WHITE MOUNTAINS INSURANCE GROUP LTD quarterly report, Q2 FY2015

Full document

White Mountains Insurance Group, Ltd. — Q2 2015 Form 10-Q

Business context and reporting period. This unaudited filing covers the quarter and six months ended June 30, 2015, with comparisons to 2014. White Mountains operates through OneBeacon, Sirius Group, HG Global/BAM and Other Operations. Amounts below are in U.S. dollars unless noted.

Financial results and key metrics

  • Second quarter: Earned premiums rose 7% to $537.3 million, but total revenue fell 10% to $587.5 million. The company recorded a $5.8 million pre-tax loss from continuing operations, versus $109.5 million of income a year earlier; net income attributable to common shareholders was $4.3 million versus $95.5 million. Total consolidated EPS was $0.72 versus $15.51.
  • First half: Total revenue increased 1% to $1.244 billion. Pre-tax income from continuing operations fell to $81.0 million from $222.0 million, and net income attributable to common shareholders declined to $88.6 million from $191.0 million. Total consolidated EPS was $14.80 versus $30.95.
  • Drivers and unusual items: Q2 net realized and unrealized investment losses were $61.1 million, compared with $113.9 million of gains in Q2 2014. First-half investment gains were $42.3 million, down from $177.7 million. Other revenue included a $20 million pre-tax gain on the Hamer sale and revenue from Tranzact and MediaAlpha; the latter businesses also added substantial general and administrative expense. Net investment income declined 20% in Q2 and 13% in the first half, mainly from lower fixed-income coupons and equity dividends.
  • Comprehensive and adjusted results: Q2 comprehensive income attributable to common shareholders was a loss of $13.3 million, while adjusted comprehensive income, a non-GAAP measure, was $48.5 million. First-half adjusted comprehensive income was $45.2 million, compared with $155.3 million in 2014. Adjusted book value per share was $670.72 at June 30, up from $664.50 at year-end; management reported a 1% increase for the first half including dividends.
  • Underwriting: OneBeacon’s combined ratio was 95% in Q2 (99% in 2014) and 95% for the first half (94% in 2014). Sirius Group’s was 78% in Q2 (81% in 2014) and 79% for the first half (77% in 2014). Sirius benefited from lower catastrophe losses and favorable prior-year reserve development; OneBeacon’s Q2 improvement included no net reserve development versus unfavorable development a year earlier. Catastrophes added two points to OneBeacon’s ratios in both 2015 periods.
  • Cash flow and liquidity: Net cash used in operating activities was $35.7 million in the first half, including $43.0 million used by continuing operations. Cash and short-term investments were $1.195 billion at June 30, including $20.9 million of restricted cash; cash excluding restricted balances was $333.3 million in the cash-flow statement. Management said cash, operating cash flows, investment maturities and the credit facility were adequate for foreseeable needs.
  • Capital and debt: Total assets were $10.429 billion, total liabilities $5.971 billion and common shareholders’ equity $3.975 billion. Debt was $748.5 million, versus $746.6 million at year-end; total debt was 14% of total adjusted capital. The $425 million revolving facility was undrawn at quarter-end. The company reported compliance with its debt and letter-of-credit covenants.

Material changes and management commentary

  • On July 27, 2015, after quarter-end, White Mountains agreed to sell Sirius Group to CMI for cash equal to 127.3% of closing tangible common shareholders’ equity plus $10 million. Based on Sirius’s December 31, 2014 tangible common equity, the indicated price was approximately $2.2 billion. Management estimated the transaction could add approximately $65 per share to adjusted book value, subject to closing results, costs and taxes. Closing was expected within six months, subject to regulatory and customary conditions; the company could replenish Sirius’s tangible common equity to its 2014 year-end level if required by the agreement.
  • On July 31, 2015, OneBeacon exited its crop businesses following the sale of its exclusive partner. It received $3 million and arranged for an AmTrust affiliate to reinsure remaining 2015 crop exposure. OneBeacon reported $26.6 million of crop net written premiums and a $1.3 million pre-tax underwriting loss in the first half, excluding allocated other underwriting expenses.
  • White Mountains completed a 50/50 PassportCard joint venture, invested $21 million, increased its fully converted ownership of Wobi to 95.3%, and Wobi acquired and subsequently increased its stake in Cashboard. The company also redeemed the Prospector funds and shifted part of its equity exposure to passive ETFs; it held $361.5 million in ETFs at quarter-end.
  • Insurance float was $2.882 billion, down $199 million in the first half, primarily because payments on prior losses exceeded reserve growth. Management estimated that a completed Sirius sale would reduce float by about $1.4 billion based on June 30 figures.

Risks, contingencies and outlook

  • Insurance results remain exposed to catastrophes, reserve-estimate uncertainty, reinsurance availability and cost, and reinsurer collectability. The company reported $3.032 billion of loss and loss adjustment expense reserves and $427.5 million of recoverables on unpaid losses.
  • Market and foreign-exchange movements materially affected reported results. The investment portfolio produced a 0.4% pre-tax return in Q2 and 0.3% for the first half. At June 30, net foreign-currency exposure was $414 million; management disclosed sensitivity to exchange-rate movements and noted valuation uncertainty for Level 3 assets and variable-annuity guarantees.
  • White Mountains retained a keep-well commitment to WM Life Re, whose contracts were in runoff and scheduled to mature by June 30, 2016. The maximum remaining commitment was $111 million; Life Re Bermuda reported $78.6 million of equity at June 30.
  • An IRS examination of OneBeacon’s 2007–2009 returns proposed an estimated $74.8 million assessment including interest. The company disputed the adjustments; $60.2 million related to deductions expected to be available in later periods, and management did not expect a material adverse outcome.
  • In the final Esurance reserve settlement, Allstate estimated it owed approximately $8 million, while White Mountains believed it was owed approximately $18 million; the dispute was in arbitration. In the Tribune shareholder litigation, no loss was accrued because any potential loss could not be reasonably estimated. Management said the identified legal matters were not expected to have a material adverse effect.
  • The filing provides no specific consolidated earnings guidance. Management’s forward-looking statements are subject to risks including catastrophe losses, reserve adequacy, investment and currency volatility, regulatory changes, competition, financing access and ratings actions.

Important facts for investors to verify

  • Progress, regulatory approvals, closing adjustments and realized proceeds from the proposed Sirius Group sale; assess the stated estimated $65-per-share adjusted-book-value impact against final terms.
  • Whether investment-market and foreign-exchange movements, including Level 3 valuations, explain continued differences between GAAP and adjusted results.
  • Development in OneBeacon and Sirius reserves, catastrophe experience, reinsurance costs and recoverable balances.
  • Performance and profitability of Tranzact, MediaAlpha, Wobi and BAM, including acquisition-related expenses and BAM’s statutory claims-paying resources.
  • Resolution of the Esurance settlement arbitration and IRS examination, and the runoff of WM Life Re and its keep-well exposure.
  • Liquidity and capital after the Sirius transaction, including restricted cash, subsidiary dividend restrictions, debt covenants and share repurchases.