White Mountains Insurance Group, Ltd. — Q3 2010 Form 10-Q
Reporting period: Three and nine months ended September 30, 2010. White Mountains is a property-and-casualty insurer and reinsurer with four reportable segments: OneBeacon, White Mountains Re, Esurance and Other Operations.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Total revenue | $821.5 million | $1,202.7 million | $2,794.0 million | $3,388.1 million |
| Pre-tax income | $84.3 million | $258.3 million | $64.6 million | $610.5 million |
| Net income attributable to common shareholders | $50.7 million | $159.6 million | $13.6 million | $370.2 million |
| Net investment income | $54.7 million | $66.2 million | $172.8 million | $204.5 million |
| Net realized and unrealized investment gains (losses) | $(2.5) million | $170.7 million | $86.3 million | $362.3 million |
| Operating cash flow | Not stated by quarter | $(21.1) million | $(43.4) million |
Revenue and earnings fell substantially year over year, reflecting lower investment gains and premiums, alongside a $48 million WM Life Re loss from revised surrender assumptions. The first nine months also included $221 million of natural catastrophe losses, versus $68 million in 2009. Nine-month pre-tax income included a $12.8 million gain on the Central National acquisition and the Personal Lines sale gain and tax benefit.
White Mountains reported adjusted comprehensive income, a non-GAAP measure, of $177.6 million for Q3 and $60.0 million for the first nine months, compared with $242.6 million and $468.9 million, respectively, in 2009. Adjusted book value per share was $428.79 at September 30, up 6% in Q3 and 3% year to date, including dividends, according to management.
Insurance results and material changes
- Premiums: Net written premiums decreased 21% to $696.1 million in Q3 and 13% to $2,385.2 million year to date. OneBeacon’s premiums declined following its commercial-lines renewal-rights sale and personal-lines divestiture; growth at White Mountains Re and Esurance partly offset the declines.
- Combined ratios: OneBeacon’s GAAP combined ratio was 95% for Q3 and 102% year to date, versus 97% and 95% in 2009. White Mountains Re reported 78% and 102%, versus 79% and 82%. Esurance’s adjusted combined ratio was 100% and 102%, versus 101% and 101%.
- OneBeacon transformation: It sold its traditional personal-lines business to Tower in July for $166.6 million consideration, recording a $24.6 million after-tax gain for the nine months. The business sold had approximately $420 million of 2009 net written premiums. OneBeacon also sold non-specialty commercial renewal rights in December 2009 and is shifting toward specialty lines.
- Reserves and catastrophes: The company recorded $76.0 million of favorable prior-year reserve development in the first nine months. This was more than offset at the overall earnings level by catastrophe losses, including $130 million from the Chile earthquake within White Mountains Re’s $176 million of year-to-date catastrophe losses.
Balance sheet, debt and liquidity
- Total assets were $14.99 billion at September 30, 2010, compared with $15.44 billion at December 31, 2009. Total investments were $8.66 billion, down from $9.23 billion.
- Cash was $401.2 million, of which $273.1 million was restricted; short-term investments were $1.35 billion. Cash and short-term investments at the holding-company level were reported as approximately $274 million.
- Total debt declined to $818.7 million from $1.05 billion. Debt repayments and repurchases included the retirement of OBH Senior Notes; the $475 million revolving bank facility was undrawn. Debt to total adjusted capital was 17%, versus 20% at year-end 2009.
- Investing activities provided $482.9 million in the first nine months, while financing activities used $488.6 million. The company repurchased 536,801 common shares for approximately $177 million during the period, according to the MD&A.
- Management said cash, operating cash flows, investment maturities and the undrawn credit facility were adequate for foreseeable cash needs. Insurance-subsidiary dividends are subject to regulatory restrictions.
Outlook, risks and unusual items
- The filing gives no specific earnings or premium guidance. Management described the specialty-lines transition, continued opportunistic movement toward common stocks, and confidence in near-term liquidity; these are not quantified forecasts.
- WM Life Re’s variable-annuity guarantee liability is valued using significant unobservable assumptions. Lower surrender assumptions increased the liability by $48 million in Q3. At September 30, a further 50% reduction in surrender assumptions would increase the liability by an estimated $12 million; a reduction to zero would increase it by $25 million.
- Reinsurance recoverability remains an exposure: the company remains responsible to policyholders if reinsurers fail to pay. OneBeacon estimated it had used approximately $2.2 billion of the $2.5 billion NICO cover, net of third-party recoverables.
- The IRS proposed a total estimated assessment of $23.9 million, including interest and tax-credit effects, for certain OneBeacon and Esurance tax years. The company disputes the proposed adjustments; it said the eventual resolution was not expected to materially affect its financial position.
- Standard & Poor’s lowered OneBeacon’s principal insurance subsidiaries’ financial-strength rating from A to A- and OBH Senior Notes from BBB to BBB- in July, both with stable outlooks. Management did not expect a material effect on borrowing access or cost.
- Other notable items include a $13.8 million impairment on the planned sale of Delos, a $12.8 million gain from acquiring Central National, and the deconsolidation of Tuckerman Fund II following an accounting-standard change.
Important facts for investors to verify
- Whether catastrophe losses, especially the Chile earthquake losses, are fully reflected in reserves and recoveries.
- The remaining capacity and collectability of OneBeacon’s NICO cover and other reinsurance balances.
- WM Life Re’s surrender assumptions, Level 3 valuation inputs and sensitivity to policyholder behavior and market movements.
- OneBeacon’s earnings, expenses and capital after its divestitures, and the effect of its lower credit and insurance ratings.
- Availability of holding-company liquidity, regulatory limits on subsidiary dividends, and progress on the disputed IRS examination.