White Mountains Insurance Group, Ltd. — Q2 2011 Form 10-Q
Business context and reporting period. This unaudited filing covers the three and six months ended June 30, 2011, with comparisons to 2010. White Mountains’ continuing reportable segments are OneBeacon, White Mountains Re and Other Operations. Esurance and AFI were classified as discontinued operations after the May 17, 2011 agreement to sell them to Allstate.
Key financial metrics
| Metric | Q2 2011 | Six months 2011 |
|---|---|---|
| Total revenue | $571.1 million, down 17% year over year | $1,119.1 million, down 26% |
| Pre-tax income (loss) from continuing operations | $34.4 million | $(0.2) million |
| Net income (loss) attributable to common shareholders | $11.7 million, versus $2.5 million | $(16.5) million, versus $(37.1) million |
| Adjusted comprehensive income (non-GAAP) | $6.2 million, versus $(66.5) million | $40.0 million, versus $(117.6) million |
| Earned insurance and reinsurance premiums | $495.8 million, down 24% | $982.0 million, down 25% |
| Net investment income | $45.8 million, down 13% | $95.3 million, down 12% |
| Net realized and unrealized investment gains | $57.3 million | $76.6 million |
| Operating cash flow | Not presented for the quarter | $(135.6) million, versus positive $54.6 million |
- Underwriting: OneBeacon’s GAAP combined ratio was 96% for Q2 and 95% for the first half, compared with 96% and 104% in 2010. White Mountains Re’s ratios were 92% and 112%, compared with 94% and 113%. Ratios above 100% indicate underwriting losses.
- Catastrophe impact: Management cited $39 million of after-tax catastrophe losses in Q2 and $135 million in the first half, principally from severe U.S. weather and the Japan and New Zealand earthquakes. White Mountains Re reported $163 million of pre-tax catastrophe losses for the first half.
- Balance sheet at June 30: Total assets were $14.20 billion and total equity was $4.22 billion. Investments totaled $7.53 billion, down from $7.94 billion at year-end 2010. Cash was $483.7 million, including $345.9 million restricted; cash excluding restricted balances was $137.8 million.
- Debt and capital: Debt was $669.0 million, down from $818.8 million. Total debt to adjusted capital was 14%, versus 17% at year-end. The $475 million revolving credit facility was undrawn; the company reported covenant compliance.
- Per-share and capital returns: Adjusted book value per share (non-GAAP) was $447.69, up from $440.59 at year-end, including dividends. The company repurchased 265,579 shares for $93 million in the first half and paid a $1.00 per-share dividend.
Material changes versus prior comparable periods
- Revenue and expenses fell substantially, mainly because of OneBeacon’s prior sales of personal and commercial lines businesses. Management said that excluding premiums from exited OneBeacon businesses, earned premiums increased 3% in both Q2 and the first half.
- Q2 common-shareholder earnings improved year over year; first-half common-shareholder losses narrowed. Investment gains were higher in Q2 but lower for the first half than in 2010.
- Net investment income declined in both periods, primarily due to lower fixed-maturity yields and a smaller invested-asset base.
- Operating cash flow shifted to a use of cash, affected by reserve run-off, lower investment income and WM Life Re derivative and collateral cash flows.
- In April, OneBeacon repurchased $150 million face amount of senior notes for $161.6 million, recognizing a $12 million pre-tax loss. Consolidated debt declined by $149.8 million from year-end.
Outlook, commentary, risks and unusual items
- Esurance sale: The announced sale provides for $700 million cash plus the tangible book value at closing. Management expected closing in fall 2011, subject to regulatory approval and other conditions. The sale-related compensation accrual reduced adjusted book value per share by about $3 in Q2; discontinued operations included an $11.5 million pre-tax charge.
- Liquidity outlook: Management said cash, operating cash flows, routine investment sales and maturities, and the undrawn bank facility should meet expected requirements for the foreseeable future. The sale was expected to reduce insurance float by approximately $500 million.
- Reserves and catastrophe estimates: The company recorded $27.5 million of favorable prior-year reserve development in the first half. Japan earthquake estimates remained uncertain: approximately 41% of White Mountains Re’s ultimate loss estimate had been paid or reported by June 30, versus about 70% at a comparable stage for the Chile earthquake.
- Other significant risks: Reinsurance recoverables depend on reinsurer performance; the company remains liable to policyholders if reinsurers fail to pay. WM Life Re’s $591 million variable-annuity guarantee liability is Level 3 and sensitive to market conditions and policyholder behavior; management estimated a 50% reduction in surrender assumptions could increase the liability by about $11 million.
- Contingencies: White Mountains subsidiaries were among defendants in Tribune-related lawsuits seeking recovery of proceeds received in the 2007 leveraged buyout; the subsidiaries received approximately $39 million. The filing does not provide a clear estimate of potential loss. The IRS proposed an estimated $18.7 million assessment for certain OneBeacon and Esurance tax years; the company disputes it and said it did not expect a material financial-position impact.
- No formal earnings guidance was provided. The filing reported no material changes in risk factors or market risks from the prior annual report. Forward-looking results remain subject to catastrophe losses, reserve adequacy, investment and currency movements, regulation, competition and financing conditions.
Important facts for investors to verify
- Whether the Esurance/AFI sale closed on the announced terms, including final tangible book value, regulatory approvals and any further sale-related costs.
- Development and payment of Japan and New Zealand catastrophe claims, and the adequacy of loss reserves and reinsurance recoverables.
- Trends in continuing-business premiums and underwriting profitability after adjusting for OneBeacon divestitures.
- Operating cash flow, unrestricted liquidity and the effect of reserve run-off and collateral requirements.
- Changes in WM Life Re’s Level 3 guarantee valuation, policyholder surrender assumptions and counterparty exposures.
- Outcomes of the Tribune litigation and IRS examination, neither of which had a clearly estimable potential loss in the filing.