White Mountains Insurance Group, Ltd. — Q1 2015 Form 10-Q
Business context and reporting period. The unaudited filing covers the three months ended March 31, 2015, compared with Q1 2014. White Mountains operates through OneBeacon, Sirius Group, HG Global/BAM and Other Operations, including insurance, reinsurance and acquired service businesses.
Key financial results
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Total revenue | $656.8 million | $578.7 million |
| Pre-tax income from continuing operations | $86.8 million | $112.5 million |
| Net income attributable to common shareholders | $84.3 million | $95.5 million |
| Basic and diluted EPS, total consolidated operations | $14.09 | $15.48 |
| Adjusted comprehensive income (loss), non-GAAP | $(3.3) million | $87.7 million |
| Net cash used for operations | $(57.7) million | $(47.2) million |
- Earned premiums were nearly flat at $494.3 million; net written premiums fell 8% to $598.6 million.
- Net investment income declined to $23.3 million from $24.7 million. Net realized and unrealized investment gains rose to $103.4 million from $63.8 million, including $68.0 million of foreign-currency investment gains.
- Expenses increased to $570.0 million from $466.2 million. General and administrative expenses included newly consolidated Tranzact and MediaAlpha costs; losses and loss adjustment expenses also increased.
- OneBeacon’s combined ratio increased to 95% from 89%; Sirius Group’s increased to 81% from 73%. Both remained below 100%.
- At March 31, total assets were $10.51 billion, total equity $4.54 billion and debt $749.8 million. Cash was $335.8 million, including $29.0 million restricted; cash excluding restricted balances was $306.8 million. Total investments were $6.91 billion.
- Adjusted book value per share was $663.64, versus $664.50 at December 31, 2014, including the quarter’s $1.00 dividend. Total adjusted capital was $5.37 billion; debt was 14% of total adjusted capital. The $425 million holding-company revolving facility was undrawn, and the company reported covenant compliance.
Material changes and management commentary
- Adjusted comprehensive results fell from $87.7 million of income to a $3.3 million loss. Foreign-currency translation losses, principally recorded in other comprehensive income, were a major factor; management reported an $8 per-share currency loss offsetting underwriting and investment results in local currencies.
- OneBeacon’s higher combined ratio reflected a higher current-year loss ratio, two catastrophe-loss points (primarily Northeast winter storms, versus one point in Q1 2014), and a higher expense ratio. Prior-period reserve development was favorable by one point in both periods.
- Sirius Group’s ratio worsened mainly because favorable prior-year reserve development was lower than in Q1 2014 and business mix changed. Net written premiums declined 9% (5% in local currencies), partly due to reduced property business and increased retrocessional purchases.
- Other Operations’ pre-tax loss widened to $24.9 million from $12.3 million. Tranzact and MediaAlpha contributed revenue and expenses following their acquisition/consolidation; their expenses substantially offset related revenue. The TaCerto investment was written down to zero after the business began winding down.
- Management said liquidity was adequate for foreseeable needs, based on cash, operating cash flows, investment maturities and the revolving facility. Operating cash use included $57 million of long-term incentive payments. The filing provides no earnings or premium guidance.
Outlook, risks, contingencies and unusual items
- Key risks include catastrophe losses, reserve estimation, reinsurance recoverability, investment-market and foreign-exchange movements, regulatory limits on subsidiary dividends, and access to financing. The filing notes that actual results may differ materially from forward-looking statements.
- Foreign-currency movements materially affected reported results: White Mountains reported $45.9 million of after-tax foreign-currency losses through comprehensive income. Net foreign-currency exposure was $481 million at quarter-end. On April 28, 2015, it executed a $100 million currency swap to reduce exposure.
- Q1 included an $8.0 million gain related to favorable reserve development on previously sold Esurance and Answer Financial businesses; the amount was not final and remained under review. OneBeacon also recorded a $4 million negative adjustment related to the Essentia sale indemnity.
- An IRS examination of OneBeacon’s 2007–2009 returns included a proposed assessment of $73.8 million, of which $60.2 million related to deductions management says are expected to be deductible in later periods. White Mountains disputes the adjustments; it could not estimate the range of outcomes and did not expect a material financial-position impact.
- Three policyholders challenged Pennsylvania regulatory approvals of the Runoff Transaction; management considered an adverse outcome remote. Tribune-related shareholder litigation remained pending, with no accrual because any loss could not be reasonably estimated. Management did not believe the disclosed litigation would materially adversely affect the company.
- WM Life Re’s Japanese variable-annuity reinsurance business is in runoff, with contracts maturing by June 30, 2016. White Mountains contributed $8 million in Q1 under a keep-well agreement; its remaining maximum commitment was $111 million.
Important facts for investors to verify
- Whether reserve development and catastrophe experience support the reported segment combined ratios, and whether reserves remain adequate.
- How currency movements, investment gains and losses, and the Symetra-related other-comprehensive-income adjustment affect underlying performance and adjusted book value.
- Whether negative operating cash flow, incentive compensation payments and premium-receivable movements have ongoing liquidity implications.
- Developments in the IRS examination, Esurance reserve true-up, Runoff Transaction challenge and Tribune litigation.
- Performance and integration of Tranzact, MediaAlpha and Wobi, along with the financial exposure from the Cashboard acquisition and WM Life Re runoff.