in millions except per-share data.
Key financial results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $652.8 | $489.3 | $1,231.1 | $1,116.7 |
| Pre-tax income from continuing operations | $109.0 | $3.6 | $221.1 | $155.4 |
| Net income attributable to common shareholders | $95.6 | $26.3 | $191.2 | $146.7 |
| Basic and diluted EPS, consolidated operations | $15.53 | $4.26 | $31.00 | $23.55 |
| Net realized and unrealized investment gains | $113.9 | $(37.3) | $177.7 | $37.9 |
| Net investment income | $29.1 | $28.7 | $53.4 | $57.2 |
Q2 2014 adjusted comprehensive income was $67.7 million, versus an adjusted comprehensive loss of $8.3 million in Q2 2013; first-half adjusted comprehensive income was $155.5 million versus $108.4 million. Management reported adjusted book value per share of $666.92 at June 30, up 4.0% for the first half including dividends.
- Premiums: Earned premiums were $503.4 million in Q2 and $997.0 million in the first half, little changed year over year. Net written premiums increased 7% in Q2 to $487.4 million and 8% in the first half to $1,138.0 million, led by OneBeacon growth.
- Underwriting: OneBeacon’s combined ratio was 99% in Q2 and 94% year to date, versus 94% and 91%. Elevated large losses and less favorable prior-year development weighed on results. Sirius Group’s ratios were 81% and 77%, versus 79% and 80%; lower catastrophe losses helped, while prior-year profit commissions benefited 2013.
- Cash flow: Net cash used for operations was $42.4 million for the first half, including $11.7 million from continuing operations and $30.7 million from discontinued operations. Cash excluding restricted balances ended at $303.2 million, compared with $287.1 million at June 30, 2013.
- Balance sheet and liquidity: At June 30, total assets were $12.36 billion, total investments $7.16 billion, common shareholders’ equity $4.11 billion and debt $677.5 million. The $425 million revolving facility was undrawn; the company reported covenant compliance. Debt was 13% of total adjusted capital.
Material changes, outlook and risks
- Investment gains were a major driver of the earnings improvement: Q2 moved from investment losses in 2013 to $113.9 million in gains in 2014. First-half net investment income declined 7%, primarily due to lower yields. Reported investment results are also affected by foreign-currency translation, with some effects offset in other comprehensive income.
- OneBeacon’s net written premiums rose 20% in Q2 and 19% in the first half, substantially reflecting newer businesses; excluding those additions, growth was 5% and 6%. Sirius net written premiums declined 9% in Q2 and 3% year to date.
- OneBeacon’s sale of its runoff business to Armour remained subject to regulatory approval. Following a July 23 public hearing, management expected closing in the second half of 2014. The amended agreement increased the seller-financing cap to $80.9 million; a $5.3 million after-tax estimated sale-loss adjustment was recorded in Q2. Closing timing and sale value remain uncertain.
- White Mountains committed $21 million to a proposed DavidShield joint venture, expected to close in Q4 subject to regulatory approval. In July, it acquired approximately 45% of Austrian comparison portal durchblicker.at for about $11.6 million.
- Other notable items include a $5 million first-quarter tax benefit from settlement of the 2005–2006 IRS examination, and an unresolved IRS proposal for 2007–2009 with a stated estimated assessment of $71 million including interest. The company disputes the proposed adjustments and said it could not estimate a range of outcomes; it did not expect a material financial-position impact.
- Principal risks include catastrophe and large-loss exposure, reserve adequacy, reinsurance collectability, investment and foreign-exchange volatility, fair-value estimates, variable-annuity guarantee assumptions, regulatory limits on subsidiary dividends and execution/approval of the runoff sale. Management stated liquidity was adequate for foreseeable requirements and reported no material change in previously disclosed risk factors.
Investor verification priorities
- Assess how much earnings and adjusted book-value growth depends on investment gains, unrealized marks and foreign-currency accounting effects.
- Review OneBeacon large-loss experience and reserve development, alongside Sirius catastrophe losses and the sustainability of its underwriting results.
- Track regulatory approval, final terms, seller financing and any further sale-loss adjustments for the OneBeacon runoff transaction.
- Reconcile negative operating cash flow with available cash, investment liquidity, subsidiary dividend restrictions and the undrawn credit facility.
- Monitor the disputed IRS examination, reinsurance recoverables and key fair-value/actuarial assumptions, including variable-annuity policyholder behavior.