Business context and reporting period
White Mountains Insurance Group, Ltd. filed this Form 10-K for the fiscal year ended December 31, 2014. Its principal segments are OneBeacon, a U.S. specialty property and casualty insurer; Sirius Group, a global insurer and reinsurer; HG Global/BAM, a municipal bond insurance operation; and Other Operations, including investment management, variable-annuity reinsurance in runoff, and insurance-services businesses. The company owned 75.3% of OneBeacon and 88.4% of HG Global’s common equity; BAM is a mutual insurer consolidated under GAAP, with its results attributed to non-controlling interests.
Financial performance and condition
| Metric | 2014 | 2013 |
|---|---|---|
| Total revenue | $2,510 million | $2,317 million |
| Pre-tax income | $302 million | $345 million |
| Net income attributable to common shareholders | $313 million | $322 million |
| Adjusted comprehensive income (non-GAAP) | $136 million | $340 million |
| Adjusted book value per share (non-GAAP) | $664.66 | $642.27 |
| Net written premiums | $2,122 million | $1,979 million |
| Net cash from continuing operations | $207 million | $(29) million |
| Total assets | $10,457 million | $12,144 million |
| Debt | $747 million | $676 million |
Revenue rose 8%, led by higher investment gains and revenue from acquired service businesses. Common-shareholder net income declined about 3%; adjusted comprehensive income fell substantially. Adjusted book value per share increased 3.6% including dividends, versus 9.5% in 2013. Cash and cash equivalents were $373 million, including $24 million restricted; investments totaled $6.89 billion. The $425 million revolving credit facility was undrawn at year-end. Total debt to adjusted capital was 14%, compared with 13% in 2013; debt plus SIG preference shares to adjusted capital was 19%, versus 18%.
Investment income declined to $105 million from $111 million. Net realized and unrealized investment gains increased to $284 million from $162 million, but total pre-tax portfolio return fell to 1.9% from 4.1%, including material foreign-currency effects. Loss and loss-adjustment expenses were $1.17 billion. Consolidated loss reserves were $3.16 billion, up from $3.08 billion.
Material changes and segment results
- OneBeacon: Net written premiums increased 12% to $1.217 billion, but pre-tax income fell to $41 million from $181 million. Its combined ratio deteriorated to 102% from 92%, indicating an underwriting loss. The principal driver was $90 million of unfavorable prior-year reserve development, including a $109 million fourth-quarter reserve increase ($76 million for prior accident years and $34 million for the current year). Reserve strengthening centered on professional and management liability, with additional issues in entertainment and government risks. Catastrophe losses contributed one point in both years.
- Sirius Group: Net written premiums rose 1% to $883 million. Pre-tax income increased to $336 million from $189 million, and the combined ratio improved to 76% from 82%. The 2014 ratio included seven points of catastrophe losses and 11 points of favorable reserve development. Sirius Group’s net favorable reserve development was $98 million, including reductions in property reserves for prior catastrophe events.
- HG Global/BAM: BAM insured $7.8 billion of municipal bonds in 2014, up 66%; year-end gross par outstanding was $12.4 billion and claims-paying resources were $581 million. HG Global reported $18 million of pre-tax income, while BAM reported a $41 million pre-tax loss, attributed to non-controlling interests. White Mountains holds $503 million of BAM surplus notes and had accrued $74 million of interest; repayment requires regulatory approval and depends on BAM’s financial performance.
- Other Operations: Reported a $53 million pre-tax loss versus $15 million of income in 2013. White Mountains acquired controlling interests in Tranzact, QuoteLab and Wobi, and acquired Star & Shield management businesses. The acquisitions added goodwill and intangible assets; related expenses substantially offset Tranzact and QuoteLab revenue in 2014.
Outlook, commentary, risks and unusual items
The filing provides no quantified company-wide earnings or premium guidance. Management said cash balances, operating and investment cash flows, routine investment maturities and the revolving credit facility were adequate for expected needs for the foreseeable future. It emphasized disciplined underwriting, balance-sheet strength and investment for long-term total return.
- OneBeacon completed the sale of its runoff business to Armour on December 23, 2014, completing its shift to specialty insurance. It provided $101 million par value of surplus notes, valued at $65 million at year-end; the discount reflected liquidity, credit and regulatory-approval risks. The transaction reduced OneBeacon assets from $5.2 billion to $3.6 billion.
- Foreign-currency translation was a significant headwind: the company reported an $87 million after-tax net loss through comprehensive income in 2014. Investment gains included $141 million of foreign-currency gains, substantially offset through other comprehensive income.
- Key risks include catastrophe losses, reserve-estimation uncertainty, reinsurance recoverability, soft-market pricing and alternative capital competition, investment and foreign-exchange volatility, regulatory limits on subsidiary dividends, and the market-sensitive Japanese variable-annuity reinsurance business. WM Life Re is in runoff; its contracts mature by June 30, 2016, and the company’s keep-well commitment was up to $118 million at year-end.
- Material contingencies include a Pennsylvania court petition filed in January 2015 challenging regulatory approval of the runoff-business sale; management considered an adverse material outcome remote. Tribune-related fraudulent-transfer litigation remained pending, with no amount accrued because any loss could not be reasonably estimated.
- Share repurchases totaled $134 million for 217,879 shares, at an average $617 per share, approximately 93% of year-end adjusted book value per share. The annual common dividend remained $1.00 per share.
- The independent auditor gave an unqualified opinion on the financial statements and internal control. Management’s control assessment excluded certain 2014 acquisitions, including Tranzact; the auditor likewise excluded those acquired entities from its internal-control audit.
Most important facts for investors to verify
- Whether OneBeacon’s 2014 reserve strengthening, particularly in long-tail professional liability, adequately reflects future claims and whether further adverse development emerges.
- The fair value, repayment prospects and regulatory restrictions on the $101 million OBIC surplus notes, and the collectability of the $503 million BAM surplus notes and accrued interest.
- How much of 2014 investment performance and reported earnings depended on realized gains, foreign-currency movements and other non-recurring items.
- Actual liquidity available at the holding-company level after considering regulated-subsidiary dividend constraints, debt maturities and the WM Life Re keep-well commitment.
- Whether recent acquisitions generate sustainable earnings and cash flow relative to their goodwill, intangible assets and added debt.
- Developments in the Pennsylvania sale challenge and Tribune litigation, along with catastrophe exposures and reinsurance recoverables.