WHITE MOUNTAINS INSURANCE GROUP LTD quarterly report, Q1 FY2012

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White Mountains Insurance Group, Ltd. — Q1 2012 Form 10-Q

Business context and reporting period. Bermuda-based insurance and reinsurance holding company reporting the three months ended March 31, 2012, compared with Q1 2011. Reportable segments are OneBeacon, Sirius Group and Other Operations. Esurance was sold in October 2011; OneBeacon sold AutoOne in February 2012, and AutoOne’s results are presented as discontinued operations.

Financial performance and position

  • Revenue and earnings: Continuing-operations revenue was $630.6 million, up 19% from $529.6 million. Pre-tax continuing income was $128.3 million versus a $33.7 million loss; net income from continuing operations was $100.3 million versus a $26.0 million loss. Net income attributable to common shareholders was $93.8 million versus a $28.2 million loss. Total diluted EPS was $12.61 versus a loss of $3.51.
  • Drivers: Net realized and unrealized investment gains were $58.6 million versus losses of $9.2 million. Earned premiums rose 7% to $499.0 million, while net investment income fell 16% to $41.8 million. Loss and LAE expense declined to $262.7 million from $358.4 million, chiefly reflecting lower catastrophe losses.
  • Underwriting: Net written premiums increased 10% to $654.4 million. OneBeacon’s combined ratio was 94% (93% in Q1 2011); its specialty-lines ratio improved to 89% from 94%. Sirius Group’s combined ratio improved to 84% from 132%, principally because Q1 2011 included major Japan and New Zealand earthquake losses.
  • Comprehensive results and book value: Comprehensive income attributable to common shareholders was $116.1 million, compared with $33.8 million. Management reported adjusted comprehensive income of $117 million versus $34 million and adjusted book value per share of $565.38, up 4.5% for the quarter including dividends.
  • Cash flow and liquidity: Operating cash flow was a use of $334.4 million, compared with a use of $129.6 million. Investing activities provided $814.9 million and financing activities used $490.8 million. Cash excluding restricted balances ended at $245.3 million; the balance sheet reported total cash of $605.4 million, including $360.1 million restricted. Management stated available cash, operating cash flows, investment maturities and the credit facility were adequate for expected requirements.
  • Debt and capital: Debt was $677.2 million, broadly unchanged from year-end; the $375 million revolving facility was undrawn. Total adjusted capital was $4.93 billion, and debt was 14% of adjusted capital. The company reported compliance with debt covenants.
  • Balance sheet: Total assets were $13.38 billion and total equity $4.31 billion at March 31, 2012, versus $14.06 billion and $4.67 billion at December 31, 2011. Common shareholders’ equity was $3.72 billion. The company repurchased 974,458 shares for approximately $484 million during the quarter.

Material changes and unusual items

  • The earnings improvement reflected markedly lower catastrophe losses: Q1 2012 included about $4 million, versus $131 million in Q1 2011. Sirius’s prior-year quarter included approximately $80 million related to Japan and $42 million related to New Zealand.
  • Q1 2012 included $4.8 million of net unfavorable prior-year reserve development: $10.5 million unfavorable at OneBeacon, partly offset by $5.7 million favorable at Sirius. OneBeacon’s development included run-off claims and an adverse Mississippi court ruling concerning a disputed Katrina-related pool assessment.
  • The quarter included a $408.6 million fixed-price tender offer, plus $76.0 million of other repurchases. The tender offer bought 816,829 shares at $500 each; total quarterly repurchases were 974,458 shares at an average $497.
  • Q1 2012 included $11.1 million of gains from marking Symetra warrants to market. Investment gains and the fair-value movements on variable-annuity guarantees and related hedges also contributed to reported results.
  • White Mountains adopted revised acquisition-cost guidance prospectively. It recognized $2.4 million of expense in Q1 related to costs that no longer qualify for deferral.

Outlook, commentary and risks

  • The filing gives no specific consolidated earnings or revenue guidance. Management described liquidity as adequate for foreseeable cash requirements. OneBeacon was placing replacement catastrophe reinsurance expected to have terms substantially similar to its expiring program.
  • Key exposures include catastrophe severity, reserve-estimate uncertainty, reinsurance recoverability, investment-market and foreign-exchange changes, and policyholder behavior affecting Japan variable-annuity guarantees. The $548.5 million variable-annuity guarantee liability is Level 3 and depends on significant actuarial and market assumptions.
  • OneBeacon remained exposed to run-off reserve development and reinsurance costs. White Mountains noted that reinsurers’ failure to meet obligations would not relieve its subsidiaries of their obligations to policyholders.
  • Tax assets may not be fully realizable if sufficient taxable income is not generated. The company disclosed a $280 million Luxembourg deferred tax asset related to internal capital structure and warned that proposed Swedish legislation limiting interest deductions, if enacted as drafted, could require a material write-down. A proposed IRS assessment of $19.8 million for certain OneBeacon 2005–2006 tax years was disputed; management said it did not expect a material financial-position impact.
  • Management cited recent Sirius staff reductions and related severance costs. The filing reported no material changes in market risks or legal proceedings from the prior annual report, and no significant changes in internal control over financial reporting.

Important facts for investors to verify

  • Whether the improvement in underwriting results persists when catastrophe losses return to more typical levels, and how OneBeacon’s run-off reserves develop.
  • The collectability and remaining protection under reinsurance arrangements, including OneBeacon’s NICO and GRC covers.
  • The valuation sensitivity of WM Life Re’s Level 3 variable-annuity liabilities, related hedges and counterparty exposures.
  • Whether the proposed Swedish tax rules are enacted and the resulting effect on deferred tax assets; also monitor resolution of the disputed IRS assessment.
  • How investment gains, foreign-currency movements and share repurchases affect adjusted book value and reported earnings in subsequent periods.