White Mountains Insurance Group, Ltd. — Q2 2013 Form 10-Q
Business context and period. Bermuda-based property and casualty insurance and reinsurance group, reporting the three and six months ended June 30, 2013. Reportable segments are OneBeacon, Sirius Group, HG Global/BAM and Other Operations. OneBeacon’s runoff business was classified as discontinued operations and held for sale.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenues | $489.3m | $542.3m | $1,116.7m | $1,171.9m |
| Pre-tax income, continuing operations | $3.6m | $37.6m | $155.4m | $178.4m |
| Net income attributable to common shareholders | $26.3m | $26.1m | $146.7m | $119.9m |
| Total diluted EPS | $4.26 | $3.92 | $23.55 | $17.03 |
| Net cash used for operations | — | $(264.4)m | $(283.8)m |
- Q2 net income included $3.9m from discontinued operations and $7.1m of after-tax equity earnings from unconsolidated affiliates. Six-month discontinued operations contributed $4.4m, versus an $8.8m loss in 2012.
- Q2 adjusted comprehensive loss was $8.3m, versus $3.7m; six-month adjusted comprehensive income was $108.4m, versus $113.6m. Adjusted book value per share was $604.75 at quarter-end, up 3.1% for the first six months including dividends.
- Q2 net written premiums were $455.4m, down 12%; six-month premiums were $1,056.6m, down 10%. Management attributed the declines principally to exiting collector car/boat and energy businesses.
- Combined ratios: OneBeacon was 94% in Q2 and 91% year to date, compared with 94% and 92%; Sirius Group was 79% and 80%, compared with 82% and 83%. Lower ratios indicate improved underwriting results.
- Net investment income fell 29% in Q2 to $28.7m and 30% year to date to $57.2m. Q2 realized and unrealized investment losses were $37.3m; six-month gains were $37.9m. Rising interest rates and foreign-currency movements pressured portfolio results.
- At June 30, total assets were $12.284bn, total equity $4.190bn, and debt $676.3m. Cash was $348.3m, including $61.2m restricted; cash excluding restricted balances was $287.1m. The $375m revolving facility was undrawn, and the company reported compliance with debt covenants.
- Operating cash flow was negative, while investing activities provided $516.6m and financing activities used $175.0m during the first half. Management said cash, investment maturities and sales, operating cash flows and credit availability were adequate for foreseeable needs.
Changes, outlook, risks and unusual items
- Net income attributable to common shareholders increased year over year for both Q2 and the first half, but continuing-operations pre-tax income declined. The six-month comparison benefited from stronger discontinued-operations results and other items, including the $23m pre-tax Essentia sale gain and $6.9m gain on acquiring American Fuji.
- Q2 underwriting gains at Sirius included $19m of ceded European property profit commissions and $14m favorable reserve development, partly offset by $35m catastrophe losses, mainly Central European floods and U.S. tornadoes. Company-wide prior-year reserve development was favorable by $15.4m in Q2 and $14.0m for the half-year.
- White Mountains completed a cashless exercise of Symetra warrants in June, receiving approximately 2.65m Symetra shares; a $14.5m mark-to-market gain was recorded before exercise. The company also repurchased 141,535 of its own shares for $79.8m in the first half.
- OneBeacon’s runoff sale agreement remained subject to regulatory approvals. Held-for-sale assets and liabilities were each $2.047bn at June 30. The filing does not provide a clear expected closing date or quantified sale proceeds.
- Variable-annuity reinsurance exposure remains sensitive to Japanese yen exchange rates, market conditions and policyholder behavior. The guarantee liability was $194.1m, down from $441.5m at year-end; management noted increased policy surrenders and revised assumptions, producing a $1.5m Q2 gain.
- Other risks include catastrophe losses, reserve adequacy, reinsurance collectability, market and currency volatility, and restricted subsidiary dividend capacity. Management provided no specific earnings or premium guidance.
- Contingencies include IRS proposed assessments of $18.7m for 2005–06 and $87.4m for 2007–09, which the company disputes; management said outcomes could occur within 12 months but did not expect a material financial-position impact. The approximately $20m after-tax Allstate sale-price dispute remained in arbitration. Tribune shareholder litigation was pending; relevant subsidiaries received approximately $39m in the 2007 transaction.
Important facts for investors to verify
- Progress and final terms of the OneBeacon runoff-business sale, including regulatory approval and effects on float and capital.
- Whether favorable reserve development persists and how catastrophe losses, particularly flood losses, develop.
- Investment performance and sensitivity to rising interest rates, currency movements and less-liquid or Level 3 assets.
- Variable-annuity guarantee valuation, surrender assumptions, hedge effectiveness and collateral/counterparty exposures.
- Resolution and potential cash effects of the IRS examinations, Allstate arbitration and Tribune litigation.
- Availability of subsidiary dividends and continuing compliance with debt covenants and capital requirements.