White Mountains Insurance Group, Ltd. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Figures are in U.S. dollars; financial statement amounts are in millions unless stated otherwise. White Mountains conducts property and casualty insurance and reinsurance operations through OneBeacon and Sirius Group, alongside other investment and insurance activities.
Financial performance and position
| Metric | Q3 2012 | Nine months 2012 | Comparable 2011 |
|---|---|---|---|
| Earned premiums | $536.8 | $1,545.3 | $491.1; $1,433.5 |
| Total revenues | $697.4 | $1,869.3 | $501.8; $1,579.7 |
| Pre-tax continuing income | $135.1 | $313.6 | $1.3; $(0.4) |
| Net income attributable to common shareholders | $19.1 | $139.2 | $(15.8); $(32.3) |
| Total consolidated EPS | $2.90 | $20.19 | $(2.00); $(4.06) |
| Adjusted comprehensive income, non-GAAP | $59.1 | $172.9 | $(97.6); $(57.6) |
Reported common-shareholder earnings include substantial discontinued-operation losses: $106.8 in Q3 and $115.5 for nine months, including $91.0 after-tax loss on sale. Adjusted comprehensive income excludes changes in unrealized gains and losses on Symetra’s fixed-maturity portfolio; it is not a GAAP measure.
- Underwriting: OneBeacon’s combined ratio was 95% for Q3 and 93% year to date, versus 94% and 95% in 2011. Sirius Group’s was 88% and 85%, versus 89% and 104%. Ratios below 100% indicate underwriting profit.
- Investment results: Net investment income was $37.6 in Q3 and $119.8 year to date, down from $42.8 and $138.1. Net realized and unrealized investment gains were $72.7 and $123.2, versus $2.9 and $36.4.
- Cash flow: Operating cash flow was a use of $128.6 for nine months, compared with a source of $40.6 in 2011; continuing operations provided $27.0, while discontinued operations used $155.6. Investing activities provided $627.6 and financing activities used $548.4. Cash excluding restricted balances was $207.5 at period-end; total cash was $549.2, including $341.7 restricted.
- Balance sheet and capital: Total assets were $13,468.8 and shareholders’ equity was $3,809.3 at September 30. Debt was $676.6, broadly unchanged from $677.5 at year-end; the $375 million revolving facility was undrawn and the company reported covenant compliance. Total debt to adjusted capital was 14%, versus 13% at year-end. Adjusted book value per share was $573.66, up 6.0% for the first nine months including dividends.
- Liquidity and float: Management said cash, operating cash flows, routine investment sales and maturities, and the bank facility were adequate for expected requirements for the foreseeable future. Insurance float was $3,183.2, down from $3,480.2 at year-end.
Material changes and management commentary
- Revenue growth reflected higher premiums, investment gains and foreign-currency-related gains. Lower catastrophe losses supported underwriting results, particularly Sirius Group’s year-to-date comparison with the 2011 earthquake losses. Net investment income declined amid lower fixed-income yields and a shift toward equities.
- Q3 results included $45 million of Sirius agricultural losses, principally from the U.S. Midwest drought; estimates remained subject to change because final crop yields and commodity prices were not yet known. Sirius also increased asbestos reserves by $33 million in Q3, more than offset by reserve reductions in liability and property lines. White Mountains reported net favorable prior-year reserve development of $10.1 million in Q3 and $21.2 million year to date.
- OneBeacon agreed in October 2012 to sell its runoff business to an Armour affiliate, subject to regulatory approvals and expected to close in the second half of 2013. The company recorded $100.5 million of after-tax transaction-related losses in Q3; management expects float to decline by approximately $375 million at closing.
- In July, White Mountains funded HG Global with $594.5 million to support new municipal bond insurer BAM, including $503 million of BAM surplus notes. BAM’s $18 million Q3 pre-tax loss was attributed to noncontrolling interests. The filing notes that BAM is consolidated for GAAP reporting but is member-owned.
- White Mountains repurchased 1,034,630 common shares for $516 million in the first nine months, including a $408.6 million tender offer. It declared a $1.00-per-share dividend for the period. Shares outstanding declined to 6,583,653 from 7,577,855 at year-end.
- Other disclosed risks and uncertainties include variable-annuity guarantee valuations based on significant Level 3 assumptions, reserve adequacy, catastrophe exposure, reinsurance collectability, and foreign-exchange volatility. Sirius’s updated catastrophe model raised its estimated 10,000-year aggregate net financial impact to $950 million from $725 million in July; management attributed the change mainly to model variability at the extreme tail, not portfolio changes.
Outlook, contingencies and unusual items
No specific earnings or revenue guidance was provided. Management’s liquidity assessment was positive, but forward-looking outcomes remain subject to catastrophe losses, changing market and economic conditions, reserve estimates, ratings changes, financing availability and regulatory approvals. The runoff sale is not assured; OneBeacon’s ongoing subsidiaries retained stable outlooks from rating agencies, while ratings actions were negative or under review for the units being sold. OneBeacon also expected to refinance $270 million of senior notes due May 2013.
Contingencies include a dispute and lawsuit against Allstate over approximately $20 million after tax relating to the Esurance sale closing statement; Tribune-related shareholder litigation involving approximately $32 million received by OneBeacon and benefit plans; and an Ace lawsuit seeking injunctive relief and unspecified damages. The company stated that it did not believe the ultimate outcome of disclosed litigation would materially adversely affect its financial condition, results or cash flows. An IRS examination of certain OneBeacon tax years included a proposed assessment estimated at $20.6 million; White Mountains disputes the adjustments and said the potential outcome range could not be estimated.
Other notable items: OneBeacon agreed to sell Essentia and terminate its exclusive Hagerty underwriting arrangement, with a projected $15 million after-tax gain subject to closing and approvals. Swedish tax proposals could reduce deferred tax liabilities by about $60 million if enacted; management said it had alternative strategies regarding potentially affected deferred tax assets.
Important facts for investors to verify
- Progress, final terms, regulatory approvals and closing timing for the OneBeacon runoff sale, including the ultimate transaction loss and expected reduction in float.
- Development of Sirius agricultural claims and asbestos reserves, and whether reported favorable prior-year reserve development persists.
- Cash generation and liquidity, particularly given negative consolidated operating cash flow and the large share repurchase outlay.
- Performance and capitalization of BAM and HG Global, including the recoverability and payment terms of BAM surplus notes.
- Assumptions underlying the $672.4 million variable-annuity guarantee liability and exposure to market movements and policyholder behavior.
- Resolution of the Allstate closing-statement dispute, Tribune litigation, Ace lawsuit and tax examinations.
- Refinancing of OneBeacon’s May 2013 notes and any changes to insurer financial-strength or debt ratings.