White Mountains Insurance Group, Ltd. — 2011 Q3 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Amounts are in millions of dollars unless otherwise noted. The company’s principal businesses are property and casualty insurance and reinsurance, reported through OneBeacon, Sirius Group and Other Operations.
Financial results and key metrics
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenues | $501.3 | $551.0 | $1,584.5 | $2,013.9 |
| Pre-tax income from continuing operations | $1.2 | $75.2 | $3.6 | $57.5 |
| Net income (loss) attributable to common shareholders | $(15.8) | $50.7 | $(32.3) | $13.6 |
| Net cash from operations | — | $40.5 | $(21.0) | |
| Earned premiums | $490.6 | $498.1 | $1,436.7 | $1,772.9 |
| Net investment income | $42.8 | $48.9 | $138.1 | $157.4 |
Q3 net loss included an $18.2 after-tax estimated loss on the AutoOne sale and $11.9 of net losses from discontinued operations, in addition to the continuing-operations result. Nine-month discontinued operations recorded a $28.9 net loss, including the AutoOne sale charge.
- Underwriting: OneBeacon’s combined ratio was 94% in Q3 and 94% for the first nine months, versus 92% and 101% in the prior-year periods. Sirius Group’s combined ratio was 89% in Q3 and 104% year to date, versus 78% and 102%. Sirius’s year-to-date result reflected significant catastrophe losses.
- Premiums: Consolidated net written premiums rose 12% to $510.9 in Q3 and fell 5% to $1,589.8 year to date. Excluding premiums from OneBeacon businesses exited in 2010, year-to-date net written premiums increased 5%.
- Investment performance: GAAP pre-tax portfolio return was -1.5% in Q3 and 1.7% year to date, versus 4.0% and 4.6% in 2010. Q3 equity losses were partly offset by stronger relative performance than the S&P 500; currency movements also materially affected reported results.
Financial position and liquidity
- At September 30, total assets were $14,581.7 and total liabilities were $10,562.6. White Mountains common shareholders’ equity was $3,444.7, down from $3,653.0 at year-end 2010.
- Total investments were $7,199.6, compared with $7,943.5 at December 31, 2010. Balance-sheet cash was $557.7, including $393.3 restricted; cash excluding restricted balances and AutoOne was $164.4. Short-term investments were $772.8.
- Debt declined to $669.0 from $818.8, primarily after OneBeacon repurchased $150.0 face value of notes for $161.6, including a $12.0 loss and fees. The new $375.0 revolving credit facility was undrawn; the company reported compliance with debt covenants.
- Management stated that cash, operating cash flows, investment maturities and the credit facility were adequate for expected requirements for the foreseeable future. Regulatory limits may restrict subsidiary dividends.
- Adjusted book value per share was $436.18 at September 30, down 3% for Q3 and 1% for the first nine months, including dividends. The company repurchased 593,451 shares for $230 during the first nine months at an average $387 per share.
Material changes, outlook and risks
- Esurance sale: Completed October 7, 2011, after quarter-end, to Allstate for $1.01 billion in cash, based on $700 million plus estimated tangible book value of approximately $310 million. Final consideration remains subject to a tangible-book-value true-up. Management reported pro forma adjusted book value per share of $523 at September 30, versus actual $436.
- AutoOne sale: OneBeacon agreed to sell the business to Interboro, subject to regulatory approvals and expected to close in Q4 2011. The filing recorded an $18.2 after-tax estimated disposal loss and classified AutoOne as discontinued operations and held for sale.
- Catastrophe and reserve exposure: First-nine-month catastrophe losses were approximately $230 across the company, including $90 from the Japan earthquake and tsunami and $49 from New Zealand earthquakes at Sirius. Only 46% of Sirius’s ultimate Japan loss estimate had been paid or reported by September 30. The company recorded favorable prior-year reserve development of $58.2 in the first nine months, but actual claims may differ from estimates.
- Currency and valuation: Foreign-exchange movements contributed materially to investment and translation losses. WM Life Re’s $761.3 variable-annuity guarantee liability was valued using Level 3 inputs, including policyholder surrender assumptions; actual behavior and market conditions could cause significant valuation changes. The company cited a $9 increase in liability for a 50% reduction in current surrender assumptions.
- Other items: OneBeacon’s updated asbestos and environmental study increased its point estimate of losses ceded to NICO from $2.2 billion to $2.3 billion; management said adverse scenarios remained within the $2.5 billion cover. An IRS examination proposed an estimated $18.7 assessment for certain 2005–2006 returns; the company disputed it, and the filing said the possible outcome range could not be estimated. White Mountains subsidiaries also faced Tribune-related litigation concerning approximately $39 million received for shares tendered in the 2007 leveraged buyout; the filing did not quantify potential loss.
- No earnings or premium guidance was provided. The company’s forward-looking statements identify catastrophe losses, reserve adequacy, market and economic conditions, financing availability, competition, regulation and ratings actions as risks. Management reported no material change in market risks from its latest annual report.
Important facts for investors to verify
- Final Esurance sale proceeds after the purchase-price true-up, and the post-sale effect on capital, earnings and insurance float.
- Completion terms and final loss on the proposed AutoOne sale, including regulatory approval.
- Changes in catastrophe estimates, especially Sirius’s Japan earthquake reserve as claims develop, and the collectability and remaining protection under reinsurance arrangements.
- Investment performance, currency exposure and Level 3 valuation assumptions, particularly WM Life Re surrender and market-risk assumptions.
- Outcome of the IRS examination and Tribune litigation, and any resulting financial exposure.