White Mountains Insurance Group, Ltd. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance sheet compared with December 31, 2015. Figures are in U.S. dollars unless noted. Sirius Group is presented as discontinued operations and held for sale; its sale closed on April 18, 2016.
Business context and key financial results
White Mountains’ continuing reportable segments are OneBeacon, HG Global/BAM and Other Operations. The company reported consolidated revenue of $427.1 million, up 9% from $391.8 million, and pre-tax income from continuing operations of $11.5 million versus $0.5 million.
- Continuing-operations net income was $20.2 million, versus a $4.1 million loss. The $8.7 million income-tax benefit included a $12.8 million benefit from settlement of OneBeacon’s 2007–2009 IRS examination.
- Net income attributable to common shareholders was $13.0 million, versus $84.3 million. The prior-year period included $73.8 million of discontinued-operations income, including an $8.0 million Esurance-related sale gain; Q1 2016 discontinued operations had a $0.9 million loss.
- Continuing-operations EPS attributable to common shareholders was $2.51, versus $1.76; total consolidated EPS was $2.34, versus $14.09. The comparison is substantially affected by discontinued operations and prior-year gains.
- Comprehensive income attributable to common shareholders was $50.3 million, versus $25.6 million. Q1 2016 included $37.2 million of after-tax foreign-currency translation gains from discontinued operations.
- Earned premiums were $282.1 million, down 2%; net written premiums were $289.1 million, down 2%. Net investment income rose to $17.9 million from $12.6 million. Net realized and unrealized investment gains were $29.5 million, versus $25.0 million.
- Loss and LAE expense was $161.1 million, down from $167.9 million. White Mountains reported $0.1 million of favorable prior-year reserve development, compared with $1.9 million favorable development in Q1 2015.
- OneBeacon reported $38.2 million pre-tax income versus $28.1 million, with a 95% GAAP combined ratio in both periods. Its book value per share was $10.78, up 4.4% for the quarter including dividends.
- Other Operations reported a $26.4 million pre-tax loss, compared with a $24.3 million loss. Its revenue growth included Tranzact and MediaAlpha; general and administrative expenses also increased.
Cash flow, balance sheet and capital
- Cash flow from operations was a $92.4 million use, compared with a $57.7 million use. This comprised $41.7 million used in continuing operations and $50.7 million used in discontinued operations.
- Investing activities provided $174.8 million; financing activities used $98.8 million. Cash and restricted cash on the balance sheet totaled $178.8 million at quarter-end, including $8.4 million restricted.
- Total assets were $10.39 billion and total liabilities $6.15 billion. These include $5.22 billion of assets and $3.12 billion of liabilities held for sale, principally relating to Sirius Group.
- Continuing-operations debt was $532.6 million, up from $440.5 million; debt held for sale was $403.6 million. Total debt including held-for-sale debt was $936.2 million. The company was in compliance with its debt covenants at March 31.
- Common shareholders’ equity was $3.79 billion, versus $3.91 billion at year-end. Adjusted book value per share, a non-GAAP measure, was $704.45, up 0.9% for the quarter including dividends; management estimated approximately $794 per share including the expected Sirius sale gain.
- White Mountains repurchased 228,688 of its shares for $172.7 million during Q1, at an average $755.36 per share. The quarterly common dividend was $1.00 per share.
Material changes, outlook and risks
- Sirius Group sale: Closed April 18 for approximately $2.6 billion, subject to a closing-equity adjustment. Management estimated a net gain of about $90 per share, expected in Q2 2016. After closing, the company repaid $150 million outstanding on its holding-company credit facility and repurchased 356,423 additional shares for approximately $287 million. It reported approximately $2 billion of undeployed capital at April 30 and expected to return capital gradually while evaluating investment opportunities; no specific earnings guidance was provided.
- Other portfolio transaction: Symetra shares were sold February 1 for $658 million, or $32 per share; White Mountains recorded a $4.7 million pre-tax investment gain in Q1.
- Underwriting and investment conditions: Management cited continued competitive conditions at OneBeacon, particularly in mature businesses. Net written premiums, excluding businesses exited in 2015, declined 5% year over year. The total investment portfolio returned 1.5%; the local-currency fixed-income return of 1.2% trailed the 2.3% Barclays U.S. Intermediate Aggregate Index return.
- BAM: Insured $2.2 billion of municipal bonds in Q1. Claims-paying resources were $607 million against $24.6 billion of insured par. BAM’s consolidated GAAP results are attributed to non-controlling interests, and its surplus-note payments require regulatory approval.
- Exposure and contingencies: Reinsurance recoverables expose the company to reinsurer credit risk, and reinsurance does not discharge obligations to policyholders. Catastrophe losses, reserve adequacy, market conditions, currency movements, regulatory restrictions on insurance-subsidiary dividends and access to financing remain risks. The Tribune shareholder litigation continued; no loss was accrued because any loss could not be reasonably estimated. The filing states there were no material changes to previously disclosed risk factors.
- The OneBeacon qualified pension plan termination eliminated its associated projected benefit obligation; a pre-tax settlement charge of $0.3 million was recorded. WM Life Re was in runoff, with contracts scheduled to mature by June 30, 2016.
Investor verification priorities
- Verify the final Sirius Group sale-price adjustment, recorded gain, and how the sale proceeds and subsequent repurchases affect capital and per-share value.
- Reconcile continuing-operations earnings and EPS with total consolidated results, including the IRS settlement tax benefit and discontinued-operations presentation.
- Review OneBeacon premium trends, combined ratio, reserve development and the cost and availability of reinsurance.
- Assess liquidity and debt after the Sirius transaction, including subsidiary dividend restrictions and covenant headroom.
- Monitor BAM claims-paying resources, insured exposure and regulatory limits on surplus-note payments, as well as the remaining WM Life Re runoff and keep-well exposure.