White Mountains Insurance Group, Ltd. — FY 2012 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2012. White Mountains is a Bermuda-based insurance holding company operating through OneBeacon (U.S. specialty property and casualty insurance), Sirius Group (international insurance and reinsurance), HG Global/BAM (municipal bond insurance and reinsurance), and Other Operations. Results include BAM on a consolidated basis, although BAM’s results are attributed to non-controlling interests.
Key financial results
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Total revenue | $2.436 billion | $2.173 billion |
| Pre-tax income | $262.8 million | $98.0 million |
| Income tax benefit | $15.7 million | $110.0 million |
| Net income from continuing operations | $278.5 million | $208.0 million |
| Net income attributable to common shareholders | $207.4 million | $767.9 million |
| Adjusted comprehensive income | $244.9 million | $744.7 million |
| Net written premiums | $2.127 billion | $1.978 billion |
| Net cash used in continuing operations | $29.6 million | Net cash provided: $94.1 million |
| Net cash used in all operations | $225.8 million | $114.5 million |
| Total assets | $12.895 billion | $14.064 billion |
| Debt | $751.2 million | $677.5 million |
| Common shareholders’ equity | $3.732 billion | $4.088 billion |
| Adjusted book value per share | $587.63 | $542.11 |
Revenue rose 12%, primarily on higher earned premiums, investment gains and foreign-currency gains; net investment income fell 17% to $153.6 million, reflecting lower invested assets and fixed-maturity yields. The 2012 tax benefit included significant tax-rate and valuation-allowance effects; excluding those changes, management reported an effective tax rate of 23%. Common-shareholder net income and adjusted comprehensive income were substantially lower than 2011, which included a $677.5 million after-tax gain on the Esurance sale.
Adjusted book value per share increased 8.6%, including dividends. The consolidated investment portfolio returned 4.9%; fixed income returned 4.4% versus 3.6% for the Barclays U.S. Intermediate Aggregate Index, while equities, convertibles and other long-term investments returned 7.7% versus 16.0% for the S&P 500.
At year-end, cash was $462.4 million and total investments were $7.278 billion. The company reported $132 million of net unrestricted cash, short-term and fixed-maturity investments at the parent and intermediate-holding-company level, plus $618 million of common equity and other long-term investments outside OneBeacon and Sirius Group. Its $375 million revolving facility had $75 million drawn at year-end; that balance was repaid in January 2013. Management said available cash, operating and investment cash flows, and facility capacity were expected to meet foreseeable needs. Cash flow from operations was negative, including $196.2 million used by discontinued operations.
Underwriting and material changes
- OneBeacon: Net written premiums increased 11% to $1.179 billion. Its GAAP combined ratio worsened to 98% from 92%, reflecting higher catastrophe losses, less favorable reserve development and higher expenses. Hurricane Sandy contributed to $56 million of net catastrophe losses; favorable prior-year reserve development was $7 million.
- Sirius Group: Net written premiums increased 3% to $947.7 million. Its combined ratio improved to 90% from 100%, primarily because catastrophe losses fell to 13 points ($117 million) from 24 points in 2011. Sandy accounted for approximately $98 million of Sirius losses; drought-related agriculture losses added 3 points. Favorable reserve development was $34.5 million, partly offset by a $46.4 million asbestos-reserve increase.
- Runoff business: OneBeacon agreed to sell its runoff business to Armour in October 2012, subject to regulatory approval and expected to close in the second half of 2013. The business was classified as discontinued operations and held for sale. FY 2012 discontinued operations included an after-tax sale loss of approximately $91.5 million and a $24 million operating loss; the operating loss included a $9 million after-tax workers’ compensation discount-rate charge. The filing also describes approximately $101 million of after-tax losses associated with the transaction and related adjustments.
- Other portfolio changes: OneBeacon completed the AutoOne sale in February 2012. In January 2013, it sold Essentia, which wrote Hagerty collector-car and boat business; a $23 million pre-tax gain was expected in Q1 2013. Sirius Group acquired four runoff entities in 2012, recording approximately $14.5 million of gain, and sold its interest in IMG, recording a $15 million pre-tax gain.
Capital, outlook, risks and unusual items
- White Mountains repurchased 1.33 million common shares for $669 million in 2012 at an average $503 per share, approximately 86% of year-end adjusted book value per share. The annual common dividend was $1.00 per share.
- OneBeacon refinanced its remaining 2003 notes: it issued $275 million of 4.6% senior notes due 2022 and retired approximately $270 million of older notes. Sirius Group had $400 million of 6.375% senior notes due 2017. Total debt was $751.2 million at year-end; debt to adjusted capital was 15%.
- White Mountains capitalized HG Global with approximately $600 million to launch BAM. HG Global purchased $503 million of BAM surplus notes; BAM began operations in July 2012 and reported a $36.3 million pre-tax loss, attributed to non-controlling interests. BAM’s bonds carry an AA/stable S&P rating at launch, and HG Re provides first-loss reinsurance of up to 15% of par, subject to collateral trust assets.
- Management provided no specific consolidated earnings or premium guidance. It emphasized disciplined underwriting and balance-sheet management. The runoff sale remains contingent on regulatory approval; no assurance was given that it would close as expected.
- Key risks include catastrophe severity and model uncertainty; reserve adequacy, especially long-tail and asbestos/environmental exposures; reinsurance recoverability; investment-market, interest-rate and currency volatility; and the effectiveness of hedges for WM Life Re’s Japanese variable-annuity guarantees. WM Life Re’s guarantee liability was $441.5 million, with approximately $2.7 billion of guarantees and account values equal to about 87% of guarantees at year-end.
- OneBeacon’s A&E liabilities remain exposed to legal and claims developments. Its NICO cover had approximately $198 million of protection remaining at year-end, and the company cautioned that adverse developments or reinsurance shortfalls could exceed available cover. Sirius Group’s net A&E reserves were $189.4 million after a substantial 2012 asbestos strengthening.
- Disclosed legal matters include the approximately $20 million after-tax dispute with Allstate over the Esurance sale closing statement, Tribune shareholder litigation (subsidiaries received approximately $39 million for shares tendered), and an Ace damages claim against OneBeacon. Management stated it did not expect the legal matters to materially adversely affect the company, but outcomes remain uncertain.
- Reported results include material valuation and tax items, including net tax benefits from Swedish and Luxembourg tax changes and deferred-tax valuation-allowance releases, as well as fair-value movements in Symetra warrants and WM Life Re’s guarantee and derivative positions.
Most important facts for investors to verify
- Whether the OneBeacon runoff sale closes on schedule, its final terms, and the resulting capital, reserve and rating effects.
- How much of 2012’s tax benefit and earnings improvement is recurring versus driven by tax changes, valuation allowances, foreign exchange and transaction gains.
- Further development in OneBeacon and Sirius Group reserves, particularly A&E claims, workers’ compensation and long-tail liability exposures.
- Catastrophe exposure and reinsurance recoveries following Sandy, including limits, co-participations, reinstatement costs and reinsurer collectibility.
- Liquidity and capital availability after the large share repurchases, BAM funding, and cash outflows from operations and discontinued businesses.
- WM Life Re’s hedge effectiveness, collateral requirements and sensitivity to Japanese interest rates, currencies, equity markets, volatility and policyholder behavior.