WHITE MOUNTAINS INSURANCE GROUP, LTD. — Q2 2012 Form 10-Q
Business context and reporting period. Bermuda-based property and casualty insurance and reinsurance group reporting for the three and six months ended June 30, 2012. Reportable segments are OneBeacon, Sirius Group and Other Operations. Esurance was sold in October 2011 and AutoOne in February 2012; both are presented as discontinued operations.
Financial performance and position
| Metric | Q2 2012 | Six months 2012 | Comparable 2011 |
|---|---|---|---|
| Earned premiums | $512.2 million | $1,011.2 million | $478.3 million; $946.1 million |
| Total revenue | $544.0 million | $1,174.6 million | $553.6 million; $1,083.2 million |
| Pre-tax continuing income | $38.3 million | $166.6 million | $36.1 million; $2.4 million |
| Net income attributable to common shareholders | $26.1 million | $119.9 million | $11.7 million; loss of $16.5 million |
| Basic and diluted EPS, consolidated | $3.92 | $17.03 | $1.48; loss of $2.06 |
| Operating cash flow | Not provided by quarter | Use of $275.8 million | Use of $135.6 million |
- Underwriting: OneBeacon’s combined ratio was 94% in Q2 and for the first half, versus 95% and 94% in 2011. Sirius Group’s was 82% and 83%, versus 92% and 112%. Lower catastrophe losses were a key driver, particularly at Sirius.
- Investment results: Net investment income fell to $40.4 million in Q2 and $82.2 million year to date, from $45.8 million and $95.3 million. Net realized and unrealized investment results were an $8.1 million loss in Q2 versus a $42.8 million gain; first-half gains were $50.5 million versus $33.6 million.
- Margins and earnings drivers: Total expenses were $505.7 million in Q2 and $1,008.0 million year to date. Q2 loss and loss adjustment expenses declined 5% year over year, mainly as catastrophe losses fell to $13 million from $53 million. First-half losses and LAE declined 17%, with catastrophe losses of $16 million versus $182 million.
- Balance sheet at June 30: Total assets were $13.28 billion, total liabilities $8.95 billion and total equity $4.33 billion. Common shareholders’ equity was $3.74 billion. Debt was $677.6 million, essentially unchanged from year-end 2011; the $375 million revolving facility was undrawn, and the company reported compliance with debt covenants.
- Liquidity and capital: Cash was $811.6 million, including $360.0 million restricted; cash excluding restricted balances was $451.6 million. Total investments were $7.22 billion. Total adjusted capital was $4.92 billion and debt equaled 14% of total adjusted capital. Management said liquidity was adequate for expected foreseeable needs.
Material changes versus prior comparable periods
- First-half revenue rose 8%, while continuing pre-tax income increased substantially from near break-even in 2011. Common shareholders moved from a first-half loss to positive earnings.
- Premium growth continued: consolidated net written premiums rose 8% in Q2 and 9% in the first half. OneBeacon and Sirius both reported higher net written premiums.
- Q2 revenue was down 2%, reflecting weaker investment results and currency translation, partly offset by higher earned premiums. First-half net investment income declined despite higher total revenue.
- Common shareholders’ equity declined from $4.09 billion at year-end 2011. The company repurchased 984,630 shares for about $490 million during the first half, including a tender offer; outstanding shares fell to 6.63 million from 7.58 million.
- Insurance float decreased to $2.93 billion from $3.48 billion, attributed to business sales, reserve run-off, commutations and payment of prior catastrophe losses.
Outlook, commentary, risks and unusual items
- No quantified earnings or premium guidance was provided. Management described its liquidity as adequate for foreseeable cash needs and cautioned that interim results may not indicate full-year performance.
- Management cited solid underwriting at both insurance segments, offset in Q2 by equity portfolio losses and foreign currency losses associated with a stronger U.S. dollar. The consolidated portfolio returned negative 0.5% in Q2 and positive 1.6% for the first half.
- In July 2012, after quarter-end, White Mountains invested approximately $600 million in HG Global, which will reinsure municipal bond insurance risks written by Build America Mutual. It owned 98% of preferred equity and 89% of common equity and expected to syndicate about $110 million.
- Key exposures include catastrophe losses, reserve adequacy, reinsurer collectability, market and foreign-exchange movements, and valuation uncertainty. Variable annuity guarantee liabilities of $661.8 million are Level 3 fair-value measurements and sensitive to market conditions and policyholder behavior.
- OneBeacon reported first-half unfavorable reserve development, including the effect of an adverse Mississippi court ruling concerning a disputed Katrina-related pool assessment. The filing also disclosed a proposed Swedish tax rule that, if enacted as drafted, could materially affect results and financial condition.
- Cash from operations was negative $275.8 million for the first half; management attributed the use partly to reserve run-off, commutations and catastrophe claim payments and said it did not expect these trends to impair future liquidity.
Important facts for investors to verify
- Reserve development and catastrophe loss assumptions at OneBeacon and Sirius, including the Mississippi assessment dispute and exposure to future major events.
- Investment performance, portfolio concentration and currency sensitivity, as well as the valuation assumptions for Level 3 assets and variable annuity guarantees.
- Cash-flow requirements and available holding-company liquidity following the $490 million first-half share repurchases and the subsequent $600 million HG Global investment.
- Execution, risk allocation and expected returns for HG Global/BAM, including the planned syndication of approximately $110 million.
- Potential outcomes of tax matters, including the IRS examination and proposed Swedish interest-deduction restrictions.