White Mountains Insurance Group, Ltd. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparative period is Q1 2013. Amounts are in millions of dollars except per-share data and ratios. White Mountains operates through OneBeacon, Sirius Group, HG Global/BAM and Other Operations.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 / prior date |
|---|---|---|
| Total revenue | $578.3 | $627.4 |
| Pre-tax income from continuing operations | $112.1 | $151.8 |
| Net income attributable to common shareholders | $95.6 | $120.4 |
| Basic and diluted EPS, total operations | $15.48 | $19.17 |
| Adjusted comprehensive income (non-GAAP) | $87.8 | $116.7 |
| Net written premiums | $650.6 | $601.2 |
| Net cash used in operations | $47.2 | $224.9 |
| Cash and short-term investments | $1,012.6 | $1,018.7 at Dec. 31, 2013 |
| Total investments | $7,213.4 | $7,192.6 at Dec. 31, 2013 |
| Total debt | $677.6 | $676.4 at Dec. 31, 2013 |
| Common shareholders’ equity | $4,014.5 | $3,905.5 at Dec. 31, 2013 |
| Adjusted book value per share (non-GAAP) | $655.67 | $642.27 at Dec. 31, 2013 |
Cash and short-term investments above combine reported cash and short-term investments; reported cash was $338.6, including $22.2 restricted. Cash at period-end excluding restricted balances was $316.4, versus $223.0 in Q1 2013. The $425 million revolving credit facility was undrawn, and the company reported compliance with debt covenants. The filing states management believes liquidity is adequate for foreseeable needs.
Combined ratios: OneBeacon 89% versus 88% in Q1 2013; Sirius Group 73% versus 81%. Lower combined ratios indicate better underwriting results. The filing does not present a single consolidated profit margin.
Material changes and operating results
- Revenue fell 8%, primarily reflecting lower investment income and the absence of prior-year gains from OneBeacon’s Essentia sale and WM Solutions’ Ashmere acquisition. Net investment income declined 15% to $24.3, while realized and unrealized investment gains were $63.8 versus $75.2.
- Net written premiums rose 8%, led by OneBeacon, up 17% to $311. Sirius Group premiums were approximately flat at $333.
- Pre-tax continuing income declined to $112.1 from $151.8. OneBeacon pre-tax income was $54.4 versus $88.1, partly reflecting the prior-year Essentia sale gain; Sirius Group income improved to $74.0 from $61.1, mainly on better reserve development.
- White Mountains recorded $11.2 of favorable prior-year reserve development, compared with $1.4 of unfavorable development in Q1 2013. Sirius Group had $9.8 favorable development; OneBeacon had $1.4 favorable development. Sirius Group also recorded $2 of losses relating to the disappearance of Malaysia Airlines Flight MH370.
- Adjusted book value per share increased 2.2% during the quarter, including dividends. The GAAP common-share dividend declared was $1.00 per share. The company repurchased 26,323 shares for $15.4 at an average price of $586.
Outlook, risks and unusual items
- Runoff sale: OneBeacon’s runoff business remains classified as discontinued operations and held for sale, with $1,803.1 of assets and matching liabilities at March 31. Closing the sale to Armour was expected in the second half of 2014, subject to regulatory approval. The quarter recorded a $0.5 discontinued-operations loss.
- Tax matter: OneBeacon recorded a $5.0 tax benefit from settlement of its IRS examination for 2005–2006. For the 2007–2009 examination, the IRS proposed an estimated $69.3 assessment; White Mountains disputes the adjustments, and the filing says the outcome range cannot be estimated. Management did not expect resolution to materially affect financial position.
- Variable annuity reinsurance: The Japanese variable annuity business is in runoff, with contracts maturing by June 30, 2016. Its guarantee liability was $54.1; fair value depends on policyholder behavior and market assumptions. White Mountains’ keep-well commitment to Life Re Bermuda had a maximum remaining commitment of $118 at quarter-end.
- Insurance and investment risks: Results remain exposed to catastrophe claims, reserve-estimation uncertainty, reinsurance recoverability, market and currency movements, and investment valuation assumptions. About 94% of investments measured at fair value used quoted prices or other observable inputs; Level 3 valuations rely on less observable assumptions. The filing reported no material change in market risks from the 2013 Form 10-K.
- Other contingencies: The company described ongoing Tribune-related litigation and indemnification obligations from the 2011 Esurance sale. Management did not believe the ultimate outcome of disclosed litigation would materially adversely affect financial condition, results or cash flows.
- No specific full-year earnings or premium guidance was provided. Management’s statements about liquidity and expected transaction timing are forward-looking and subject to risks described in the filing.
Most important facts for investors to verify
- Whether the OneBeacon runoff sale receives regulatory approval and closes on the expected timetable, and its final effect on float and results.
- Whether favorable reserve development persists and whether recorded reserves and reinsurance recoverables prove adequate and collectible.
- The performance and capital needs of the newly acquired QuoteLab, Wobi and Star & Shield-related businesses.
- Developments in the IRS 2007–2009 examination and the potential timing and cash-tax consequences of the proposed adjustments.
- Changes in variable annuity guarantee assumptions, counterparty exposure and the remaining keep-well commitment.
- Investment returns, including the impact of market, interest-rate, foreign-exchange and less-observable fair-value inputs.