WHITE MOUNTAINS INSURANCE GROUP LTD quarterly report, Q3 FY2014

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White Mountains Insurance Group, Ltd. — Q3 2014 Form 10-Q

Reporting period: Three and nine months ended September 30, 2014; comparisons are with the corresponding 2013 periods unless noted. Amounts are in U.S. dollars, millions except per-share data and ratios. The company operates through OneBeacon, Sirius Group, HG Global/BAM and Other Operations.

Financial results and key metrics

  • Q3 revenue: $589.4, up 3%; earned premiums were $538.6, up 8%. Net investment income declined to $24.7 from $27.3.
  • Q3 earnings: Continuing-operations pre-tax income was $34.4 versus $55.3; net income attributable to common shareholders was $51.5 versus $57.2. Diluted EPS was $8.45 versus $9.26. The quarter included $6.7 of income from discontinued operations.
  • Nine-month results: Revenue was $1,820.5 versus $1,690.8; continuing-operations pre-tax income was $255.5 versus $210.7; net income attributable to common shareholders was $242.7 versus $203.9. Diluted EPS was $39.50 versus $32.83.
  • Investment results: Net realized and unrealized investment gains were $20.8 in Q3 and $198.5 year to date, compared with $28.2 and $66.1. These results were volatile and included foreign-currency effects. Net investment income was lower year to date, $78.1 versus $84.5.
  • Underwriting: OneBeacon’s GAAP combined ratio was 95% for Q3 and 94% year to date, versus 96% and 93%. Sirius Group’s was 79% and 78%, versus 89% and 83%. Sirius benefited from lower catastrophe losses and favorable prior-year reserve development; OneBeacon had unfavorable development.
  • Cash flow: Nine-month operating cash from continuing operations was $150.9 versus $22.7; total operating cash flow was $123.3 versus a use of $70.8. Ending cash was $543.5, including $23.8 restricted; cash excluding restricted balances was $519.7.
  • Balance sheet and capital: Total assets were $12,188.3 and total equity $4,498.8 at September 30. Debt was $678.1. Adjusted book value per share was $665.55, down 0.2% for Q3 and up 3.8% for the first nine months, including dividends. Adjusted comprehensive loss was $12.7 in Q3; adjusted comprehensive income was $142.8 year to date.
  • Liquidity: The $425 revolving credit facility was undrawn, and the company reported compliance with debt covenants. Debt was 13% of total adjusted capital; debt plus SIG preference shares was 18%.

Material changes and notable items

  • Q3 comprehensive results were significantly affected by currency movements: the U.S. dollar strengthened, and foreign-currency losses reduced adjusted book value by approximately $7 per share, according to management. Q3 investment returns were essentially flat excluding currency translation effects.
  • Nine-month earnings benefited from higher investment gains and equity earnings from Symetra, but comparisons also reflect 2013 gains from the Essentia sale, Ashmere acquisition and Symetra warrants. Q3 general and administrative expense rose to $69.3 from $41.5, including QuoteLab expense; the acquired business also contributed revenue.
  • White Mountains repurchased 173,853 common shares for $106.9 in the first nine months; 122,264 shares for $76.5 were repurchased in Q3. A further 382,118 shares remained authorized for repurchase at quarter-end.
  • The company acquired stakes in QuoteLab, Wobi and durchblicker.at and acquired assets related to Star & Shield. In October, it acquired 63.2% of Tranzact for $177.7; a post-closing recapitalization returned $44.2 to White Mountains. A $21 commitment to a PassportCard joint venture remained subject to regulatory approval and was expected to close in Q4.

Outlook, risks and contingencies

  • Runoff Business sale: OneBeacon expected the sale to Armour to close in Q4 2014, subject to regulatory approval. The transaction remained under review; expected seller financing was approximately $80.9 in surplus notes. Their estimated fair value is sensitive to credit spreads, Treasury rates, liquidity assumptions and regulatory approval of payments.
  • Reserves and catastrophe exposure: Prior-year reserve development was net favorable by $12.1 in Q3 and $19.0 year to date, but OneBeacon recorded unfavorable development, particularly in professional and management liability, accident and inland marine. Actual claim payments and reserve estimates may differ. Reinsurance reduces exposure but does not eliminate it or reinsurer credit risk.
  • Currency and valuation: The company held about $1.0 billion of non-U.S.-dollar investments, primarily at Sirius International. Foreign-exchange changes affected earnings and other comprehensive income. Some investments and variable-annuity liabilities use Level 3 estimates and unobservable assumptions.
  • Tax matter: OneBeacon disputed proposed IRS adjustments for 2007–2009 with an estimated total assessment of $72.0, including $60.2 relating to deductions expected to be available in later periods. Management could not estimate the range of outcomes and did not expect a material financial-position effect. A separate 2005–2006 examination settlement generated a $5.0 tax benefit in Q1 2014.
  • Other exposures: The filing describes ongoing Tribune-related litigation and ordinary-course claims litigation; management did not expect litigation outcomes to materially adversely affect financial condition, results or cash flows. WM Life Re is in runoff, with contracts maturing by June 2016; a keep-well agreement may require contributions if its equity falls below $75, subject to a stated cap.
  • Guidance: No quantified full-year earnings or revenue guidance is provided. Management stated that cash, operating cash flow, investment maturities and the undrawn credit facility were adequate for expected foreseeable cash requirements, while cautioning that results may differ materially from expectations.

Important facts for investors to verify

  • Whether the Runoff Business sale received approval and closed on the expected terms, and the ultimate value and payment terms of the surplus notes.
  • Whether favorable Sirius reserve development and lower catastrophe losses persist, and how OneBeacon’s unfavorable development affects future combined ratios.
  • How much reported earnings and book-value movement reflects recurring underwriting and investment performance versus currency, market valuation and transaction-related items.
  • QuoteLab and other acquired businesses’ ongoing contribution to revenue, expenses and cash flow, including Tranzact’s post-quarter acquisition effects.
  • The outcome and timing of the IRS examination and material litigation, and any resulting cash, capital or reserve impact.