White Mountains Insurance Group, Ltd. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011. White Mountains is a Bermuda-based property and casualty insurance and reinsurance group, with reportable segments OneBeacon, White Mountains Re, Esurance and Other Operations. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Key financial results
| Metric | Q1 2011 | Q1 2010 / comparison |
|---|---|---|
| Total revenue | $782.4 | $1,036.8; down 25% |
| Earned premiums | $695.5 | $864.7; down 20% |
| Net written premiums | $861.4 | $944.9; down 9% |
| Net investment income | $53.5 | $60.6; down 12% |
| Net realized and unrealized investment gains | $22.7 | $87.0 |
| Pre-tax loss | $(32.5) | $(26.8) |
| Net loss attributable to common shareholders | $(28.2), or $(3.51) per share | $(39.6), or $(4.48) per share |
| Comprehensive income attributable to common shareholders | $33.8 | $(18.3) |
| Operating cash flow | $(129.7) | $(71.5) |
Adjusted comprehensive income was $33.8, versus an adjusted comprehensive loss of $51.1 in Q1 2010. Adjusted book value per share was $446.70 at quarter-end, up from $440.59 at December 31, 2010; management reported a 1.6% increase for the quarter, including dividends.
Underwriting and segment performance
- OneBeacon: GAAP combined ratio improved to 94% from 112%; pre-tax income was $51.8. Net written premiums declined 25% to $278.1, mainly reflecting previously completed business exits and sales.
- White Mountains Re: GAAP combined ratio was 132% in both periods; pre-tax loss widened to $67.5 from $15.7. Q1 2011 catastrophe losses included $80 from the Japan earthquake and tsunami, $42 from the New Zealand earthquake and $3 from Australian floods and Cyclone Yasi.
- Esurance: Adjusted combined ratio improved to 102% from 106% (GAAP combined ratio: 105%); net written premiums rose 6% to $245.9, supported by higher new policy sales.
Company-wide catastrophe losses were reported at $132 before tax and $96 after tax, principally from Japan and New Zealand. Prior-year reserves developed favorably by $23.7, compared with $16.3 in Q1 2010.
Financial position, liquidity and debt
- Total assets were $14,597.4 at March 31, 2011, versus $14,534.1 at year-end; total equity was $4,209.1 versus $4,260.8.
- Total investments were $8,671.2. Cash was $452.5, including $297.6 restricted; cash excluding restricted balances was $154.9.
- Debt was $818.8, unchanged from year-end. Debt was 17% of total adjusted capital; debt plus WMRe preference shares was 22%.
- The $475 revolving credit facility was undrawn, and the company reported compliance with debt and facility covenants. Management said cash, operating cash flows, investment maturities and the facility were adequate for expected requirements for the foreseeable future.
- After quarter-end, OneBeacon accepted and retired $150 of senior notes for $161.2, producing an $11.7 pre-tax loss expected to be recognized in Q2 2011.
Changes, outlook and material risks
Lower consolidated premiums, revenue and expenses largely reflected OneBeacon’s Commercial Lines and Personal Lines exits and sale; excluding the exited businesses, management said earned premiums increased 4%. Investment gains were lower year over year, while foreign-currency movements contributed materially to investment returns and other comprehensive income. Q1 share repurchases totaled $86.1 for 246,284 shares, at an average $349 per share; the company declared and paid $1.00 per common share in dividends.
The filing provides no specific earnings or premium guidance. Management described liquidity as adequate for the foreseeable future and said it would pursue organic growth in insurance float only when market conditions support an expectation of underwriting profits.
- Japanese earthquake losses were estimated using catastrophe models while reported claims information remained limited; estimates may change materially as claims develop. The filing also notes uncertainty in catastrophe loss estimates generally.
- Reinsurance recoverables are material, and the company remains responsible to policyholders if reinsurers fail to pay. OneBeacon’s largest listed reinsurer group accounted for 74% of its total paid and unpaid recoverables.
- WM Life Re’s Japanese variable-annuity guarantees are valued using significant unobservable assumptions, including policyholder surrender behavior; market changes or actual behavior differing from assumptions could materially affect results.
- Potential tax matters include an IRS proposed assessment of $18.7 relating to certain OneBeacon and Esurance tax years; the company disputes the proposed adjustments and could not estimate a range of outcomes.
- Management noted that future use of U.S. deferred tax assets depends on profitability and net capital gains, and that a valuation-allowance change could affect tax expense.
Important facts for investors to verify
- How reported Japanese and New Zealand catastrophe claims develop relative to the Q1 estimates and available reinsurance recoveries.
- Whether operating cash flow improves from the Q1 cash use and how OneBeacon’s business exits affect future premium and investment-income levels.
- The outcome and financial impact, if any, of the disputed IRS assessment and the recoverability of deferred tax assets.
- WM Life Re’s exposure to Japanese market movements, counterparty credit risk and changes in policyholder surrender behavior.
- The Q2 accounting impact of the $150 senior-note tender and the company’s capital allocation, including share repurchases and dividends.