Business context and reporting period
White Mountains Insurance Group, Ltd. is a Bermuda-domiciled property-and-casualty insurance and reinsurance group. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2013, compared with the corresponding 2012 periods. Reportable segments are OneBeacon, Sirius Group, HG Global/BAM and Other Operations. OneBeacon’s runoff business is reported as discontinued operations and held for sale.
Financial and operating performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $574.1 million | $697.4 million | $1,690.8 million | $1,869.3 million |
| Pre-tax income from continuing operations | $55.3 million | $135.1 million | $210.7 million | $313.6 million |
| Net income from continuing operations | $47.1 million | $87.3 million | $161.5 million | $228.3 million |
| Net income attributable to common shareholders | $57.2 million | $19.1 million | $203.9 million | $139.2 million |
| Basic EPS, continuing operations | $9.20 | $19.11 | $32.05 | $36.96 |
| Net written premiums | $513.3 million | $559.1 million | $1,569.9 million | $1,729.9 million |
| Net investment income | $27.3 million | $37.6 million | $84.5 million | $119.8 million |
| Net realized and unrealized investment gains | $28.2 million | $72.7 million | $66.1 million | $123.2 million |
Net income attributable to common shareholders was higher year over year partly because 2012 included a $91 million after-tax loss on the sale of discontinued operations. Continuing-operations earnings and EPS declined in both comparison periods.
- Underwriting: OneBeacon’s combined ratio was 96% in Q3 (95% in 2012) and 93% for both nine-month periods. Sirius Group’s ratio was 89% in Q3 (88% in 2012) and 83% for the first nine months (85% in 2012). Ratios below 100% indicate underwriting profit.
- Reserves: White Mountains reported favorable prior-year loss reserve development of $11.6 million in Q3 and $25.6 million for the first nine months. Sirius Group contributed most of the nine-month favorable development.
- Cash flow: For the first nine months, continuing operations generated $22.7 million of cash, while discontinued operations used $93.5 million; total operating cash flow was negative $70.8 million. Investing activities provided $370.9 million and financing activities used $177.1 million.
- Balance sheet and liquidity: At September 30, total assets were $12.31 billion, total liabilities $8.02 billion and total equity $4.29 billion. These totals include $1.96 billion each of assets and liabilities held for sale. Cash was $411.0 million, including $74.4 million restricted; cash excluding restricted balances was $336.6 million. Investments totaled $7.06 billion.
- Debt and capital: Debt was $676.3 million, down from $751.2 million at year-end 2012. Total adjusted capital, a non-GAAP measure, was $5.00 billion; debt was 14% of total adjusted capital. The $425 million revolving credit facility was undrawn, and the company reported compliance with debt covenants.
- Shareholder value: Adjusted book value per share was $621.56, up 2.8% in Q3 and 5.9% in the first nine months including dividends. The company repurchased 141,535 shares for $79.8 million in the first nine months; none were repurchased in Q3.
Material changes versus prior periods
- Revenue fell 18% in Q3 and 10% year to date. Lower earned premiums, investment income and investment gains, as well as reduced foreign-currency gains and the absence of certain prior-year gains, contributed to the declines.
- Net written premiums fell 8% in Q3 and 9% year to date. The reported declines primarily reflected exits from OneBeacon’s collector-car, boat and energy businesses and lower Sirius Group accident-and-health premiums. Excluding the exited businesses, OneBeacon premiums increased 14% in Q3 and 8% year to date.
- Investment income declined 27% in Q3 and 29% year to date, which management attributed primarily to lower invested assets following share repurchases and lower yields. Investment gains also decreased from 2012.
- Combined ratios reflected contrasting segment trends: Sirius Group improved year to date, while its Q3 ratio edged higher; OneBeacon’s Q3 ratio worsened slightly and its nine-month ratio was unchanged. Sirius Group recorded substantial 2013 catastrophe losses, partly offset by favorable reserve development and lower agricultural losses.
- Debt declined after repayment of the remaining $75 million balance under the prior bank facility. The new five-year, $425 million facility was established in August 2013.
Outlook, commentary, risks and unusual items
- Management said cash, operating cash flows, investment sales and maturities, and the revolving facility were adequate for expected cash needs for the foreseeable future. No specific earnings or revenue guidance was provided.
- The sale of OneBeacon’s runoff business was expected to close in Q2 2014, subject to regulatory approval; the termination date under the sale agreement was extended to July 31, 2014. An independent actuarial review estimated statutory net loss and LAE reserves of $215 million to $668 million as of March 31, 2013, compared with OneBeacon’s recorded $166 million. Management considered its estimate reasonable, but said further analysis could increase its best estimate. As of September 30, runoff net reserves were $131 million. Under the sale agreement, Armour assumes unfavorable reserve development from September 30, 2012 onward; a reserve increase before closing would be offset by a corresponding reduction in the estimated sale loss. The regulator may require additional reserves or surplus, potentially funded through surplus notes subject to contractual limits.
- WM Life Re’s Japanese variable-annuity guarantee liability is a Level 3 fair-value estimate dependent on policyholder behavior, market conditions and other assumptions. The liability was $143.7 million at quarter-end, down from $441.5 million at year-end 2012; its derivatives recorded $308.4 million of losses for the first nine months. Management noted that surrender behavior and other assumptions may differ materially from projections. A related reinsurance obligation was transferred from Sirius International to WM Life Re in October 2013; White Mountains disclosed a maximum $202 million capital commitment to WM Life Re, including up to $127 million under a keep-well agreement.
- Other notable items included a $23 million pre-tax gain on the Essentia sale and a $6.9 million gain from the American Fuji acquisition; a $6.8 million tax valuation-allowance release; and a new interest-rate cap costing approximately $9.9 million to limit the future rate on SIG Preference Shares during 2017–2022.
- The IRS proposed assessments of $18.7 million for certain 2005–2006 OneBeacon tax matters and $64.5 million for 2007–2009 matters. White Mountains disputed the adjustments; it said the latter largely involved timing of deductions and did not expect resolution to materially change financial position. The company also disclosed ongoing Tribune LBO-related litigation: noteholder actions were dismissed in September 2013, but plaintiffs appealed; a separate proceeding continued. Management did not believe litigation would have a material adverse effect.
- Management identified catastrophe losses, reserve adequacy, market and economic conditions, currency and investment volatility, financing availability, regulation, competition and ratings actions as risks. The filing reported no material change in market-risk disclosures or previously reported risk factors.
Important facts for investors to verify
- Track the runoff transaction’s regulatory approval, closing timetable, reserve reviews and any required surplus funding.
- Assess reserve adequacy and the effect of future catastrophe losses and reserve development, particularly at Sirius Group and OneBeacon.
- Monitor WM Life Re’s variable-annuity liability, hedge performance, surrender assumptions and capital requirements.
- Separate recurring underwriting and investment performance from discontinued operations, investment marks, currency effects, tax benefits and transaction gains.
- Review liquidity and capital needs, subsidiary dividend restrictions, debt covenants and the company’s ability to access financing if needed.