Business context and reporting period
White Mountains Insurance Group, Ltd. is a Bermuda-based insurance holding company reporting for the three months ended March 31, 2017, compared with the three months ended March 31, 2016. Its segments are OneBeacon, HG Global/BAM and Other Operations. Sirius Group and Tranzact are presented as discontinued operations following their 2016 sales; Star & Shield was sold on March 7, 2017.
Financial performance and condition
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Total revenue | $385.9 million | $369.3 million |
| Earned insurance premiums | $264.8 million | $282.1 million |
| Net investment income | $26.1 million | $17.9 million |
| Net realized and unrealized investment gains | $51.3 million | $29.5 million |
| Total expenses | $348.0 million | $360.8 million |
| Pre-tax income from continuing operations | $37.9 million | $8.5 million |
| Net income from continuing operations | $34.0 million | $18.2 million |
| Net income attributable to common shareholders | $34.3 million | $13.0 million |
| Diluted EPS, total consolidated operations | $7.50 | $2.34 |
| Net cash used for operations | $56.1 million | $86.6 million, including discontinued operations; continuing operations used $45.9 million |
Revenue rose about 4%, primarily on higher investment returns, while earned premiums fell about 6%. Expenses declined about 4%; lower loss, acquisition and underwriting expenses more than offset increased general and administrative costs. The effective tax rate on continuing operations was 10.3%; the prior-year tax benefit reflected a $12.8 million IRS audit settlement benefit.
OneBeacon’s GAAP combined ratio was 95% in both periods (Q1 2017 loss ratio 58%, expense ratio 37%). Its net written premiums fell 8% to $256.9 million, largely due to risk-selection changes in Programs, Entertainment and Healthcare. White Mountains reported no net prior-year reserve development in Q1 2017; unfavorable OneBeacon Healthcare development was offset by favorable experience in other lines.
At March 31, 2017, total assets were $6.52 billion, total investments $5.34 billion, cash $125.0 million, and short-term investments $230.9 million. Total liabilities were $2.76 billion; debt was $284.7 million and common shareholders’ equity was $3.63 billion. Debt to total capital was 7%. The $425 million holding-company and $65 million OneBeacon revolving facilities were undrawn; the company reported covenant compliance. Book value per share was $792.77 and adjusted book value per share was $798.83, each up 1% for the quarter including dividends. The quarterly dividend was $1.00 per share.
Material changes versus the prior comparable period
- Higher net investment income and investment gains drove improved consolidated revenue and earnings; investment gains were predominantly unrealized in Q1 2017.
- Earned premiums and OneBeacon net written premiums declined, while OneBeacon’s combined ratio remained unchanged.
- Other Operations moved to $7.0 million pre-tax income from a $29.4 million loss, mainly due to stronger investment results and a larger invested-asset base following the Sirius Group sale.
- General and administrative expenses increased 9% to $91.3 million, including $14 million of additional compensation expense related to the former Chairman and CEO’s retirement. The company also paid a $21 million cash retirement payment.
- Operating cash use from continuing operations increased to $56.1 million from $45.9 million; management attributed the change primarily to higher incentive compensation and retirement payments.
- White Mountains sold Star & Shield and its investment in SSIE Surplus Notes without recognizing a gain or loss. Q1 2017 discontinued operations include a $1.0 million reduction to the Tranzact sale gain related to 2016 tax payments.
Outlook, commentary, risks and contingencies
No general earnings or revenue guidance is provided. On May 2, 2017, OneBeacon announced a definitive agreement to be acquired by Intact Financial Corporation for $18.10 per share, approximately 1.65 times tangible book value. White Mountains estimated gross proceeds of $1.3 billion and an increase in its book value of approximately $107 per share; closing was expected in Q4 2017, subject to regulatory approvals and other conditions. Completion, timing, termination and integration-related risks remain.
Management said cash, operating cash flows, routine investment sales and maturities, and available credit facilities should meet expected cash requirements for the foreseeable future, while noting that future financing may not be available on satisfactory terms. Insurance cash needs are uncertain because claim payments can occur years after losses. Reinsurance reduces large-loss exposure, but OneBeacon remains liable to policyholders if reinsurers do not perform; the cost of reinsurance may exceed its benefits.
Other risks include catastrophe losses, reserve estimates proving inadequate, investment-market and foreign-exchange movements, illiquid or Level 3 asset valuations, and regulatory limits on insurance-subsidiary dividends. A potential reduction in the U.S. federal tax rate to 20%–15% could reduce deferred tax assets by an estimated $54 million–$72 million. In the Tribune litigation, no loss was accrued because any potential loss could not be reasonably estimated; management stated it did not believe the ultimate outcome of litigation would materially adversely affect the company.
Important facts for investors to verify
- Whether the proposed OneBeacon acquisition received required approvals, closed on schedule, and delivered proceeds and book-value effects consistent with the filing’s estimates.
- How much of the quarter’s earnings improvement came from repeatable underwriting and investment income versus fair-value gains, and how investment valuations evolve.
- Whether premium trends, OneBeacon’s combined ratio and reserve adequacy remain satisfactory, including the effect of reinsurance costs and catastrophe exposure.
- Liquidity and cash generation after incentive and retirement payments, and the availability of subsidiary dividends subject to regulatory restrictions.
- Developments in the Tribune litigation, tax exposure and deferred-tax-asset assumptions.