White Mountains Insurance Group, Ltd. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. White Mountains is a Bermuda-based insurance and reinsurance holding company whose continuing reportable segments are OneBeacon, Sirius Group and Other Operations. Esurance was sold on October 7, 2011 and is reported as discontinued operations; OneBeacon’s AutoOne sale closed in February 2012.
Financial performance and position
| Metric | 2011 | 2010 |
|---|---|---|
| Total revenue | $2.178 billion | $2.567 billion |
| Pre-tax income | $61.6 million | $153.1 million |
| Net income from continuing operations | $184.3 million | $136.2 million |
| Net income attributable to common shareholders | $767.9 million | $86.5 million |
| Net cash from (used for) operations | $(114.5) million | $56.0 million |
| Total assets | $14.064 billion | $14.534 billion |
| Common shareholders’ equity | $4.088 billion | $3.653 billion |
| Debt | $671.2 million | $818.8 million |
Common-shareholder net income includes a $677.5 million after-tax gain on the Esurance sale and a $19.2 million after-tax estimated loss on the AutoOne sale. The $123 million income-tax benefit principally reflects a $130 million valuation-allowance release in connection with the Sirius Group reorganization; excluding that release, management reported an effective tax rate of 11%.
Net written premiums were $1.979 billion, down 3%; earned insurance and reinsurance premiums were $1.928 billion, down 14%. Net investment income fell to $184.5 million from $208.9 million, while net realized and unrealized investment gains rose to $122.8 million from $82.6 million. The total investment portfolio return was 2.9%, versus 5.0% in 2010.
Adjusted comprehensive income, a non-GAAP measure, was $744.7 million versus $140.9 million. Adjusted book value per share was $542.11, up 23% including dividends, from $440.59; the Esurance sale contributed approximately $89 per share to the increase. GAAP book value per share was $539.43.
Operating cash flow was negative despite positive net income, reflecting, among other items, reserve run-off and working-capital movements. Investing activities provided $799.6 million, including Esurance sale proceeds; financing activities used $460.2 million. Year-end cash was $705.4 million, of which $453.5 million was restricted. The Company and its intermediate holding companies reported $1.554 billion of net unrestricted cash, short-term investments and fixed maturities outside the insurance groups, plus an undrawn $375 million revolving credit facility. Management said available cash, operating and investment cash flows, and the facility were adequate for expected needs.
Debt-to-adjusted-capital was 13% (17% including the $250 million SIG preference shares). The $375 million revolving facility was undrawn and covenants were met. OneBeacon had $270 million face value of senior notes outstanding, maturing in May 2013; Sirius had $400 million of senior notes due in 2017. The SIG preference shares carry a 7.506% dividend rate through June 2017.
Segment results and changes
- OneBeacon: Pre-tax income was $83.3 million versus $139.2 million. Its total GAAP combined ratio improved to 96% from 100%; specialty operations were at 92% versus 94%. Specialty net written premiums rose 8% to $1.063 billion, while total net written premiums declined 8%, reflecting the exit of commercial and personal lines. Favorable specialty reserve development of $30 million was largely offset by $27 million of adverse development in run-off business, principally after a review of unallocated loss-adjustment expenses.
- Sirius Group: Pre-tax income was $81.0 million versus $114.0 million. The combined ratio worsened to 100% from 94%, including 24 points of catastrophe losses versus 23 points. Net written premiums increased 6% to $916 million. 2011 catastrophe losses included Japan, New Zealand, Thailand and U.S. severe weather; favorable reserve development was $47 million.
- Other Operations: Pre-tax loss was $102.7 million versus $100.1 million. WM Life Re’s pre-tax loss narrowed to $27.2 million from $60.8 million; the business remains in run-off and reinsures Japanese variable-annuity guarantees.
White Mountains completed the Esurance sale for $1.01 billion in cash, comprising $700 million plus estimated tangible book value at closing. The reinsurance business was reorganized and rebranded as Sirius Group; Sirius America became a wholly owned subsidiary of Sirius International. Sirius Group also acquired Old Lyme’s run-off loss-reserve portfolio, recording a $7.2 million gain. White Mountains repurchased shares and OneBeacon paid regular and special dividends.
Outlook, risks and contingencies
The filing provides no formal company-wide earnings or revenue guidance. Management described a disciplined underwriting approach and said it would pursue profitable business rather than prioritize premium growth. Sirius Group stopped writing casualty business, other than incidental exposures, effective January 1, 2012 because of inadequate rates and low investment yields; it may resume if pricing and terms improve.
Sirius Group’s modeled net financial impact from an extreme aggregate catastrophe year was under $750 million at January 31, 2012, versus a prior target below $700 million. Management attributed the increase to model changes, lower forecast comprehensive income—principally in a low-rate environment—and moderate exposure growth. Catastrophe estimates depend on uncertain models, data and assumptions and may understate actual losses.
Key risks include catastrophe losses, uncertain long-tail reserves and asbestos/environmental claims, reinsurer collectability, competitive and cyclical pricing, investment and foreign-exchange volatility, and regulatory limits on subsidiary dividends. OneBeacon’s A&E exposure is substantially protected by the NICO cover, with approximately $2.3 billion of estimated incurred losses ceded against a $2.5 billion limit; adequacy remains subject to claims and coverage uncertainty. WM Life Re’s $769 million guarantee liability is Level 3 and sensitive to market conditions and policyholder behavior; hedges may not fully offset losses, and funding requirements can arise.
Tribune-related litigation seeks recovery of approximately $39 million received by White Mountains subsidiaries in the 2007 leveraged buyout; proceedings were stayed, and management did not expect a material adverse effect. The Esurance sale remains subject to purchase-price true-up and indemnification provisions, including retention of 90% of positive or negative development in closing-date loss reserves for three years. The filing identifies no formal estimate of potential Tribune liability.
Management reported effective disclosure controls and internal control over financial reporting; the independent auditor also opined that internal control was effective.
Important facts for investors to verify
- Separate recurring continuing-operation results from the large, nonrecurring Esurance sale gain and the AutoOne sale charge.
- Review the quality and volatility of reserve development, including OneBeacon run-off expenses, Sirius catastrophe estimates and A&E exposures.
- Assess the cash-flow deficit, restricted cash, subsidiary dividend capacity and the timing and terms of debt maturities.
- Evaluate whether investment returns and WM Life Re hedges can withstand sustained low rates, market volatility and adverse policyholder behavior.
- Track the Esurance purchase-price true-up and indemnities, Tribune litigation, and the adequacy and collectability of reinsurance recoverables.