White Mountains Insurance Group, Ltd. — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010; unaudited. Amounts are in millions of dollars except per-share data and ratios. The company operates through OneBeacon, White Mountains Re, Esurance and Other Operations.
Financial performance and position
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Earned premiums | $859.1 | $898.3 | $1,723.8 | $1,809.7 |
| Total revenue | $928.4 | $1,218.9 | $1,972.5 | $2,185.4 |
| Pre-tax income (loss) | $7.1 | $303.8 | ($19.7) | $352.2 |
| Net income (loss) attributable to common shareholders | $2.5 | $180.3 | ($37.1) | $210.6 |
| Basic and diluted EPS | $0.28 | $20.35 | ($4.24) | $23.82 |
| Net investment income | $57.5 | $77.2 | $118.1 | $138.3 |
| Net realized and unrealized investment gains | $1.8 | $214.9 | $88.8 | $191.6 |
Q2 2010 adjusted comprehensive loss, a non-GAAP measure, was $66.5, versus adjusted comprehensive income of $235.5 in Q2 2009; the six-month loss was $117.6 versus income of $226.3. Adjusted book value per share was $405.94 at June 30, down 1% for Q2 and 2% for the first half including dividends. GAAP book value per share was $411.79.
- Insurance underwriting: OneBeacon’s GAAP combined ratio was 97% in Q2 and 105% for the first half, versus 93% for both 2009 periods. White Mountains Re’s was 94% and 113%, versus 87% and 83%. Esurance’s adjusted combined ratio was 101% and 103%, versus 99% and 101%. A ratio below 100% generally indicates an underwriting profit.
- Cash flow and liquidity: First-half operating cash flow was $54.6, compared with cash used of $213.6 in 2009. Cash and cash equivalents were $348.8 at June 30, including $195.4 restricted; unrestricted cash was $153.4. Short-term investments were $1,663.7. Management said available cash, operating cash flows, investment maturities and the undrawn credit facility were adequate for expected needs.
- Debt and capital: Debt was $851.7, down from $1,050.7 at year-end 2009. Debt to total adjusted capital was 17%, down from 20%. The $475 million revolving bank facility was undrawn; the company reported covenant compliance. First-half financing cash use was $362.7, including $197.3 for debt repurchases and $118.3 for company share repurchases.
- Balance sheet: Total assets were $15,502.7 and total equity was $4,160.4. Total investments were $8,389.3. Loss and loss-adjustment expense reserves were $6,643.3, with $2,778.6 of reinsurance recoverables on unpaid losses.
Material changes and operating developments
- Revenue fell 24% in Q2 and 10% in the first half. Lower investment gains and investment income, foreign-exchange losses, and lower premiums drove the declines. The prior-year comparisons included much larger investment gains.
- First-half loss and LAE expense rose to $1,257.8 from $1,072.1, reflecting $204 of catastrophe losses, principally the Chile earthquake and winter storms, versus $25 in the prior-year period. The company recorded favorable prior-year reserve development of $30.2 in Q2 and $46.5 in the first half.
- Total net written premiums declined 14% in Q2 and 9% in the first half, mainly following OneBeacon’s sale of renewal rights for non-specialty commercial lines. OneBeacon net written premiums fell 31% and 26%, while White Mountains Re premiums rose 8% and 10%, and Esurance premiums rose 7% and 8%, respectively.
- OneBeacon sold its traditional personal lines business to Tower Group in July 2010 for approximately $167. At June 30, the related assets and liabilities were classified as held for sale; net assets were $153.3. The company expected an approximately $19 after-tax gain in Q3, in addition to a $5.6 tax benefit recognized in Q2. The sale is not presented as discontinued operations.
- OneBeacon repurchased $156.4 principal of senior notes through a tender offer and made further repurchases; these transactions generated losses. White Mountains Re acquired Central National for $5 cash and recorded a $12.8 gain.
- White Mountains repurchased 347,409 of its common shares for $117 during the first half, at an average price reported as approximately 83% of June 30 adjusted book value per share.
Outlook, risks and contingencies
- No formal earnings or revenue guidance is provided. Management expected insurance float to decrease by approximately $380 in Q3 as a result of the OneBeacon personal lines sale.
- OneBeacon’s ratings were downgraded by S&P in July: senior notes from BBB to BBB- and principal insurance subsidiaries from A to A-. Fitch changed the outlook on White Mountains’ ratings from negative to stable. Management did not expect a material effect on financing access or cost.
- Key exposures include catastrophe losses, reserve uncertainty, reinsurer credit and collectability, investment-market volatility, foreign-exchange movements, and the availability and cost of capital. The company warns that actual claim payments and policyholder behavior may differ from estimates.
- WM Life Re’s Japanese variable-annuity guarantees are valued using significant, partly unobservable assumptions. Its $538 liability was classified as Level 3; management estimated a 50% reduction in surrender assumptions would increase the liability by approximately $34. Derivative counterparty exposure was also disclosed.
- The company reported $416.1 of net U.S. deferred tax assets and cautioned that future profitability and capital gains affect their realization; changes in valuation allowances could materially affect tax expense. IRS examinations were ongoing, with outcomes not estimable, though no material financial-position impact was expected.
- A Scandinavian Re arbitration dispute was remanded for a new panel after a court vacated the prior award; St. Paul appealed and enforcement was stayed by a bond. The filing said the earlier award had not materially affected financial position.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the Tower transaction closed on the stated terms and whether the expected Q3 gain and tax benefit were realized.
- Actual catastrophe claims and subsequent development of loss reserves, particularly for Chile, winter storms and large property losses.
- Performance and valuation sensitivity of WM Life Re’s guarantees, including surrender assumptions and derivative counterparty exposures.
- OneBeacon’s post-disposition premium base, underwriting ratios, ratings and capacity to pay dividends to the holding company.
- Realization of deferred tax assets, resolution of tax examinations, and outcome of the Scandinavian Re arbitration.