White Mountains Insurance Group, Ltd. — Q3 2016 Form 10-Q
Period: Three and nine months ended September 30, 2016; unaudited. Unless noted, financial amounts are in millions of dollars. The continuing business comprised OneBeacon, HG Global/BAM and Other Operations. Sirius Group and Tranzact were sold and presented as discontinued operations.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Continuing-operations revenue | $365.0 | $296.1 | $1,092.5 | $1,019.1 |
| Earned insurance premiums | $281.3 | $284.9 | $838.1 | $896.0 |
| Pre-tax continuing income (loss) | $20.0 | $(86.9) | $26.4 | $(89.0) |
| Net income (loss) attributable to common shareholders | $91.7 | $(58.9) | $445.8 | $29.7 |
| Net investment income | $22.5 | $16.8 | $59.6 | $42.6 |
| Net realized and unrealized investment gains (losses) | $26.4 | $(43.9) | $84.0 | $(33.9) |
- The substantial improvement in common-shareholder earnings chiefly reflects discontinued-operation sale gains: $362.6 million after tax on Sirius Group for the first nine months and $51.9 million after tax on Tranzact. Q3 included the $51.9 million Tranzact gain and a $4.0 million downward Sirius sale-price true-up.
- OneBeacon’s combined ratio was 96% for Q3 versus 99% a year earlier, but 98% for the first nine months versus 96%. Its nine-month loss ratio was 61% and expense ratio 37%.
- Consolidated net cash used in operating activities was $142.3 million for the first nine months, compared with $87.3 million provided in 2015; continuing-operations operating cash use was $126.1 million versus $64.6 million provided. Investing activities provided $1,342.2 million, while financing activities used $922.9 million.
Financial position, capital and liquidity
- At September 30, 2016, total assets were $6,683.3 million, total liabilities $2,881.9 million, total equity $3,801.4 million and cash $244.7 million. Assets and liabilities declined substantially from year-end 2015, principally reflecting the Sirius Group sale and discontinued-operation reclassification.
- Debt was $288.5 million, down from $337.6 million at December 31, 2015; debt to total capital was 7%, versus 16%. The $425 million parent revolving facility and $65 million OneBeacon facility were undrawn. The company reported compliance with debt covenants.
- Management reported $1.8 billion of undeployed capital as of October 31 and said it expected to return capital gradually while exploring investment opportunities. It considered available cash, operating cash flows, investment maturities and the parent credit facility adequate for foreseeable cash needs.
- Common book value per share was $797.65 and adjusted book value per share was $801.66 at quarter-end. Adjusted book value per share increased 15% in the first nine months, including dividends. The company repurchased 1,081,337 shares for $866.8 million through September 30, and 1,094,795 shares for $877.9 million through October 31.
Material changes and management commentary
- White Mountains completed the approximately $2.6 billion Sirius Group sale in April and the Tranzact sale for $221.3 million net proceeds in July. It also received $658.0 million from its February sale of Symetra shares. These transactions reshaped the balance sheet, earnings mix and investment base.
- Premiums were weaker: nine-month earned premiums fell 6%. Management attributed the decline largely to OneBeacon’s exit from underperforming lines and accounts and, excluding the exited crop business, continuing soft-market conditions. Net written premiums excluding crop declined 1% in Q3 and 4% year to date.
- OneBeacon recorded $15.4 million of net unfavorable reserve development for the first nine months, primarily related to Healthcare, Other Professional Lines and Programs. The Healthcare development included higher-than-expected extended-care-facility activity and two large managed-care claims. Q3 development was not significant.
- Investment returns were positive: total portfolio returns were 0.9% for Q3 and 3.3% year to date. Energy-exposed private-equity write-downs weighed on equity and other long-term investment performance; favorable marks on OneBeacon surplus notes partly offset them. Management reported that 91% of the investment portfolio was valued using quoted prices or other observable inputs.
- BAM insured $8.5 billion of municipal bonds in the first nine months; claims-paying resources were $629 million against $30.5 billion of par insured. BAM had no Puerto Rico exposure under its underwriting guidelines. Star & Shield stopped writing new policies from July 1 amid increased Florida auto claim frequency and severity; its sale was agreed but was not reported as completed.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management cautioned that actual results may differ materially from forward-looking expectations.
- Key stated risks include catastrophe losses, reserve inadequacy, market and investment volatility, competition, regulatory or legal changes, availability and cost of reinsurance, and access to capital. Insurance-subsidiary dividends may require regulatory approval; BAM surplus-note principal and interest payments also require regulatory approval.
- Other unusual items included $16.3 million of favorable IRS examination settlements recorded in the first nine months and a $3.2 million pre-tax OneBeacon pension settlement gain in Q3. White Mountains also wrote down its $21.0 million Star & Shield surplus-note investment; consolidation eliminated the pre-tax impact, but the write-down reduced common-shareholder net income and book value.
- In the Tribune litigation, a petition for Supreme Court review was filed after prior dismissal rulings. No amount was accrued because any loss could not be reasonably estimated. Management stated that it did not believe outstanding litigation would materially adversely affect financial condition, results or cash flows.
Important facts for investors to verify
- Reconcile reported earnings and per-share results to the Sirius and Tranzact disposal gains, tax effects and final Sirius purchase-price true-up.
- Assess whether OneBeacon’s Healthcare reserve development persists and whether reserves and reinsurance recoverables remain adequate.
- Review the sustainability of operating cash flows, holding-company liquidity and the pace and pricing of share repurchases.
- Monitor investment valuations and exposure to energy-related private equity, Level 3 assets and less-liquid funds.
- Confirm completion and final terms of the Star & Shield and Ashmere dispositions, and follow material legal or regulatory developments.