White Mountains Insurance Group, Ltd. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet comparisons are with December 31, 2012. Amounts are in U.S. dollars, generally millions except per-share data. White Mountains operates through OneBeacon, Sirius Group, HG Global/BAM and Other Operations.
Key financial results
| Metric | Q1 2013 | Q1 2012 / prior date |
|---|---|---|
| Total revenue | $627.4 | $629.6 |
| Earned premiums | $495.4 | $498.0 |
| Net investment income | $28.5 | $41.8 |
| Net realized and unrealized investment gains | $75.2 | $58.6 |
| Pre-tax income from continuing operations | $151.8 | $140.8 |
| Net income from continuing operations | $110.2 | $109.7 |
| Net income attributable to common shareholders | $120.4 | $93.8 |
| Basic and diluted EPS, total operations | $19.17 | $12.61 |
| Operating cash flow | $(224.9) | $(333.3) |
| Common shareholders’ equity | $3,758.9 | $3,731.8 at Dec. 31, 2012 |
| Adjusted book value per share | $606.20 | $587.63 at Dec. 31, 2012 |
Total expenses were $475.6 million versus $488.8 million. No consolidated gross-margin measure is provided; the company reports insurance combined ratios. OneBeacon’s GAAP combined ratio improved to 88% from 89%, and Sirius Group’s to 81% from 84%. The effective tax rate rose to 27.4% from 22.1%. The declared common dividend was $1.00 per share.
Balance sheet, debt and liquidity
- Total assets were $12.61 billion and total liabilities $8.33 billion at March 31, 2013. Total equity was $4.28 billion.
- Cash was $411.5 million, including $188.5 million restricted; investments totaled $6.97 billion. Cash and cash equivalents excluding restricted cash were $223.0 million at quarter-end.
- Debt was $676.2 million, down from $751.2 million at year-end, primarily after repayment of the $75 million revolving-facility balance. The $375 million facility was undrawn at quarter-end; the company reported compliance with debt covenants.
- Total adjusted capital was $4.90 billion; debt was 14% of total adjusted capital, and debt plus preference shares was 19%.
- Management said cash balances, operating cash flows, investment sales and maturities, and the undrawn facility were adequate for expected requirements for the foreseeable future.
Material changes and unusual items
- Common-shareholder net income rose to $120.4 million from $93.8 million. Continuing-operations net income was nearly unchanged; discontinued operations contributed $0.5 million versus a $9.3 million loss in Q1 2012, and attribution to non-controlling interests also differed materially.
- Investment gains increased, but net investment income declined 32%, reflecting a lower invested-asset base and lower fixed-maturity yields. Portfolio total return was 1.4%, including 0.4% currency losses, versus 2.0% including 0.4% currency gains a year earlier.
- OneBeacon recorded a $23 million pre-tax ($15 million after-tax) gain on its January 2013 sale of Essentia. The exit from collector-car/boat and energy businesses reduced OneBeacon premiums; excluding premiums from exited businesses, OneBeacon said net written premiums rose 2%.
- Sirius Group premiums and earned premiums declined; improved current-year underwriting helped its combined ratio. It recorded $4.3 million of net unfavorable prior-year reserve development, primarily related to a late-reported agricultural claim from the 2012 U.S. drought. Consolidated prior-year development was $1.4 million unfavorable.
- White Mountains repurchased 140,224 shares for $79 million at an average $564 per share, compared with $485.8 million of repurchases in Q1 2012. It had authorization to repurchase a further 545,496 shares.
- Assets and liabilities of OneBeacon’s runoff business, subject to a pending sale agreement, remained classified as held for sale at $2.16 billion each. Closing remained subject to regulatory approvals; management estimated the transaction would reduce insurance float by about $297 million.
- HG Global/BAM was a newer operation: BAM reported an $18.4 million pre-tax loss, while HG Global reported $9.9 million pre-tax income, principally reflecting interest on BAM surplus notes. BAM’s results were attributed to non-controlling interests.
Written-premium disclosure: The filing reports Q1 2013 consolidated net written premiums as $601.2 million in its results table, while the overview gives approximately $599 million and the segment figures total about $599.2 million. The filing text does not provide a clear reconciliation.
Outlook, risks and contingencies
- No specific earnings or revenue guidance is provided. Management’s liquidity assessment is qualified by the uncertainty of claim-payment timing and availability of external financing.
- Key stated risks include catastrophe losses, reserve inadequacy, reinsurance collectability and pricing, investment-market and foreign-exchange movements, regulatory changes, competitive conditions, rating actions and access to capital.
- Variable-annuity guarantees in Japan expose WM Life Re to equity, interest-rate, currency, volatility and policyholder-behavior risk. The $251.6 million guarantee liability is a Level 3 fair-value measurement; hedging derivatives and collateral mitigate but do not eliminate exposure.
- The company disputes IRS proposed adjustments, including estimated assessments of $18.7 million for 2005–2006 and $87.0 million for 2007–2009; it is defending its positions and says it cannot estimate the range of outcomes. It does not expect resolution to materially affect financial position.
- Other disclosed matters include an approximately $20 million after-tax dispute with Allstate over the Esurance sale closing statement, Tribune-related fraudulent-transfer litigation involving approximately $39 million of historical sale proceeds, and an Ace American damages action. Management does not expect the Ace matter or routine litigation to have a material adverse effect; outcomes remain uncertain.
- Management reported no material change in market risks from the prior annual report, no material change in previously disclosed risk factors, and effective disclosure controls.
Most important facts for investors to verify
- Reconcile the inconsistent consolidated net-written-premium figures ($601.2 million versus approximately $599 million).
- Track completion and final terms of the OneBeacon runoff-business sale, including regulatory approvals and reserve/reinsurance transfer treatment.
- Assess the sustainability of underwriting performance and the development of prior-year reserves, especially Sirius Group’s agricultural exposure.
- Monitor the variable-annuity guarantee valuation, hedge effectiveness, collateral needs and sensitivity to policyholder behavior and market movements.
- Follow the IRS examinations, Allstate sale-price arbitration and material litigation for changes in expected cash exposure.